Banks and money
The word bank comes from the Italian word for bench. Financial traders in cities such as Florence and Rome sat on benches by the market. Of course, there have been financial traders in all societies, but the idea of a large-scale company that lent people money in an organised way emerged in Europe around 500 years ago.
A bank is a business that aims to make a profit for its owners. People rely on banks to provide a range of financial services. Most people need to borrow money from a bank at some point.
Imagine two people, Alia and Bassam, using the same bank. Alia has money in her account but does not need most of it at the moment and wants to save. Bassam wants to borrow some money from the bank to start a new business. The bank may decide to lend Bassam money.
Banks calculate that not everyone will need their money
at the same time. Some of the money the banks lends belongs to their other customers. In this example, some of Alia’s capital might be part of the 1,000 given to Bassam.
Globally, many banks charge interest on loans. They may require the person borrowing the money to pay back more than was lent. The additional amount repaid is the interest on the loan. The extra money is profit for the bank. Islamic banks do not charge interest on loans and make profits in different ways, such as investing money.