Understanding Banks and Banking: How Financial Institutions Operate and Serve the Economy

For a good and comfortable life, managing personal finances is essential. A bank is such an institution that helps ease the process of financial management and works to ensure a better life for its customers. Besides savings and investment, banks offer many other financial services that help make our daily lives easier and more organized.

While many people use banking services, most don't actually understand how banks operate. This article aims to shed light on exactly that.

A bank is a financial institution licensed to accept deposits from the public and then lend that money out again. The various activities that a bank performs are collectively referred to as "banking." The two core functions of a bank are accepting deposits and issuing loans. In addition to these, banks offer other services, such as:

• Fixed Deposit Accounts
• Mortgage Loans
• Debit and Credit Cards
• Cheque and Bill Processing
• Asset Management
• Locker Services, etc.

In simple terms, a bank serves as a financial intermediary between businesses and the general public. Banks offer a safe place for people to deposit their money and later lend that money to businesses as loans to earn revenue.

Banks charge interest on the money lent, which is their main source of income. The biggest share of a bank's profit comes from the interest earned on loans.

A portion of the interest earned is then paid back to depositors as interest on their savings. The difference between the interest received on loans and the interest paid on deposits is the bank's profit.

Additionally, banks also earn money through the various services mentioned earlier. This is how a for-profit institution like a bank sustains its business.

Because banks play a critical role in the flow of money in an economy, they are required to operate under strict regulations. These rules are created and enforced by the country's central bank.

Although the term “bank” broadly covers all types, not all banks function the same way. There are various kinds of banks globally, and their operations vary. Therefore, it's important to understand the different types.

Central Bank

The central bank is known as the “bank of all banks.” It determines how other banks in the country will operate. The central bank is established by a presidential ordinance. For example, Bangladesh Bank, the central bank of Bangladesh, was established under the Bangladesh Bank Order of 1972 (Presidential Order No. 127 of 1972).

In addition to policy formulation, the central bank performs functions such as:

• Formulating monetary policy
• Printing currency
• Acting as the lender of last resort
• Setting interest rates
• Controlling inflation, etc.

Commercial Banks

Most of the banks we see around us are commercial banks. These banks accept deposits from customers and lend a major portion of those funds to businesses and individuals. In addition to financial transactions, commercial banks also offer services like cheque processing, debit and credit cards, locker services, etc.

Investment Banks

Investment banks mainly deal with investment management. Unlike commercial banks, they do not accept deposits from the public.

Investors can assign their investment management responsibilities to investment banks, which then buy, sell, and manage investments on behalf of the client. These banks may also offer investment consultancy services.

Credit Unions

Similar to investment banks, credit unions do not accept deposits from the general public. A credit union is formed by a group of like-minded individuals who pool their savings. These members invest their collective funds or lend them to fellow members.

Digital Banks

Digital banks are a new concept in Bangladesh. These are institutions with no physical branches, operating entirely online. Although similar in function to non-banking financial institutions like bKash or Nagad, digital banks are allowed to accept deposits, unlike bKash or Nagad.

Today, banks offer many types of accounts, often with varying names depending on the bank. Broadly, bank accounts can be categorized into three types:

1. Current Account

This account type is mainly used by business people. Its main feature is that deposits and withdrawals can be made as many times as needed within a day, making it ideal for managing daily business transactions.

These accounts usually offer very little to no interest. Banks offer both debit and credit cards for these accounts. Despite low interest, these accounts typically have higher service charges.

2. Savings Account

As the name suggests, this account is used by individuals to save money. While money can be deposited multiple times a day, withdrawals are limited to a certain number per day or month.

This account offers more interest than current accounts but does not usually come with credit cards. However, debit cards are provided, and service charges are generally lower than current accounts.

3. Fixed Deposit Account

This type of account is typically opened for a period of more than one year, requiring a fixed monthly deposit. At maturity, the bank returns the full amount with interest. Withdrawals before maturity often lead to account closure and forfeiture of interest.

No debit or credit cards are offered for this type of account, and service charges are minimal compared to other account types.

Banking institutions stand at the very center of a country’s financial system. Their role extends beyond accepting deposits and issuing loans — they help maintain a smooth flow of money throughout the economy. Additionally, having a bank account helps individuals avoid the risks associated with physical cash, such as loss or theft.

Thus, both in personal life and in the country’s overall system, banks play a very crucial role.