Banks offer personal loan at interest rate of 11 %, but why don't they invest those money in mutual funds or shares and earn more ?

2 Answers 2


Traditionally a bank makes money by lending out money. Their source of these funds is the deposits people make into the bank.

There are risks with this business model. Some borrowers might not pay it back. The economy (local, national, or world) may collapse and significant number of borrowers may not pay back what they owe. The bad economy may also cause people to have to pull their money out of their bank accounts. They balance those risks by setting the rate based on their estimated risk of each borrower and type of loan. Countries also set banking rules that mandate what percent of deposits must be held in reserve to handle normal banking transactions.

Banks offer personal loan at interest rate of 11 %, but why don't they invest those money in mutual funds or shares and earn more ?

In some years stocks go up 10% or even 20%. In other cases they go down by the same amount. The bank wants stability, the stock market doesn't give them stability. They have to be able to meet the reserve requirements. This is becasue every depositor wants to feel like they can spend their bank account tomorrow if they need to.

If a customer wants to know their money is safe they put it in a bank. If they want to invest their money and see the possibility of great growth, with some risk of losses they invest in stocks & bonds either individually or via mutual funds.

  • Your typical bank doesn't make money by loaning money, they make money by getting loans and selling them.
    – noslenkwah
    Commented Jan 7, 2019 at 14:29

There is a very good subject of fully reserved banking.

But a full-reserve bank doesn't need overnight government loans or might not qualify for government banking loans on their reserves. What would the government banking loans be for if the reserves are liquid ? And if the full-reserve bank doesn't get government banking loans then it could just be a mutual fund instead. Certainly, a full-reserve bank, without overnight government loans, would invest in income securities with both redemption dates and liquidity.

The goldmoney website might be an example of full-reserve banking. But they don't invest the gold and pay interest but just store the gold.

Some U.S. internet savings banks pay about the same interest as a three-month Treasury Bill but require linking with a checking account. I don't really know if these banks make commercial loans.

But commercial loans is what a bank is really about. Local groups of business persons form the banks in the first place. And then the government banking loans cover short-term withdrawal demand against the illiquid commercial loan positions.

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