Personal Finance & Money Asked on April 23, 2021
"Banking means accepting money for the purpose of lending or investment,of deposits of money from the public,repayable on demand or otherwise,and withdraw able by cheque,draft,order or otherwise."
I really do not understand why accepting money would mean lending or investment? In fact if you are taking money then how do you lend? If someone could explain me what this really means it would be of great help.
In fact if you are taking money then how do you lend?
The national government defines the banking regulations for the country. They allow banks to take a large percentage of the money deposited in the bank, and lend that money to people/businesses. The interest collected from those loans is the source of the interest they can pay on the money deposited in the bank. It also pays all the expenses, and leaves the bank company with a profit.
Yes, if everybody tried to pull money out of a bank in a short time period, there wouldn't be enough cash on hand to empty all the accounts. But in reality most of the time very little of the money deposited is pulled out o any particular day.
To provide peace of mind, many countries also have "insurance" to make sure the bank will be able to honor their obligations. If too many people with loans default, and the bank can't refund all the money to depositors, the insurance kicks in and makes the customers whole.
The national government also periodically reviews the books of the bank to make sure they are acting within the legal parameters of the banking regulations.
repayable on demand or otherwise,and withdraw able by cheque,draft,order or otherwise
If you want to pull the money out of the bank, you have to be able to do so. Both parties have to follow the rules.
For example:
if the money is in a Certificate of Deposit then cashing out early can cost you some interest.
If you want the money in physical cash, you may have to wait a business day or two for them to get enough physical cash to the physical building.
These rules should be spelled out in the paperwork associated with your account.
Correct answer by mhoran_psprep on April 23, 2021
Financial institutions are highly regulated entities. The rules differ based upon the incorporating charter of what sort of financial institution, it is to be.
If you jump through the "bank hoops" you can call yourself a bank. If you jump through the "credit union hoops" or the "savings & loan hoops", you can call yourself one of those.
Who holds the hoops? An agent of the government empowered by legislation to make sure all the i's are dotted and the t's are crossed. Bank regulators may also be credit union, or savings & loan regulators, but don't count on it.
Regulators work within a legal framework defined by federal legislation, state, and sometimes county (see Cook County, IL) legislation. And don't forget case law. There are companies whose sole reason for existence is keeping financial institutions informed about where the legal boundaries lie. And where they are likely to be moved. (I worked for one.)
Years ago a software company decided it wanted the name "SoftBank" or something with "bank" in its name. A distracted idiot would not confuse this company for a financial institution. Nevertheless, regulators came calling and they had to change their name.
Hence, "banking" is a term of art that is defined by law, not dictionaries.
If you have a financial institution that does banking-like functions, it will offer two sorts of products: deposit and lending products. The funds realized from deposit products are used to underwrite lending products. The profits from lending products (i.e. interest) are used to satisfy the contractual obligations of deposit products (i.e. interest).
(If the financial institution is a credit union, they use different words for the same things (e.g dividends). If the financial institution is a savings & loan, it probably went out of business in the late 1980s. If the financial institution is an Islamic bank, now that's interesting since Moslems cannot charge interest.)
Answered by StevePoling on April 23, 2021
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