In today’s economic landscape, banks are no longer optional financial institutions. They are indispensable nodes in the complex web of modern economic transactions. For many people, visiting a bank has become a daily necessity—often not just once, but several times a day, whether physically or digitally. Banks have evolved from simple financial custodians into dominant institutions that influence the functioning of virtually every sector of society.
The Rise of Commercial Banks
Commercial banks, as we know them today, have evolved over four to five centuries. Some of the earliest known institutions include the Banca Monte dei Paschi di Siena, established in Italy in 1472; the Berenberg Bank in Germany (1590); and Hoare & Co. in the UK (1672). In the United States, The Bank of New York, founded in 1784, marks the beginning of formalized banking in the country.
Over time, commercial banks became trusted intermediaries, not just for safeguarding wealth or aiding merchants and travelers, but also for managing the public’s day-to-day financial lives. Today, nearly all major economic transactions pass through banks, and legislation in most countries mandates the use of banks for handling public and private funds.
Among the world’s most powerful banks today are JPMorgan Chase, Bank of America, and Wells Fargo in the U.S., and the Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China. Together, these five banks control assets worth nearly 20 trillion USD. Remarkably, Islamic banks collectively manage around four trillion USD—a significant figure for a system that gained traction only in the last few decades.
Why Are Commercial Banks So Influential?
Commercial banks wield influence due to the vast range of services they offer. For individuals and small businesses, banks provide basic facilities like savings and checking accounts, loans, and easy access to funds. But they also engage with massive corporations and governments through long-term, high-value financial agreements.
Let’s break down their core functions:
1. Primary Activities
- Accepting Deposits: Through savings, fixed deposits, and recurring accounts.
- Providing Loans: Home loans, business loans, vehicle loans, personal loans, and credit lines.
- Facilitating Transactions: Using instruments such as debit cards, credit cards, cheques, and electronic transfers.
2. Ancillary Services
- Foreign exchange transactions
- Investment and insurance advice
- Mutual funds, stock broking, and wealth management
- Safe deposit lockers
3. Support for Economic Growth
Banks provide capital to industries, helping them expand, which in turn boosts employment and economic output.
4. Digital Services
Internet and mobile banking, UPI, and QR payments have revolutionized banking accessibility.
5. Inclusive Finance
Loan fairs and targeted rural development loans supported by government initiatives help reach underprivileged communities.
However, this expansive influence also brings challenges. Non-performing assets (NPAs), especially loans that are not repaid, pose significant threats to bank health. Additionally, digital fraud and cyber vulnerabilities demand constant vigilance and investment in security infrastructure.
Despite this, banks continue to earn enormous profits. For instance, the State Bank of India (SBI) has over 500 million customers and 22,640 branches, and generates annual profits around ₹20,000 crore on assets worth ₹40 lakh crore.
The core business model of commercial banking remains simple: collect deposits at lower interest rates and lend them out at higher ones. The interest rate gap is what generates profit.
The Ethical Challenge of Interest-Based Systems
This model, however, is not without its critics. Interest, or riba in Islamic terminology, is considered exploitative in Islamic teachings. The Qur’an explicitly differentiates between trade, which is permissible, and usury, which is condemned (Qur’an 2:275). The practice of making money from money—charging interest irrespective of profit or loss incurred by the borrower—is viewed as unethical and unjust.
The modern global economy, both in the West and East, largely depends on interest-bearing credit. Loans to governments, corporations, and individuals, as well as supply chains that rely on credit-based capital, have embedded interest into the very pricing of goods and services. Inflation, in this view, becomes a side effect of the compounding burden of interest.
