Why do we need Banks?

One question that might pop up in many people’s mind is “Why do we need banks”? Is It just to deposit money and earn some interest or has it got something much more important than this. Well let’s start and try and understand “Why do we need Banks?” I will take an example, suppose we have three entities Party X, Party Y and an organization Z. Now we will take a few scenarios, first of all let us suppose that all three of them know each other, now if anyone wants money for some activity he has the option of borrowing it from the other party which is willing to lend him. Now let us consider the scenario that these three parties don’t know each other, so what can be the possible consequences. One thing that I can think off is a party who needs money for some activity will not be able to get that and hence may not be able to go ahead with the plans it had. These plans can be the expansion of a business which could have helped to generate jobs and pay the taxes to the government. In other words it could have led to the economic development of a country. So to address this important question of letting the parties interact with each other we need an interface. This interface can function as an intermediary and can help in taking money from people who have excess of them and lending it to the one’s who need them. And so here comes the concept of banks into picture.

Banks basically are involved in the task of taking money from people and giving the same money to others who need them to pursue some activity. These needy people can be organizations, students, or other individuals. Organizations in turn use this borrowed money by investing them in their businesses and generate economic activity. The corporates earn returns on their investments and so are able to return the money to banks with interest component and the banks in turn returns them to the depositor with an added interest component. Thus banks solve this basic problem of taking money from someone and giving them to others in a world where people may not know each other. I hope this article has clarified the concept of banks and helped you to understand the importance of banks to generate economic activity and attain sustainable development of a country.