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Section 1: Definitions and Functions of Banking

 Overview

Dear trainees,

This section deals with definitions and functions of banking. As you know, a bank is a financial
institution and a financial intermediary that connects economic agents to use available fund in the
economy in productive manner. Thus, a bank is the connection between customers that have capital
deficits and customers with capital surpluses.

Objectives
Upon completion of this Section, you will be able to:

 define banking; and

 identify functions of banking.

1.1 Definition and Functions of Banking

Can you intellectually guess what the term banking refers to?
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(You can use the spaces left below to write your response)
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Banking is defined as the business activity of accepting and safeguarding money owned by other
individuals and entities, and then lending out this money in order to conduct economic activities
such as making profit or simply covering operating expenses.

Dear learners, some of the salient features of a bank are pointed at below. A bank:
 is an institution which deals in money;
 accepts deposits of money from the public;
 mobilizes the savings of people;
 lends or invests money;
 manages profitable employment of such funds;
  makes funds available to businesses, financing their capital & revenue expenditure;
 provides financial services for a price i.e., interest, discount, commission, etc.
 has obligation to refund deposits on demand;
 deals with financial instruments; and
 stimulates economic activity in the market by dealing in money.
From the foregoing explanation, it could be deduced that banks mobilize the resources by
accepting deposits and utilize such funds by employing them profitably. The banker is, thus, an
intermediary and deals with the money belonging to the public. In here, an acceptance of deposits
of money is an essential function of a banker. However, accepting deposits of money from the
public alone doesn’t make it a banker. Rather, it is necessary that, the deposits accepted should
also be used for lending or investment purpose. Currently, industrial units, large business houses,
and other commercial undertakings also accept deposits from the public with the facility to
withdraw them when required or after the expiry of a certain lock-in period. Nevertheless, such
institutions cannot be termed as bankers because acceptance of deposits is their subsidiary
business, while the main function is manufacturing or trading.

To sum up, Bank is an institution that accepts deposits, makes loans, pays checks, and provides
financial services. A primary role of banks is connecting those with funds, such as investors and
depositors, to those seeking funds, such as individuals or businesses demanding loans. In the entire
process, it earns revenue and stimulates the economy.