There are several reasons for saving money in a bank. First of all, saving it at home is not really safe. Someone can still your money. Second reason is that your money will lose value. Money in a bank account will earn interest. The interest will help compensate for the effect of inflation.
Individuals and businesses often need to borrow money, and they need a lender that they can trust. That is exactly what banks are – reliable lenders. In fact, most of the money that people deposit in their bank accounts is immediately lent out to someone else.
They make a living by charging interest on loans. Of course, when you make a deposit into a bank savings account, the bank pays you interest on that money. However, the rate they pay savers is less than the rate they charge borrowers. The extra money they make by charging interest on loans is where banks earn most of their money.
A small amount of the total savings is kept by the bank so that customer can make withdrawals. The rest, however, is made available for loans. The amount that is kept is called the reserve. The reserve must be a certain percentage of all the savings received from customers – for example 20 per cent. This figure is set by the central bank, and this is one of the ways that governments can control the amount of money circulating in the economy.
