How do commercial banks earn?
For any bank to survive without relying on liquidity measures like government intervention to save it, it needs to earn from several sources. Commercial banks make their money from various schemes such as investments, lending rates and using their own bank fees and for cards that they charge their customers.
By pooling the large capital base made up of cash deposits, a bank may be able to invest the money in the meantime in profitable schemes that have financial significance for the bank and through advertising. Another most common standard of doing business by commercial banks is by charging interest on loans, which can yield a large profit, ranging from one-tenth of the amount lent to double the amount or more in certain long-term transactions. In special cases such as loans that have a high risk value, especially those granted on an economically uncertain basis, banks charge a high interest rate that will buffer the credit consequences in the event of a loss. In this way, the bank can make a high profit when external factors remain the same and the customer makes his repayment.
Finance charges such as those associated with opening an account are some of the other means of making money for a bank. This is possible in the case where the commercial bank enjoys a large following, which, when other long-term security measures are excluded, has little effect on the custody costs associated with the deposit. Other fees include those contained in transfer fees and ATM fees for city residents who do not have access to a physical bank or are limited by time to visit a real bank. Banks may also offer mobile money transfer services, involving service charges higher than normal rates in the telecommunications industry.
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