What is a Bank?
A bank is an authorized and regulated institution that borrows and lends money in its respective country of establishment. As such, from loans, mortgages and maintaining safe deposit boxes to credit cards, our financial lives revolve around banks. These Financial Institutions play a pivotal role in the modern economy as they drive the ‘money creation process’ via creating ‘credit’ by lending its money to eligible customers. A bank is authorized to lend a certain portion of depositors’ money and in return, they charge ‘Principal’, ‘Interest’ and ‘Fees’. This is simply what a bank does and how it makes money. Any individual who works for this institution can be simply called a ‘Banker.’ Such people can work in Sales , Administration, Management or IT.
The only 3 aspects in a potential customer that are of utmost importance to a banker is:
- Proof of Identity
- That the individual is a law abiding Citizen
- Credit worthiness
When making a deposit, a banker will first get to know their client by requesting for Proof of Identify and asking some questions geared towards checking if one is in the green zone with the law and credit intuitions such as the CRIB (Credit Information Bureau). This iscommonly known as a (KYC= Know Your Client). If an individual passes this vetting process then they are eligible to be the bank’s customer. At this stage the bank’s main intention is to make you their customer and to convince you that their bank is the better option compared to the rest of its competitors.
If you are seeking loan or a line of credit you will not qualify for this facility simply on the grounds that you are a customer of that respective bank. This is where your ‘credit worthiness’ becomes crucial. The banker wants to know if you have the financial capacity to service the loan amount and to pay the interest component in a timely manner as per the agreement that you are going to enter with the bank. They simply do this because their main function or role‘is to make more money out of money’ and the money they lend are depositor funds.
In fact, this is the reason that your bank statement shows your deposited money as a credit entry to the bank. This is the only reason why banks pay you interest for the time value of money. Many factors contribute to deciding the interest rate and this, as mentioned earlier, is a role of the Central or Reserve Bank of a country.
The introductory process between a customer and banker, as explained here, can take minutes or weeks to complete. If you have a proven track record of repaying the promised financial commitment in a timely manner and have a growing asset class and cash flow, banks will do everything in their power to ensure that you keep depositing your money with them and give you lines of credit subject to the strength of your collateral assets. They will mainly pamper you with gifts on Christmas and on your birthday just to woo your finances towards them. Land, Fixed or Term Deposits and earning an income more than your expenses that manage any existing liabilities, are key in this endeavor.
Disqualifying a customer from a line of credit or loan “breaks a banker’s heart” (Believe it or not!)
Why ? 🤔
The moment you sign on that dotted line (BARELY READING THE FINE PRINT WHICH STATES OTHER TERMS AND CONDITIONS THAT YOU MUST AGREE ON ) for a credit card or loan as and when you use you the allocated funds you automatically have to adhere to the rules of paying the loan / credit portion + INTEREST .
This process creates a cash flow to the bank. Banks thrive on the growth of their cash flows as this increases their money creation ability and profits.
Anything that creates a cash flow can be considered an Asset. No banker in the right frame of mind, wishes to lose an asset.
Therefore, it is your responsibility to sharpen your financial discipline, which will one day take you to financial freedom. So you become an asset in the banker’s eye and he or she must win you over. As a customer, this is your vantage position.
Question number one
Dear Mr. Banker, what’s the country’s inflation rate since I’m ready to make an investment in your bank?
Inflation simply means an increase of prices and a fall in the purchasing value of money.
This is an important question when deciding on opening a deposit account or choosing a financial instrument based on your financial goal.
For example, if the country’s inflation is 12% and the interest the bank offers for the term or fixed deposit for a duration of three months is 8% you are losing 4% of “value “ from your deposit at the time of maturity .
Meaning the value of that amount of money has reduced by 4%.
We can say that your “purchasing power” via currency, the value of “money” depreciated by 4%.
Any deposit or investment decision must mainly be focused on beating or matching the respective country’s rate of inflation in order to preserve the (value) of money which qualifies as a healthy cash flow.
Question Number two
Dear Mrs. Banker, what Financial Instrument fits my goal?
Wealth management is important in our financial lives. Financial Instruments are non-tangible assets we create by choosing to invest in them. They have varied financial characteristics. For example, one must understand the difference between a Term Deposit and a Savings Account.
All financial investment decisions rely on financial instruments and they, in turn, rely on these key factors–
What is Risk ? Risk is the possibility of you losing the funds or deposit, in candid terms. For example, banks asses the risk when you apply for a loan. Investing in the stock market can be less riskier than placing a bet on number 15 on a roulette table. But, in contrast, the same decision can be riskier when compared with the investment option of a Term or Fixed Deposit.
But always remember that no investment decision, whoever the party might be– Bank, Casino, Hedge Fund, Mutual Fund, Finance Company or a Country, is RISK FREE.
What is Liquidity? Cash / Currency is the most liquid form in financial terms.
For example, let’s assume Sarath has a hundred million rupees in his savings account and Abdullah has a painting worth a hundred million rupees.
Both can claim that their net worth is a hundread million rupees, which is correct, but the question is who is more liquid, Sarath or Abdullah ?
Sarath can convert his money into any tangible or intangible asset or expense, whereas Abdhullah has to sell his painting and convert the proceedings into currency, which means money.
Unless he completes this process, his value is fortified in an asset he holds subject to value fluctuation.
So, the next time you consider financial instruments, think of them as vessels to get you to your financial goals.
They can range from a Savings Account, investing in a Mutual or Index Fund or a Term or Fixed Deposit. Depending on your goal, age, and risk appetite the instruments you might be advised upon can vary, but always consider the Risk, Return and Liquidity of the Financial instrument that the banker suggests.
What is Return? At the date of maturity, am I recovering the principal amount plus interest? Does this interest match the value of money and has it enhanced or matched the purchasing power of the deposit amount in relation to the current moment in TIME (which is sometime in the future)?
Always remember, the return must match or over perform the rate of inflation to make it valuable to you.
Question Number three
Dear Mr. Banker, what’s your fee structure?
They can be small, but they can feel like a pebble stuck inside your shoe.
Avoid any future misunderstandings by getting the facts right .
From maintaining a basic Saving or Cheque Account to Fund Transfers, it is important to identify the fees your bank might charge. There is no set criteria as the bank has full discretion on this matter. For example, some banks charge fees monthly and even for Interbank Bank Transfers. There have been instances where some banks have over charged their clients in fees, which have resulted in lawsuits.
It is always better to clarify these matters at the outset, since it is your money that is on the line.