Banks play an important role in the economy:
1. They only keep about 15% of the deposits as cash. The rest is used to give loans to various people.
2. Loans are required for various economic activities as well as investments. Banks mediate between people having surplus cash and those in need of it.
3. They give interest to the depositors and they charge interest on those taking loans from the banks. The difference between the interest rates is the main income of the bank.
4. Banks encourage depositing money by giving an interest. This contributes to savings in the economy.
5. By providing credit at reasonable interest rates, they encourage investment and prevent exploitation from the informal sector.
Explanation: Banks are essential for any economy. It’s a formal source of credit hence serves in the people's interest. Depositing money with the banks is also beneficial to the people.
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