Have you ever tried to take out all the money in your account and you are told it is not possible? Well, for reasons listed herein, some banks ask that users have a minimum balance. So many financial establishments need a minimum balance to create an account and get a very high rate of interest. It also prevents you from paying service fees or things like this. In summary, they have to get more money from what you put in your account than you cost them to sustain your accounts. In this article, we will learn about why banks require a minimum balance, what a minimum balance is, and other questions. so, Let’s answer the question Why Banks Require Minimum Balance?
Banks require minimum balance because customers cost them money. The financial institution pays the overhead to operate branches, sustain accounts, perform customer service and so many other things. As a bank, it is also a business firm and all businesses strive to make profits.
What does a Minimum Balance Mean?
A minimum balance is the smallest amount of money that you have had with a bank for the month. The minimum balance payments can increase, so you understand what you will face in the future. There are types of minimum balance requirements and they are listed and explained as follows;
- Minimum Balance: if you are asked to have a minimum balance, then it means that your balance cannot go down beyond a specific amount at any point of the cycle of your statement, or you will end up being charged a fee.
- Minimum Daily Balance: a minimum daily balance means your balance can go down beyond a certain amount for that day as far as you reach the specific amount needed at the end of the business day.
- Average Monthly Balance: be sure to not mix up this term with the average daily balance. To reach an average monthly balance, the bank must give account balance records at the end of all business days. The bank averages the balances at the end of the statement cycle, by adding them all together and dividing them by the number of days in the statement cycle.
Reasons Why Banks Require Minimum Balance
It is often said that there is a reason behind everything. This is true of the request for a minimum balance by banks. There are some reasons why banks ask for minimum balance and they are listed as follows;
- Customers cost them money: the banks pay overhead costs to run branches, keep customers’ accounts, and give customer service. They also have to get money since it’s a business too.
- To lend to other institutions or retailers: the deposits of users are used to lend out to institutions or retailers who are in dire need of funds. Banks support businesses by giving out loans.
- Investment purposes: A minimum balance is needed because the deposits will be used and mobilized to invest in government securities. This will give future earnings, benefits, and profits to banks and create more money to run the bank.
- To maintain financial requirements: the minimum balance is asked for by banks to maintain certain regulatory financial ratio requirements for it to keep up with daily plans.
Benefits of Minimum Balance to Banks
The Banks surely will benefit from the minimum balance and they are given
- Strengthens the financial management: with more money coming through thanks to the minimum balance, all parts of this sector will be strengthened with more money. It will create an easy mode of management in the system.
- Able to invest: through the minimum balance requirements, the bank tends to get funds to put into government securities like shares, bonds and debentures, for more profits in the long run.
- To reduce costs: getting customers to have a minimum balance helps banks to reduce costs of running branches, customer services and lots more.
- Keeps banks financially afloat: the minimum balance requirements help financial institutions be financially afloat rather than being on the wrong side in the financial books.
Conclusion
In summary, we have broken down the meaning of a Minimum Balance, why banks ask users to have a minimum balance, the reasons in detail, the perks, and the importance to financial institutions. There are so many of them that require customers to have money however, not all banks ask for this. If you are not happy with having a minimum balance, there are other financial institutions to bank with. We hope this article was helpful, and anytime you require insights about minimum balance you can read through this article.
Frequently Asked Questions
1. If I do not keep a minimum balance, what could happen?
If you do not keep a minimum balance, the bank will charge you, and you must pay the penalty.
2. What is a minimum balance fee?
A minimum balance fee is a charge that takes effect on accounts that go below a particular balance.
