How do banks make money?

Wahed Editor
September 23, 2022
How do banks make money?

Banks, like any other profit-driven business, issue charges for the services and products they offer. These services primarily entail accepting deposits. Deposits are funds that people place in the bank with the understanding that they can withdraw them at any time or at a predetermined future date. But what do banks do with all of the money they receive as deposits? Here’s where a lending system comes into play. A significant amount of money the bank receives in terms of deposits is lent to other people. Loans are borrowed for homes, automobile purchases, education or personal requirements. Banks also provide loans to businesses that are looking for capital. While deposits and loans only play a small role in the overall banking game, the vital business of most banks is when interest is earned through this exchange. Profits start rolling in from interest earned by the banks!

What is interest?

When you borrow money from a bank, you pay back the principal amount plus interest. Additionally, your interest rate increases as your loan term increases. Assume you borrow $1,000 from a bank at a 10% interest rate per year.

You will be required to repay $1,000 plus 10% interest, i.e. $100. So the amount you must repay after one year is $1,100. If you borrow it for two years, it adds up to another additional $100, and so on. Year after year, the bank is able to make significant profits because of this surplus.

Alternative revenue streams for banks

Broadly speaking, interest on loans is the most common way for banks to make money. But in addition to interest, banks also charge fees for services like account maintenance and wire transfers, etc. They make a great deal of money from fee-based sources, as they are generally stable and do not fluctuate over time, especially during economic downturns when interest rates are low. 

Here are some bank fees to make a note of:

1. Minimum balance fee: if you fall below a minimum balance in your account at any point, you will be charged a fee at the end of that particular month.

2. Late payment fee: banks charge a fee on payments made later than the pre-determined due date.

3. ATM fee: using an ATM that isn't associated with your bank could cost you. Banks charge you when you reach a certain number of withdrawals outside your bank's network.

4. Withdrawal fee: depending on your account, you may be limited to a certain number of withdrawals per month. After which, banks start charging a fee each time you withdraw.

Banks generate revenue through a mix of activities such as fees for their services, investment banking and wealth management. Investment banking is a strong source of revenue for banks as well. Investment bankers help companies raise money by issuing and selling securities. By wealth management, we mean services like financial planning, asset management, and estate planning.


The majority of money in the world is held at the bank. Banks keep at least 10% of each deposit on hand but can lend the remaining 90%. While banks do pay interest on the depositors’ funds in savings and investment accounts. But the interest paid out on deposits is at a considerably lower rate than the interest charged by banks on loans. This difference, known as the interest rate spread, is how the bank collects profits.


This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”).  Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice. Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security.

Furthermore, the information presented may not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented.

Any links to third-party websites are provided strictly as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites nor do we endorse the content and information contained on those sites. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the third-party websites.

Other Articles

Employee Spotlight: Zayan Yassin- VP Business Operations

Employee Spotlight: Zayan Yassin- VP Business Operations

“Wahed is the place and opportunity for you to make a difference. Nothing beats the satisfaction of working with like-minded people who share a common goal and drive, to make an impact with everything we do. A growing company backed by real talents.”
What is market volatility and why should you care?

What is market volatility and why should you care?

The stock market has been very “volatile” throughout the year 2022. During the early stages of COVID-19, the stock market was "volatile.” Haven't we all heard the term "volatile" too many times in stock market discussions or market commentaries? But what does it actually mean in this context? Let’s find out. Basically, “volatility” occurs when stock markets experience frequent and unpredictable price movements, either up or down. A more technical definition is that volatility is the standard deviation of a stock's annualized returns over a given period and indicates the range within which its price can rise or fall. To simplify, a stock is said to have high volatility if its price fluctuates rapidly in a short period.Factors such as political and economic conditions, company performance, earnings reports, and interest rate decisions can all contribute to market volatility.
Banking on History: The Advantages and Disadvantages of Saving Money in a Bank

Banking on History: The Advantages and Disadvantages of Saving Money in a Bank

When you think of the word “money”, one of the words you probably think of next is “bank”. That’s not surprising - banks are age-old institutions that are deeply ingrained in our modern society. The history of banking is rich; the first documented bank is the Banca Monte dei Paschi di Siena, founded in 1472. Since then, the financial services sector has ballooned to a value of about $22.5 trillion, which is roughly 20% of global GDP. When it comes to saving money in a bank, it’s worth understanding the pros and cons so you can make the best decision about where to save your money.

Start your journey to wealth

Download the App now