 A bank is a financial company with special functions and powers, including the taking of deposits and the issuing of loans. Banks are not simply registered as companies but as institutions that can perform these powers and functions and they have a direct impact on the finances of most individuals. South African banks are registered, licensed and regulated by the South African Reserve Bank. Without a license from the central bank, no company may call itself a bank. As the central bank of South Africa, the South African Reserve Bank exercises diligence and care in the issuance of banking licenses. This care ensures integrity in the banking system. In South Africa, we have three types of banks. Bank legislation in South Africa makes provision for three types of banks, namely commercial banks, mutual banks and cooperative banks. All three types of banks can take deposits irrespective of their type. We will briefly look at each type. Commercial Banks Banking in South Africa is dominated by commercial banks. These banks can elect which banking services to offer. These services include the provision of loans and advances, credit and debit cards, mortgage bonds, check accounts and foreign exchange trading. Banks charge fees on many of these services, which is an important source of their income. The larger, well-known banks such as ABSA, Capitech, FNB, Investec, Netbank and Standard Bank are examples of commercial banks. These banks have shareholders and their shares trade freely. These banks sometimes elect to call themselves investment banks or merchant banks. Despite these special names, they share a simple, common legal registration as banks. Mutual Banks Mutual banks are the second form of banks in South Africa. There are very few of these banks in South Africa and they are owned by their members, mainly their depositors. The best-known South African examples are Finbond Mutual Bank, GBS Mutual Bank and VBS Mutual Bank. Other than taking deposits, mutual banks offer limited services such as mortgage loans, asset-based finance, personal loans and loans against the security of investments in the bank. The lending services offered by these banks are limited by law to reduce the risk in their lending activities. Cooperative Banks Cooperative banks make loans to their members. However, the lending functions are limited to curtail risk. The most prominent example in South Africa is the OSK Cooperative Bank Limited. The Main Functions of a Bank Accepting Deposits The most important unique function of all the types of banks described above is that they can accept deposits from the general public and other companies. Deposits are the savings of the public and other companies and are normally made for short periods. Banks transform these short-term deposits into long-term loans which are their most important assets. Deposits are the liabilities of banks and assets of depositors and are used to fund the lending activities of banks. Ishering of Loans For most individuals, the ability to buy a house, a car or finance their studies will depend on getting a loan, usually from one of the commercial banks. However, the ability of banks to issue loans is dependent on the ability to attract and retain deposits. Banks charge higher interests on the loans they make than what they pay for deposits. By issuing loans, banks perform a crucial function in the economy. Banks finance transactions in the economy and can also be used as a source of investment, for example to purchase property. How do banks generate their income? The income that banks get from selling services to the public and the difference between the rate of interest they pay on deposits and receive on loans provide their income to cover the cost of their operations. What are the risks related to banking? If deposits are withdrawn and not replaced with new deposits, banks can run into liquidity problems. As their loans are tied up in long-term commitments, banks cannot insist on immediate repayment when they face deposit withdrawals. This is referred to as a run on the bank and although it is always a risk factor, the actual occurrence of such an event is very scarce. Banks therefore have to be trusted by the public with their money to be able to continue operations. Unscrupulous operators Unfortunately, people often fall foul to the activities of unscrupulous operators. These people can be individuals or companies who pretend to be banks and take deposits. In South Africa, these illegal activities are often in the form of pyramid schemes while internationally they are called Ponzi schemes, named after Charles Ponzi who ran one of the biggest such schemes in the United States. In a pyramid scheme, the operator, a person or a company uses new deposits to pay the promised return to people who invested earlier. Naturally, the scheme can run as long as new investors are attracted but once the inflow of funds from new investors stop, the scheme collapses. People who entrusted their funds to these operators then lose their deposits and often suffer hardship owing to the loss of their savings. In South Africa, it is particularly difficult to distinguish between a legitimate stock fall scheme and an illegal pyramid scheme. Generally, when a scheme pays a rate of interest well above the market rate or rate offered by banks, it is a pyramid scheme. Investors should take care with the responsible investment of their funds and should avoid investment offers that give returns well above rates offered by South African banks. Remember the old saying that if it sounds too good to be true, it probably is. Summary and Caution It should be evident that banks play a crucial role in people's lives and the functioning of the economy. People borrow money from banks for various reasons but mainly because they think that such borrowing will improve their living standards despite the interest payable on borrowed funds. People can save and pay cash for items such as houses and cars although it will take time to save enough money to buy without borrowing. The alternative is to borrow funds despite the interest burden. It is important, however, to remember that nobody is obliged to borrow any money from any bank and the option of saving before buying is always available. It is very important for the public to be diligent when making deposits and honest when applying for loans. Make sure that deposits are only made with banks registered with a central bank, the South African Reserve Bank. A complete list of registered banks that can legally take deposits can be found on the website of the central bank.