Have you tried to observe who owns the tallest buildings in your metropolis? Or in any Central Business District all over the world? Observe. And you will see that the biggest and tallest buildings, and probably, the most profitable businesses all over the world, belong to the banking sector. Ever wonder how are they able to make so much money? From the deposits? Partly yes. But do you think that with just accepting deposits from several people would sustain the company's expenses like salaries for their tellers, managers, accountants, CEO's and payments for massive advertisements? Of course not!
This is what banks usually do. They accept deposits from people who do not know how to manage their money (ouch!). From people who get fooled that by saving their money in banks their money is safe and what's more, they earn interest on it! Little do they realize that in reality, by depositing their money in the bank, the bank is borrowing from them. Surprised? Yeah, it really is true - when you deposit your money in the bank, the depositor is in fact the lender and the bank is the borrower. Why is that so?
Let's get a bit technical. Legally speaking, a deposit is constituted from the moment a person receives a thing belonging to another with the obligation of safely keeping it and of returning the same. Take note of the last three words "returning the same." So if putting money in the bank is a "deposit" the bank should return the exact and "same" money that you gave to the bank. When I say "same" it means the very same money you gave them - same currency, same serial numbers - no less, no more. Question is, when you withdraw your money from the bank, do they give the money with the same serial numbers as you gave them? Nope! This is clearly a deviation from the law , right? But how come no one has cried out loud for such malpractice? It is simply because the transaction between a person who "deposits" his money to the bank and the bank is, in legal terms, a simple loan or mutuum.
From the point of view of bookkeeping and accounting, when a bank receives money from the depositor, it enters the receipt of money in its books in the credit side. The credit side is where you put in the company's liabilities and capital. Since the deposit cannot be categorized as Capital since capital is supposed to be those that came from the owners, the deposit therefore is a liability.
Thus, from legal and accounting point of view, the bank owns the money from its depositor.
Now, let's go to the more important part. The money part. How do banks create more money from the depositors in order for it to pay its everyday expenses and produce a substantial net income?
The money received from the depositors are in turn used by the banks to lend them to individuals or companies thru various bank loans like car loan, housing loan, business loan, and the ever popular, credit cards, or the bank may invest the money to real estate, the stock market, and other money market instruments of other banks and companies.
Don't you ever wonder why, when you have a big deposit in the bank, the bank would offer you a loan and term it as a pre-approved loan? Let's say you have a deposit of $100,000, the bank would offer to loan you money double or triple the amount you've deposited. But at what cost? Let's say the bank charges you the legal interest rate of 12%, that means the bank would earn a flat rate of 12% from your "own" money, this is not taking into consideration the compounding of interest yet (I will discuss that in my next blog) and how much do they give back to you as a return in your deposit? The banks give you 2% per annum (sometimes a bit higher or lower, depending on the bank's policy). So they earn 12% from your own money and give back to you the 2% - they pocket the 10% and you bring home the 2% and you're happy about it without even realizing that the bank have made a fool of you by profiting from you! In Filipino, you call that "ginigisa sa sariling mantika." And what's even worse, the 2% you earned is still subject to 20% withholding tax. So how much did you really earn? A collossal, massive, very huge 1.60% per annum! How much is that per month? While the bank gets to reap 10% FROM YOUR OWN MONEY! And banks do this to all their depositors. How many depositors does one bank have? How much are the deposits? How many banks are there? Do the math.
So now you know how bank works - they get money from people so they can use it and earn more money from it and return a small portion to their depositors, and silently saying, "Good riddance, chap! Thanks to you I have a big net income this year!" And you, in turn, is very happy about it. Yeah!
Why not, instead of putting your money in the bank, be "your own bank." Manage your own money. Be in control of your own money. Be the one to earn the 12% entirely, solely, no sharing it with anyone. It is your own money afterall.
But before you can do that, you need to have financial literacy first. And that's what this blog, and the succeeding blogs would all be about - FINANCIAL LITERACY.
Hope you enjoyed reading and hope you learned something from it.
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