How Banks Work

Deposits represent the money which individuals offer to the banks and consequently obtain profit in terms of interest. Deposits enable banks to lend and invest anywhere. Diverse deposits forms exist, including saving deposits, fixed deposits, current deposits, and call deposits. The stiff competition in the banking sector and technological innovations aids in the economic growth contribution. Most banks focus on operational effectiveness and efficiency, which directly affects their survival. Most of the developing countries strategies their financial sectors as the overall economic growth plans. In these countries, banks dominate as financial institutions. (Tarawneh, 2006: 103).The performance and profitability of banks provide the key to economic growth. Profitability computed by return on total assets. The ratio presents the effectiveness of the firm in using assets in earnings generation. The rate is keen, followed by investors in making investment decisions in a particular firm. The bank’s borrowings from the manufacturers are generally used to cater for working capital. Since there exists safety in keeping money in banks, the desire to save is increased; therefore, the savings are used in the production of new capital assets. The idea leads in the bank’s capital formation in a specific country aiding in the growth process. There exists extensive research which examines the impacts of banks on economic growth. The bank’s activities, which include identification of productive businesses, resource mobilization, risk management, and transaction facilitation all contribute to economic growth. The major bank contributor to economic growth is usually bank credit. Bank credit supply plays a vital role in monetary policy, which is a significant contributor in the macroeconomic economy output. The bank loan effects on economic growth are generally context-based. While bank loans mitigate economic growth in some countries, they fail to do so in other countries. However, there exists a strong relationship between economic output and bank lending. Increase in goods and services investment instituted by more lending leads to GDP increase in a country.

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