Why Do Banks Make Profit Amidst Poverty?

Last updated on March 20th, 2024 at 09:24 am

Advertisements

Every year, financial institutions around the world post voluminous profits even when there is poverty or when there has been no significant change in the poverty level.

Economically, the fact that financial institutions are making more profits does not translate to poverty reduction.

But it is baffling that even when there is hunger, economic difficulties, invasion, or even when businesses are shutting down, banks are always recording high returns.

Advertisements

In the United States, for instance, the three largest banks made at least a combined profit of $26.71 billion in the quarter of 2023 – JP Morgan ($13.5 Billion), Bank of America ($7.8 Billion), and Wells Fargo ($5.76 Billion) – while 37.9 million people in the country live in poverty, according to data from the U.S. Census Bureau.

While 14.4 million residents in the United Kingdom were considered poor between 2021/2022, the UK’s four biggest banks, which in 2022 posted £23 Billion in 2022, almost doubled their pre-tax profits in 2023 to the tune of £41 Billion.

Elsewhere in Nigeria, where over 40 per cent of its total population is considered poor, the country’s most profitable banks – Access, Zenith, UBA, GTBank, FBN Holdings and Stanbic IBTC – grew their profits from N656.15 Billion in 2022 to N2.06 Trillion at the end of September 2023.

Also Read:  Comparing American Express Savings Accounts to Other Financial Institutions

What is the cause of this trend?

Why do banks make profits even when the poverty rate is worsened by the uneconomic or bad implementation of policies or during a recession?

In a column, an executive director of Positive Money,  campaign group, Fran Boait, described the situation as a clear monopoly and that bank customers are the ones paying the price.

The cause of this can be attributed to the following:

Economic Inequality

The fact that financial institutions are making profit doesn’t necessarily correlate directly with poverty reduction. Their profit isn’t directly channeled to activities or programmes that will take people out of poverty.

Economic systems can generate wealth for certain segments of the population while leaving others in poverty. For instance, if economic policies favor the wealthy or if there’s unequal distribution of resources, poverty can persist or worsen even when banks are posting billions of dollars in profit.

Financial System Dynamics

If financial institutions primarily focus on serving wealthier clients or engaging in speculative activities, their profits may not translate into broad-based economic development that could reduce the poverty rate.

Global Economic Forces

Factors such as globalization, trade policies, and international economic conditions can impact poverty levels. Economic events at the global level may affect developing countries more significantly, potentially leading to an increase in poverty despite some sectors, including banks, making profits.

Policy and Regulation

If policies are designed to benefit certain groups or if regulatory oversight is weak, it can contribute to income inequality and hinder poverty reduction efforts.

Access to Financial Services

While banks may be profitable, the extent to which they contribute to poverty reduction also depends on their role in providing financial services to a broad spectrum of the population. Lack of access to banking services, particularly for those in lower-income brackets, can exacerbate poverty.

Also Read:  10 Benefits of Islamic Banking To Business Growth

Social and Cultural Factors

Poverty is often influenced by social and cultural factors, including education, healthcare, and social mobility. Even if banks are profitable, addressing poverty requires a comprehensive approach that considers these broader societal elements. Issues such as unbanked or underbanked.

Job Market and Employment Opportunities

Economic growth driven by profitable sectors, including banking, may not necessarily lead to a significant increase in job opportunities for the lower-income population. The type and quality of employment generated are crucial factors in poverty reduction.

Various sources for banks to make profits

Interest Income

When the central bank of a country increases interest rates, lenders are one of the biggest beneficiaries and this is the biggest source of revenue for banks.

They earn interest on loans and other interest-bearing assets such as government securities and corporate bonds. The difference between the interest earned on loans and the interest paid on deposits is known as the net interest margin (NIM).

Charges from Illicit funds

When the political elites embezzle money, it passes through the banking sector. When they use ill-gotten funds to buy foreign properties or train their kids in overseas institutions, banks are always the channel and they get their share of these illicit funds through charges and other financial services they provide.

Non-Interest Income

This includes fees and commissions charged for various services. In countries such as Nigeria where banks charge for SMS, credit alerts, debit alerts etc, some of their profits come in the form of:

  • Loan Fees: Origination fees, processing fees, and late payment fees.
  • Deposit Fees: Account maintenance fees, overdraft fees, and ATM fees.
  • Investment Banking Fees: Advisory fees, underwriting fees, and brokerage fees.
  • Wealth Management Fees: Fees for managing clients’ investment portfolios.
  • Visa processing fees etc.
Also Read:  What Is a Tier-1 Bank Account?

Trading and Investment Activities

Banks engage in trading financial instruments, such as stocks, bonds, and derivatives, to generate profits. They may also invest in various securities, either for their own portfolio or on behalf of clients.

Asset Management

Banks provide asset management services to individuals and institutional clients, earning fees based on the value of the assets under management (AUM).

Foreign Exchange Services

Banks facilitate currency exchange for their clients, earning profits through the bid-ask spread and other transaction fees.

Treasury Operations

Banks manage their own treasury operations, investing in short-term money market instruments, government securities, and other liquid assets to generate returns.

Mergers and Acquisitions (M&A)

Investment banking divisions of banks earn fees by advising and facilitating mergers, acquisitions, and other corporate finance activities.

Insurance Services

Some banks offer insurance products and earn premiums and fees from underwriting and selling insurance policies.

For instance, before November 2023, American banks such as M&T Bank, Truist Financial and Eastern Bancshares used to have insurance subsidiaries. They’ve sold those subsidiaries anyway. But before they were sold, it was a means of generating revenue for the banks.

Another smart way banks are doing this is to arrange with insurance companies to offer insurance products to their customers, through this, they generate additional revenue from the sale of these products.

Technology and Innovation

As technology evolves, banks may also explore new sources of revenue through fintech initiatives, such as digital banking, mobile payments, and other innovative financial services.

Credit Cards

Banks generate revenue through interest on credit card balances, annual fees, and transaction fees on credit card purchases.

Author

  • Opeyemi Quadri

    Ope is a finance writer and researcher with 10+ years of experience in content creation. His interests cut across decentralized finance, investment, foreign exchange, government policies and politics.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top