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What is Private Sector Banking?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 October 2016
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Private sector banking is a type of banking process that involves financial institutions which are primarily owned and operated by private individuals and business organizations rather than by a government entity. This is in contrast with public sector banking, in which the banking enterprise is owned and operated by the state in some manner. In many nations that are supportive of free enterprise, private sector banking is the most common form of banking available. While a government may not actually control banks and other financial institutions that engage in this form of banking, private sector institutions do typically have to comply with governmental regulations that apply to banking in general.

It is not unusual for private sector banking to play a major role in the economy of a given nation. Since this form of banking along with other private sector business enterprises tends to account for a large portion of the money that moves through an economy, financial analysts will pay close attention to what is happening in the private sector. In some nations, a government bank may sometimes set the standard for issues such as interest rates, with banks in the private sector following the example. Since so much of the economy depends on the activities occurring within the private sector, the current policies and procedures that govern private sector banking within a given nation can often help to slow and eventually reverse an unfavorable economic trend, such as a recession.

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Another benefit of private sector banking is the support that the mechanism provides to the free enterprise system within a number of economies. Assuming that the banks associated with the private sector are working in harmony with other private sector businesses and concerns, the potential for growing the economy at a consistent and prudent pace is possible. Banking of this tends to make it easier for companies to obtain funds for expansion projects, the launching of stock offerings, and other vital activities that ultimately benefit both the banks and the companies, as well as consumers in general.

While private sector banking does provide a wide range of benefits, this form of banking has to comply with governmental regulations that are in effect in the nation where the banks are located. This helps to provide a basis or foundation for the operation, allowing all banking concerns to have the opportunity to compete for customers. Typically, the regulations also help to establish guidelines for the creation of financial products that are offered to individual and commercial customers, while still allowing each bank to offer value-added benefits that help them to stand out among the different choices open to those potential customers.

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