Bank and banking meaning explained

Banks are where things are stored. We have power banks, water banks, and so on. But we refer to banks here as a place where money is stored. A layman's definition anyway. A bank is a financial institution that connects individuals and institutions with surplus funds to those with deficit funds. Banking is the activities carried out in a bank.

Explanations of banking and bank

A bank acts as an intermediary between various economic agents. That's why they are referred to as financial institutions or financial intermediaries. As an intermediary, they serve as a link between economic agents with supply funds and those with deficit funds. By bringing these two individuals together, banking activities can take place daily and revenue and profits can be realized. 

Economic agents include individuals, households, firms/institutions, and the government. Some individuals may have excess money that is money they do not want to spend or are saving to meet a target. They bring this money to banks. These are then stored for safekeeping on behalf of those individuals so that anytime they need their money they can have the same. A bank doesn't keep money in a safe/vault for each customer. Instead, the money is added into a single basket and is provided to deficit economic agents.

Other economic agents need funding (deficit agents). Therefore, they request such funds from banks. Banks gave out the excess money to deficit agents on an interest basis. The interest earned is usually higher than that given to surplus economic agents. The difference between these two is referred to as net interest income. This is the main source of income for banks. There are other income sources for banks. Some of them are fee income, dividend income from investment in private equity, and gains from foreign exchange among others.

Other banking activities

Aside from safekeeping of money, other banking activities occur. This includes: 

• the safekeeping of valuables such as certificates, deeds of agreements, and collaterals; 
• creating money (which is achieved by keeping reserve deposits by customers and giving out the rest as loans); 
• complying with regulatory mandates such as the new circular stating that all Nigerian banks, etc should ensure that all customer's accounts are regularized with BVN;
• Serves as credit guarantees for their customers such as the use of letters of credit; among other things.

To conclude, banks and banking activities are the bedrock of the economy. They owed most of the money in the economy. This is why they are heavily regulated to protect citizens' funds.