Types of Banks

IGCSE Economics, Unit 3.1Section6

What is a bank?

A bank is a financial institution that acts as a financial intermediary between consumers who wish to deposit money and consumers who wish to borrow money.

Check Point

Complete activity 3.6. This activity will be handed in, so make sure you do not write it in your notes.

How do banks make a profit?

1. Charging interest on loans2. Charging fees for the provision of financial

servicesa. Withdrawals from ATMsb. Exchanging and transferring foreign currenciesc. Issuing credit and debit cardsd. Telephone and internet banking services

3. Making Investments

Types of Bank

1. Commercial Bank– A type of bank with individual and business

customers that has retail branches in many towns and cities.

– Services include:• Accepting deposits of money and savings• Helping customers make and receive payments• Making personal and commercial loans• Exchanging foreign currencies

Types of Bank

2. Credit Unions– A cooperative, not-for-profit organization, owned

by and for its members• Services include:

– Low-cost loans to members– Services similar to commercial banking services, but at low to

no fees

Types of Bank

3. Mutual Societies– Owned and run on behalf of members or

customers. • Services include

– Traditionally specialized in providing mortgages– Now offer many commercial banking services

Types of Bank

4. Investment Bank– Specialize in helping large business organizations

raise finance to fund their operations and expansion. • Services include:

– Helping firms raise funds by selling shares on the stock market– Advising on company mergers and takeovers

Types of Bank

Islamic Banks– Based on the principles of Islamic Sharia law,

which forbids interest charges and payments. • How do Islamic banks make profit?– Islamic banks can earn a profit from the fees it

charges customers for banking services, including making loans

– People who deposit their money will earn a share of the bank’s profits rather than paid interest

Check Point

Choose one of the banks we discussed today and write a haiku (5-7-5) about it. Here’s mine:

Investment BanksInvestment Banking

You raise so much capitalBy selling the stocks

The Role of the Central Bank

The central bank is the center of the banking system in most economies.

The main function of the central bank is to maintain the stability of the national currency and the money supply.

In other words, the central bank is in charge of controlling all the money in an economy.

The role of the central bank

The oldest central bank is the Bank of Sweden, est. 1668

In many countries, the central bank is owned by the government and run by a public corporation.

The second oldest is the Bank of England, est. 1694

Functions of the Central Bank

1. Issues notes and coins for the nation’s currency2. It manages payments to and from the government3. It manages the national debt4. It supervises the banking system, regulating the

conduct of banks, holding their deposits and transferring funds between them

5. It is the ‘lender of last resort’ to the banking system6. It manages the nation’s gold and foreign currency

reserves7. It operates the government’s monetary policy

Check Point

Complete the Venn diagram for commercial banks and the central bank. Make sure you consider the following questions:1. What are the main functions of the two banks?2. What services do they provide and to whom?3. How are they organized, controlled, and financed?4. What are their relationships with other banks in your

country and globally?5. What role do they play in your economy?