Deposit — Definition Explained Simply | Examples & Role
Deposit is money placed by a client in a bank or other financial institution under the condition of repayment and earning income (interest).
Deposit is funds (in national or foreign currency) that individuals or legal entities place in a bank or other financial institution under certain conditions. In return, the bank undertakes to return the deposited amount and, as a rule, pay interest income.
Deposits are one of the most common forms of savings and investment. They ensure the safety of capital, while for banks they serve as a source of funds for lending and other financial operations.
Types of deposits
- Term deposits — placed for a fixed period (e.g., 6 months, 1 year) and bring higher interest. Early withdrawal is usually restricted.
- Demand deposits — funds can be withdrawn at any time, but the interest rate is minimal or absent.
- Foreign currency deposits — deposits in foreign currencies (USD, EUR, etc.) that help protect savings from depreciation of the national currency.
- Investment deposits — combine a deposit with the possibility of earning income from financial instruments (e.g., stocks or bonds).
The role of deposits in the economy
For depositors, a deposit is a tool for saving and earning income. For banks, deposits are the main source of funds, which they use to issue loans, make investments, and carry out operations on financial markets. Thus, deposit operations balance the interests of the population with the needs of the banking system.
Examples
- An individual places a deposit of €100,000 in a bank at 2% per year.
- A company keeps working capital in a demand deposit account.
- A client opens a deposit in US dollars to protect against inflation in their country.