Understanding Banks the Bank is a legal entity that carries out banking activities, ie activities of accepting and collecting deposits from the public and using these funds to provide loans, advances, loans or as an investment on behalf of the legal entity that performs this activity.activity, as well as other commercial activities defined by bylaws of the Bank of Albania “. This is the definition that the Albanian law makes to the banking activity.
To better understand the notion of “bank”, it is necessary to explain first, what is money and secondly, what functions does it perform? Prof. Herber Mayo in his text “Finance” defines money as “a generally accepted symbol for the payment of goods and services or for the repayment of debt.” Money is called a “symbol” because in fact the real value of the material from which coins are made, especially banknotes, is many times smaller than the value attributed to it. Mankind has used different types of coins and banknotes. Also in different countries the symbol-money is different, for example, American Dollar (USD), Albanian Lek (ALL), German Mark (DM), it has even been passed to symbols accepted and used in some countries. , for example. Euro (EUR), etc.
Money is created to perform several functions:
- First, it is used as a medium of exchange instead of barter, or as it is otherwise called “direct transfer of goods and services”, people sell goods and services for money and the latter can then be used to buy goods and other services.
- Second, it is used as a backup tool, i.e. to transfer purchasing power in the future.
- Third, it is used as a unit of account and as a means of payment, because the prices of goods or services are expressed in money and not in parts of each other.
Money holders often have free, unused money for a relatively long period of time, which makes them technically “dead”. At the same time, someone, usually a commercial or industrial firm, needs this money, so it is necessary to transfer funds through a financial intermediary from those who have them, but do not use them, to those who need them for their businesses, but do not have enough money at the moment. Prof. Herber Mayo says that “The financial intermediary stands between the end bidder and the end user of the funds and facilitates the movement of money and credit between bidders and users.” This operation helps money holders because it gives them (pays) interest on the funds made available with a minimum of risk. It also helps the user of money, who in the inability to finance his own business projects, borrows large sums of funds, which are nothing but deposit amounts of a considerable number of depositors. The financial intermediary, who has collected these funds and put them at the service of the users, will be compensated for the service rendered to the parties. The remuneration for it, or as it is otherwise called “the profit of the financial intermediary” arises from the difference between what the financial intermediary pays to the depositors and what is paid by the borrowing users. For example. a bank, which is nothing more than a financial intermediary, lends to a construction firm at an interest rate of 15% per annul. The loan amount is taken from the deposits of a certain number of depositors, to whom the Bank pays 9% deposit interest per year. The difference between the 15% paid by the firm (borrower) to the bank (lender) for the loan taken and the 9% that the Bank pays to depositors who have left their funds with it, ie 6% is the share of income for the Bank. The economy also benefits from such financial operations, because firstly, the possibility of its development increases through the implementation of large business projects, and secondly, at the same time, the level of employment increases and consequently the income. Financial intermediaries are diverse, like banks , savings companies, credit companies, life insurance companies, etc. The earliest and most important among financial intermediaries are banks.
From the example shown above it is clear that banks have two main functions: the passive savings collection and the active lending. Given that these two functions undoubtedly have a major impact on the public interest, it is imperative that banks be subject to a special order, both in terms of licensing and the ongoing conduct of commercial banking.