Have you ever wondered how banks manage to pay for their location and employee salaries? Or how do they give away loans, free checking accounts, and pay for interests on savings accounts? We all know that top banking staff is very well paid, and where does all this money come from?
Let us go ahead and learn a bit about how banking works. In this post, we will have a closer look at why banks store your funds for free and how they use the same to make money and deal with all their expenses.
Banks never run short of funds, and they always keep coming to win over new customers. This is because they use your money to make their money.
Here are a few common ways for banks to make money in the UAE.
Banks make money from the interests they charge on loans, credit card bills, overdrafts and other dues. The interests banks earn from these dues are greater than the interest they pay to their savings bank account holders. The difference of amount between interest earned and paid is the bank’s profit.
For example, you have an emergency fund of AED 10,000 deposited in your high-yield savings account with an interest rate of 2 per cent. And your bank has invested this money to provide a mortgage loan or student loan at 6.65 per cent. So the bank paid you interest of AED 200 but earned the same in hundreds or thousands more from the loan. Now, imagine this process being repeated with millions of banking customers with billions of dirhams.
Here are a few investment options that help banks make money.
Banks in the UAE also charge fees and other charges on the services provided to the account holders. For example, if you open a bank account, you need to pay account opening charges. There are various other types of charges that banks apply. Here is a precise list.
Fee-based income sources are stable for banks even during economic downturns when the market fluctuates and capital market activities slow down.
Most banks in the UAE offer capital market services for investors and organisations. Capital markets help corporations who need funds to expand their business meet the investors with the capital and then need a return on this capital.
These banks facilitate capital market activities for various services like underwriting, sales and trading, etc. They execute trades within their houses and make money through brokerages. In addition, they employ trained and qualified investment banking teams in different sectors to promote business in debt and equity underwriting. These teams also handle businesses in mergers and acquisitions. The banks charge their clients certain charges in exchange for these services.
Banks can get creative and find multiple ways of making money. If you want to know about banking products and services of any specific bank, you can visit our website and find the same with their features and benefits. This way, you can ensure making the right choice in terms of managing your finances.