BANK INTEREST WHAT IS BANK INTEREST?

There are two definitions of bank interest:

1. General definition Bank interest is a reward given by a bank to its customers based on conventional principal. 2. Specific definition Bank interest is a price of which a bank needs to pay to its customers for having accounts, as well as a price of which the customers need to pay to the bank for having loans. TYPES OF BANK INTEREST In daily banking activities, there are two types of bank interests given for customers:

1. Interest on accounts a price of which a bank needs to pay to its customers as a reward for having accounts or deposits. 2. Interest on loans a price of which the customers need to pay to the bank as a compensation for giving them loans. These two types of interests have effects on one to the other if the interest on accounts is high, the interest on loans will also be high. There are two ways of calculating the interests:

1. Simple interest the interest is calculated only on the principal amount (e.g. time deposit, certificate deposit) 2. Compound interest the interest is calculated by taking the times into account as the balances are changing (e.g. demand deposit, savings deposit) INTEREST RATE Types of interest rate:

1. Fixed rate accounts or loans which have a single interest rate (i.e. the interest rate does not change) 2. Floating rate accounts or loans which have a changeable (berubah ubah) rate (i.e. the interest rate changes over the life of the accounts or loans) FACTORS AFFECTING INTEREST RATE 1. The need of fund When there are more customers applying (menerapkan) for loans than customers depositing the money, a bank will raise the interest rate on accounts to attract (menarik) more customers to deposit the money. Thus, the bank will have enough fund to provide the loans.

2. Competition When a bank wants to attract more customers or needs immediate fund, it can raise the interest rate on accounts higher than its competitors and reduce the interest rate on loans lower than its competitors. 3. Governments policy The government has the right to set the maximum and minimum limit of the interest rate either on accounts or loans. 4. Target on profit If a bank wants a big profit, it can offer a big interest rate on loans to its customers. However, the bank must consider the maximum and minimum limit of the interest rate. 5. Time span (jangka waktu) (for loans) For loans, the longer the time span, the higher the interest due to the bigger risk possibility. 6. The quality of guarantee (for loans) The interest rate for loans is lower if the quality of guarantee is liquid enough. For example, the rate for a loan having CDs as its guarantee can be lower than another loan having a land certificate as its guarantee. It is due to the fact that CDs are easier to be converted into cash than a land certificate, if the customer having a problem in repaying the loans. 7. A customers credibility (kepercayaan) (for loans) A customers financial background is also a factor in deciding the interest rate when the customer borrows some money. The assumption is there is small possibility for having troubles of repayment of loans for customers who have good background. The bank usually needs to check on the customers financial background to approve the application as well as to decide the interest rate.