Introduction
Some of the largest banks operating in Malaysia
Banks are defined as financial institutions, where it is licensed to receive deposits from the public and create credit for loans (Bank of England, 2015). The banking industry is an indispensable part of a nation as it contributes to the stability of the economy. Without the presence of banks, it is sure that the economy will not be able to function properly as there is no regulator between individuals and the financial markets, leading to significantly higher risks bear by an individual. To some extent, it may lead to market failure if this goes out of hand.
Brief Roles of Banks
One function of banks is to act as a safe for people to deposit their savings and in return provide interest payments to the depositors (ING, 2016). Of course, banks are not pyramid schemes that collect money from new depositors to pay interests to existing depositors, they are profit-oriented organisations as well. To generate profits for themselves, banks collect deposits from the public and invest them into the financial markets. To juggle between the need to make profit and the obligation to pay interest to depositors, banks invest the funds by diversifying them into different pools that suit the needs of the depositors accordingly, be it conservative depositors (fixed deposits) or aggressive investors (investment schemes provided by the bank).
Besides, banks also offer other goods and services to the general public. For example, debit and credit cards, different schemes of deposits that bear different risks and returns respectively, insurance, and so on. It tries to cater to the different needs of the public while staying competitive compared to the other banks offering similar products (with lower rates, higher returns and etc).
Banks and Us
General/Conservative Users
You might have heard about the occasional “wars” by various banks on the offered interest rates, or how your parents compare the rates of fixed deposits from different banks. Fixed deposit is the safest mean of investment for an individual to participate in as the interest rate is fixed once you deposit your money. It is useful if you have no plans to use your money in the near future, or if you just want to have a minor risk-free investment.
The most important thing to take note of is the interest rates offered and the term stated with respective to the interest rates. Banks may have promotions that sound attractive at first but further research will reveal that it is not. Therefore, it is essential to find out the total returns with respective to the initial investment for the same period of time while comparing different banks and its promotions.
For example, Bank A offers 4% per annum as its fixed deposit rate for 12 months while Bank B offers 3.5% per annum for the first 9 months and 5% per annum for the remaining 3 months, a sum total of 12 months. Calculations illustrated below will be based on an initial deposit of RM10,000 and assuming that the fixed deposit is held to its maturity date:
Bank A (pick this)
Interest earned = RM10,000 x 4% = RM400
Bank B (even though the 5% sounds attractive, its short period = less returns)
Interest earned = (RM10,000 x 3.5% x 9/12) + (RM10,000 x 5% x 3/12) = RM387.50
Besides that, we are likely to be using the debit and credit cards issued by the banks. Debit cards are received upon the creation of an account in the bank, where it also acts as an ATM card. It is possible to purchase goods with the debit card alone, provided that there is sufficient balance in your bank account and the dealer accept cards as a method of payment.
Credit cards however are subjected to approval by the bank through applications for it. These cards do not impose a limit to spending based on your account balance, but a limit based on the card itself, hence it is essential for the bank to ensure that the applicant has the ability to pay back the bank after usage. The risk of overspending is significant as the money is invisible, leading to accumulation of credit card debts and bankruptcy if the user is unable to pay back its spending. According to statistics, nearly 50% of bankruptcies caused by credit card overspending are people below the age of 30 (Lim et al., 2014). It is important to be disciplined and control your spending according to your income.
Business Owners/Potential Business Owners
If you are a business owner, banks can be of great use to you. Overdraft facilities are available if you need to solve your working capital issues (provided that you can prove to the bank that you can overcome it with a little assistance). Loans are available if you need to expand your business. Equity financing is only available as a source of capital if you are a large corporation (you have accountants/professionals to deal with that anyway when you get to that point).
For potential business owners, or individuals who are thinking of starting a business, banks may not be the best source of funding for you. Banks usually grant loans to already well-established businesses as there are proven track records. For new start-ups or individuals who wants to promote a new business idea, you are better off finding angel investors or approaching venture capitalists for funding. Both appreciate fresh ideas and are willing to spend money if they think that the idea can yield returns for them in the future.
Investors
Commercial banking is only one of the functions of a bank. Large banks are usually conglomerates and investment banks are often a part of it. Hence, investment services are available and banks serve as a middleman between the investor and the financial markets.
Investment options in Maybank2u, Maybank’s online banking platform
Taking the example of Maybank, Malaysia’s largest banking group. It has its own online trading platform and brokers for individuals who wants to invest in stocks (only if you open a trading account with them). It has its own unit trusts and the convenience of managing them through Maybank’s online portal. You can even trade gold online by creating a specialised gold trading account with them. Though, since Maybank is offering these services and bringing convenience to the end user, transaction fees will be incurred.
Conclusion
Banks are useful institutions to an individual as it serves to bring you convenience by offering services that meet your various needs. It also acts as a safe haven for you to deposit your money (you don’t want to store your money in the form cash under your bed right?) So, the next time when you have some excess cash on hand, why not approach a bank and use their services to your advantage?
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[tw-toggle title=”References”]
Bank of England. (2015). PRA Rulebook. [online] Available at: http://www.prarulebook.co.uk/rulebook/Glossary/Rulebook/0/03-09-2015/B [Accessed 26 January 2017].
ING. (2016). The Role of Banks. [online] Available at: https://www.ing.com/About-us/Profile-Fast-facts/The-role-of-banks.htm [Accessed 27 January 2017].
Investopedia. (2016). Pyramid Scheme. [online] Available at: http://www.investopedia.com/terms/p/pyramidscheme.asp [Accessed 30 January 2017].
Lim, W., Ng, W., Chin, J. and Boo, A. (2014). Understanding Young Consumer Perceptions on Credit Card Usage: Implications for Responsible Consumption. Contemporary Management Research, [online] 10(4), pp.287-302. Available at: http://www.cmr-journal.org/article/viewFile/11657/pdf_12 [Accessed 1 Feb. 2017].
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