What banks do?

Banks accept deposit from individuals and businesses and makes loan to individual and businesses for consumption and investments. The process begins when savers who have surplus spending decide to deposit their money into the banks. Then, the banks transfer those savings to the borrowers (deficit spending) as a form of individual or business loans. Hence, the borrowers can use the money for consumers spending like buying houses, cars, education, etc.

A high level of consumption market will eventually increase the standard of living of the population. These loans can also be used for investment purposes like investing in stocks, new projects, start up companies etc. More jobs will be created out from these new investments. It also could spur the economic growth of the country. Businesses and manufacturers will produce more of their goods.

However, the borrowers need to pay back the principal loan amounts plus interest to the banks. Interest rate is fluctuating and determined by the central bank. The consumers and government have inelastic demand towards the changes to interest rate. But, foreigners and business operators (local, foreign owned) have elastic demand in relations to interest rate changes.

When the economic is strong, more people will become savers and the process of banks giving loans continue to progress.

Customers leave a branch of Malaysia's Maybank in Putrajaya October 9, 2009. ~ Reuters/Bazuki Muhammad

Advertisements