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Importance of Commercial Banking

Commercial banks are an indispensable element of any functioning market economy. Commercial banks facilitate a transfer of payments in private households, companies, and government entities. As cash only plays a minor role in our everyday lives, banks organize a large part of our monetary dealings through electronic transactions. The purpose is for the exchange of economic goods and services for zero money or the settling of financial obligations. Companies pay wages, taxes, and contributions to social insurance systems suppliers’ invoices, and make other transactions. Electronically, private households transfer rents and pay their bills. Everything we pay is debited from our accounts. All of these money flows are made possible through the bank’s transfer of payments.

Banks act as financial intermediaries for people and businesses that save money and those that also need loans. In this context, commercial banks fulfill several functions. Their most important tasks as intermediaries are the pooling of assets, maturity transformation, and the risk transformation for savers and providers of capital on the one side and borrowers and investors on the other.

Pooling

Commercial banks accept medium smaller and in microscopic savings deposits and bundles these low volumes into more jumbo or even substantial loans. In the case of maturity transformation, the bank balances time horizons. On the one side, you have “save as,” the plan to withdraw part of their money in cash in the foreseeable future or their transfer of funds from their account to pay bills. On the other side, we can have people who want to build a house with a loan or a company that wants to make an industrial investment with borrowed money. These deputies plan to pay the loan over many years or even decades. Therefore, only a small portion of the funds lent flows back to the bank every month. A condition for the maturity of the maturity transformation is that they have to have sufficient liquidity.

Transformation of risks

Banks transform risks when granting loans and for another type of financial transaction. The focus here is on the risk of default of a debit or over or of a counterparty. By carefully evaluating potential borrowers and widely diversifying the savings deposits invested, the bank minimizes the risk for small savers and guarantees the full repayment if the amounts deposited. Additionally, for an absolute premium, banks are willing to assume the risk of interest in the exchange rate fluctuations and commodity price fluctuations. Such measures assist companies in protecting themselves against high of your prices. This is part of the risk transformation assumes by banks.

A large number of customers and transactions make it possible to diversify maturities and risks. The aim of prudent lending is, therefore, to expand both timelines as well as the risks as widely as possible.

Advancing loans

Providing loans is a crucial task for American banks. It enables people to make purchases and companies to invest, which ultimately supports growth and jobs. There are various types of loans offered by banks, such as; mortgage loans, term loans, cash credit, demand loans, and overdrafts. The nature of the loans depends on the purpose for which it is given. For instance, cash credit is given for the purpose of meeting working capital requirements, and cash credit loans are for the use of meeting temporary needs of praise for the borrower. Bans offer term loans for a long term loan relationship, for example, a credit can be given for machinery such as a car with a high cost and cannot be repaid within a one year period. Therefore, such loans are provided for a more extended period. On the contrary to a term loan, demand loans are demanded within a short period.

It is through such loans that the American commoners can seek quick financial money and change it into an active investment that will assist them in generating an income. Commercial banks have a primary function of giving out loans and, in this regard, spearhead the economy to grow.

But, sometimes, paying loans may seem to be difficult for business entities. When this happens for a certain amount of time, a loan becomes non-performing. Banks with a high stock of non-performing loans earn less and therefore have less money to lend. They must also use the remaining earnings they have to cover future losses from non-performing loans. In short, bad loans cause banks to borrow less.

Financing foreign trade

The finance gap can be for anyone who has a finance gap between providing goods or services and receiving the final payment. A large percentage of global trade is reliant on trade supply chain finance, which is estimated to be ten trillion US dollars a year.  The exchange rate is incredible in the world, and it helps the dollar currency to travel abroad comfortably with the American citizens taking advantage of the exchange rate.

Commercial banks in the US assist in financing customers through foreign trade and accepts international bills from them too. This is essential during tourism as well as there is an action of the transaction when goods and services are in demand.

Agency banking

Agency banking is fast dominating the financial ecosystem and has dominated for years. It is on the uprise in developing countries with evolving economic subjects. Across America, agency banking has provided unlimited access to financial services to the unbanked population. Agency banking could refer to a type of branch banking, which is the primary channel for improving financial inclusion and ensuring a broad customer base for banks. It is mainly targeted by people in the countryside and semi-urban communities, and the unbanked segments of the urban population. The Agency banking system operates with the help of agents who conduct underlying financial transactions on behalf of the banks.

The benefits of agency banking have proven to be a blessing to the economy, financial institutions, and numerous end users since its inception. Such a system of banking has promoted the financial inclusion policy by making available banking services in areas where commercial operators are either discussed or non-existing at all. From the perspective of financial institutions, it is cost-effective to provide banking services to the financially excluded population through strategically placed agents as opposed to establishing new branches in multiple locations.

For the agents, agency banking provides them with the opportunity to diversify their business and earn extra income. In doing so, they are building capacities and learning new skills in information and technology, cash management, and relationship building. Besides, the agency creates jobs for those who are interested in the agency banking platform run by banks and help those interested in starting a profitable business. For this to be authentic, agents must establish their businesses in areas where there are little to no bank branches put in place for adequate risk management strategies, and the agents must ensure that they are honest staff members to prevent fraud.