HOW COMMERCIAL BANKS MAKE MONEY

Commercial banks were designed to bring people together those people fall in to two categories: the surplus sector and the deficit sector. The surplus sector consists of people who are cash rich and have more money than they can spend and would like to lend this extra money to earn more money and the deficit sector consists of people who have less money than they would like to spend and would be prepared to pay money to those who will lend to them. The commercial banks profit from bringing these two sectors together, they borrow money from the surplus sector at a low rate of interest and lend to the deficit sector at a higher rate of interest, the difference between the interest rates is their profit.

Many people don’t understand how banks work, they believe that when they deposit money at their bank the money just sits there waiting to be spent or withdrawn, whereas what actually happens is the money you deposit at the bank is used to make profit, by using the fractional reserve system a bank can multiply your deposit to create debt based money which they can give out in the form of loans. The money may be pooled together with many other depositors money and used towards a loan or mortgage by someone else who requires the money. This is why we are encouraged by banks to save in a savings account.

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