History of banking
One of the oldest profession in the world is banking. The first traces of banking were found in the Roman Empire. Banking comes from the word ‘’banca”, which means bench. Another very common phrase, ’’banca rotta“, means broken bench. The first bank in the world was ’’Bank of Venice“, which was founded in 1171, in Venice.
Qualifications of banks
Today, banking has a crucial part in the global economy. The importance of banks is huge in financial markets. There are two basic type of banks: on the one hand, we have Central bank which is a national institution, or in some cases an international institution as in the European Union. Its main task is to keep inflation in the normal and stabile range. On the other hand, we have commercial banks. Their main task is to credit the economy and individuals. Furthermore, we have many qualifications of banks, depending on their main purpose. For example, there are investment and universal banks, which are also important institutions in financial markets.
The loan is a debtor-creditor relationship in which the creditor, in this case the bank, gives to the debtor, in this case the customer, a certain amount of funds. That certain amount of funds is given to the debtor to use at a particular time, under certain conditions, and for a fee known as interest, as the cost for the use of these funds.
Interest is compensation in cash. The borrower needs to pay the bank for a temporary assignment and use of funds.
The interest rate is the price of the loan term. The most common way to express interest rate is in the percentage of the 100 units per year.
Fixed interest rate is interest rate that is unchangeable during the time of the loan. This type of rate is defined by contract.
Variable (changeable) interest rate means that the bank has the right to change the interest rate in either direction, which means that they can increase or decrease interest rate. What the bank will do depends on the situation of the financial market. Reaction depends on movements in interest rates during the loan repayment. Variable interest rates contain two parts. The first part is the bank's margin, which represents a fixed part of the interest rates. The second part is reference interest rate which represents a variable part of the interest rate, i.e. EURIBOR or LIBOR.
Default interest is additional interest that the borrower needs to pay if he has not settled obligations during the contracted time.
Banking vs. other sources of money
In a global economy we have different opportunities to lend money. Financial markets are not equally developed in all countries. In some countries that are less developed or are developing, companies do not have the opportunity to lend money by issuing bonds or relevant securities. For that reason, they do not lend money with the best conditions (or the cheapest way). In this situation, banks are the only source of money for them. Regardless, companies need money to maintain their liquidity, and to improve and increase their product range in order that they can buy new equipment. In addition, these loans are crucial for growth and business improvement.
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