The role of banks in creating a competitive economy

Banks are companies specifically authorized by the Bank of Namibia (BoN) to conduct banking business. The Banking Institutions Act 2 of 1998 defines banking business as the regular receiving of funds from the public for safekeeping and the lending of the funds so received for loans, as well as for investments. Simply put, banks are the institutions you go to, to deposit money, withdraw money, or borrow money from.All banks must have a license to operate and are regulated by the central bank. Banks currently operating in Namibia are Bank Windhoek, First National Bank of Namibia, Nedbank Namibia, Letshego Bank Namibia, Trustco Bank, Bank BIC, Atlántico Bank, Absa Bank, and Standard Bank Namibia. Some banks are licensed to conduct full banking business, while others are authorized as representative offices or branches of foreign banks.Banks offer various products and services, but as stated earlier, the main business of a bank is to receive money through deposits and to lend these deposits to the next person requiring funds for various purposes. You will then earn interest on your deposit, while the person who borrowed the funds pays interest for using the required funds. The difference of what is being paid to you as interest, and what the borrower pays the bank as interest, is the income of the bank, referred to as net interest income.Funds lent have two components, namely, the capital amount (which is, for example, the N$10 000 advanced as a loan per annum), plus interest on the capital amount (which is currently 9.25% per annum, therefore 925.00 per annum). A N$10 000 loan over a year will therefore cost the borrower 925.00 in interest, which will bring the total repayment of that loan to N$10 925.00. The monthly instalment on this loan will be N$875.67, consisting of the repayment of the capital amount of N$798.59, and an initial interest amount of N$77.08. Payments to the capital amount increase with each instalment paid, while the interest portion decreases over the term of the loan.That interest amount on a loan, together with other service fees, charges, and investments, is the bank’s total income per annum, or over a period. This income is then used to lend further, to pay salaries and other operating expenses.The fundamental importance of banks to the growth of a country’s economy is that economic growth is always underpinned by financial intermediation. This implies taking of deposits from depositors and lending these deposits to borrowers.ConvenienceBanks provide you with the convenience of safeguarding your cash, accessing your cash as and when you need it (also through online platforms), providing you with investment products with good returns, and providing you with many value-added services (depending on the bank). Your deposits with the bank will always be payable on demand, unless you have invested in a long-term product, in which case your deposit, with interest, will be payable on the date of maturity of your investment term.As it is difficult to for anyone to have N$1 million to buy a house, individuals borrow from banks to fund their needs such as housing, vehicles, studies for themselves and or loved ones, farming etc. Banks therefore play a pivotal role in the facilitation of many individual investment decisions, which then help grow the country’s economic sectors. Businesses borrow from banks to expand their operations or invest in new ventures, which creates new jobs and assist the country’s industrialization efforts and international competitiveness. As the economy grows, so is the prosperity of the citizens of that country.Through holding reserves as mandated by the law and lending the rest of the funds immediately not needed, banks create money through such lending, which is then used to purchase additional goods and services. The additional funds generated are then deposited back into the banking system and a portion thereof again on-lent, which then creates new money, thus having a multiplier effect.Banks play an important role in the facilitation of monetary policy, as set by BoN to achieve economic growth by monitoring inflation. While monetary policy is set by the central bank, banks facilitate the flow of money in the markets.It is estimated that over 6000 Namibians are formally employed by banks in various roles. Thus, many families directly and indirectly depend on those that are formally employed by banks. Banks also contract various service providers to provide various services, such as cleaning, IT, security services, catering, legal and medical services etc.

The role of banks in creating a competitive economy

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Namibian Sun 2025-10-01

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The role of banks in creating a competitive economy

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Namibian Sun 2025-10-01

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