Ola: I intend opening a bank account.
Uche: You have two accounts already. Why do you want to open another one?
Ola: I want to dedicate that one to saving an amount of money. I heard a global recession is coming.
Uche: The global recession may start in the second half of next year. But let us leave the topic of global recession for now and have a discussion about the bank.
Ola: I actually have a question.
Uche: You may ask.
Ola: What are banks really for?
Uche: Making money.
Ola: For the customers?
Uche: No. For the banks.
Ola: But in almost all of the bank adverts I have watched, they make it seem as if they are doing something wonderful for us and not making money.
Uche: That is how it is.
Ola: The banks have assets right?
Uche: They mention N25 billion as assets.
Ola: Is that the money they have made?
Uche: Not really. It is the money they use to make money.
Ola: Hmm. Where do they keep it?
Uche: They don`t keep it anywhere. They lend it to customers.
Ola: If that is what they do with it then they have not got it.
Uche: No.
Ola: Then why is it called Assets?
Uche: They say it would be that if they get it back.
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Ola: But they must have it somewhere.
Uche: Yes. N25 billion. They call it Liabilities.
Ola: How can they be liable for it when they have got it.
Uche: Because it is not theirs.
Ola: If it is not theirs, why do they have it?
Uche: Their customers lent it to them.
Ola: You mean customers lend money to banks?
Uche: That is what is done in effect when they put money into their accounts.
Ola: And what do banks do with it?
Uche: They lend it to other customers.
Ola: You mentioned earlier that the money they lend to other people was Assets.
Uche: Yes.
Ola: Are you saying in essence that Assets and Liabilities are the same thing?
Uche: Well, one doesn`t say that.
Ola: But that is what you are saying. If I put N10,000 into my account, the bank is liable to have to pay it back so it`s Liabilities. But they lend it to someone else hoping that the person will pay it back so it`s Assets. It is the same N10,000.
Uche: Well
Ola: It cancels out then. The banks really do not have any money.
Uche: Theoretically
Ola: Let us forget about theory for now. How do banks make their money?
Uche: They lend your N10,000 to someone and charge the person interest.
Ola: How much?
Uche: It depends on the bank rate which is about 15% now. That is their profit.
Ola: It is my money. It should be my profit. Why is it not?
Uche: The theory of banking
Ola: Forget about theory. When I lend them my N10,000, why don`t I charge them interest?
Uche: You do.
Ola: Really? How much?
Uche: It depends on the bank rate which is about 4% presently.
Ola: Life of me.
Uche: But that is if you do not withdraw the money out again.
Ola: But of course I am going to withdraw. I could have buried it in my backyard if I didn`t want to withdraw again.
Uche: The banks would not like that.
Ola: Why wouldn`t they? You say it is a Liability for them. Wouldn`t they be glad their Liabilities reduced by my withdrawing my money.
Uche: No. Once you withdraw it, they can`t lend it to someone else.
Ola: But if I want to withdraw they would let me have it.
Uche: Almost always.
Ola: What if they have already lent my money to somebody else?
Uche: They will let you have someone else`s money.
Ola: But suppose that someone else wants his money but I already have it?
Uche: Another person`s money will be given to that someone else.
Ola: What if everybody wants their money at once?
Uche: It is the theory of banking that everybody would not want their money at once.
Ola: Wait. Are you saying that banks are banking on not having to meet their commitments?
Uche: I wouldn`t put it like that.
Ola: I think our discussion is enough for today.
Uche: Now run off and go and open your account.
Ola: Actually, I won`t be opening an account again.
Uche: Why not?
Ola: I want to open a bank.
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