Monday, October 19, 2009

Three Prinicples for Honest Banking (2)

2. Money on Call should not be loaned.

Money deposited on call is money that can be withdrawn at any time that the depositor chooses, ie whenever they call. The deposits in all cheque accounts and many savings accounts are on call. Modern banking practice is based on the fact that in general only a proportion of money deposited on call is withdrawn at any time. The rest is used to finance overdrafts and other short term loans or loans on call. Honest banks will not make loans against money on call.

This will eliminate the practice of paying interest on deposits that are on call. Banks can only pay interest, if they can earn interest by making a loan. Banks that do not loan money deposited on call would not be able to pay interest on it.

This change to banking practice would make depositing money on call less attractive, as there may be bank charges, but no interest. Therefore, people will only deposit money on call if they expect to use it fairly immediately. If they do not want to use it immediately, they will be better to deposit it for a fixed term (even if only a few weeks) so the bank can lend it and they can be paid interest.

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