The Rationale behind existence of banks

Banks can be defined as a business establishment in which money is kept for saving or commercial purposes or is invested, supplied for loans, or exchanged. Banks have existed for more than seven centuries, (Hildreth; 2001, 1) and ‘have traditionally played the key role [in any economy] by acting as financial intermediaries between savers and borrowers’, (Llewellyn; 1998; 2). This work aims at discussing what explains the existence of a bank. The approach adopted was to first explain the importance of borrowing and lending in an economy and why direct borrowing and lending is not practical. Then it goes on to show how a bank, acting as intermediary can facilitate the transfer of fund from lenders to borrowers. Finally it explains why banks are the most able adminstrators for this task.