How banks make money

Published: September 20, 2012

DUBAI: This is with reference to Najma Sadeque’s article “How banks make money — off you and me” (September 19). The writer needs to understand that banking, like any other business, has to operate so that the institution makes a profit. The reason why the Bank of North Dakota did not go through the meltdown that some of the other banks in the US did was because they followed the capital adequacy requirement properly and did not play around with fancy products.

Yes, the deposit of the customers is used for lending but this cannot happen many times over as suggested by the writer. In fact, it is a percentage of deposits held by the banks and is always less than 100 per cent. The reason why certain banks give higher rates on deposit and certain charge higher interest rates on lending has to do with a) the central bank interest rate; b) the lending risk and; c) operational costs.

In Pakistan, no bank offers any fancy products and to be honest, the deposit rates for all the banks are more or less the same, give or take 0.10 to 0.15 per cent. While lending, some banks are transparent about their rates and some have charges built into them that are not so transparent. As an example, look at auto loan rates of banks. Some appear to be lower than others but the monthly payment of each varies about Rs100 to Rs300 only. The choice is always that of the customers. Yes, banks make money off you and me, but then tell me, what exactly do you get in life solely at the cost of production and without any profit for the seller?

I Ahmed

Published in The Express Tribune, September 21st, 2012.


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