Commercial banks are primarily funded through which of the following sources?

Introduction / Context:
Understanding how commercial banks are funded is a basic requirement in banking and finance. While banks do have equity capital and earn fee income, their primary funding source is customer deposits. Many exam questions test whether candidates can identify this correctly because it connects directly to topics like reserve requirements, asset liability management and the role of banks in the financial system.

Given Data / Assumptions:

• We are dealing with typical commercial banks that accept deposits from the public.
• Deposits include savings accounts, current or checking accounts and various term deposits.
• Banks also have equity capital and may borrow from other banks or markets, but these are usually smaller compared with deposits.
• Government grants and lottery winnings are not normal primary funding sources for commercial banks.

Concept / Approach:
The basic banking model is often described as accepting deposits and making loans. Deposits represent the amounts customers place with the bank for safekeeping and transaction purposes. The bank owes this money back to customers, so deposits appear as liabilities on the bank balance sheet. Equity capital and borrowings support operations but are typically much smaller. Fee income and commissions are revenue items, not the main source of funding for the asset portfolio. Therefore, the correct option must highlight customer deposits as the primary funding source for commercial banks.

Step-by-Step Solution:
Step 1: Recall that deposits are central to commercial banking and are reflected as liabilities on the balance sheet. Step 2: Identify different types of deposits, including savings, current and term or fixed deposits, which together form a large liability base. Step 3: Recognise that while stockholder capital is important for solvency, it is usually a smaller portion compared with total deposits. Step 4: Note that service charges and commissions are income, not a stock of funds used to support loan portfolios. Step 5: Select the option that defines customer deposits as the primary funding source, not government grants or unusual inflows.

Verification / Alternative check:
To verify, one can look at the published balance sheet of any major commercial bank. On the liabilities side, customer deposits are usually the largest item, often many times larger than shareholder equity. Other liabilities may include borrowings, but deposits dominate the funding mix. On the asset side, loans and investments are funded significantly by these deposits. Banks earn income by lending and investing these funds and paying lower interest on many deposits. This structure confirms that customer deposits are the primary funding source as described in the correct option.

Why Other Options Are Wrong:
Option A is wrong because equity capital from stockholders, while crucial for solvency, is not the sole or primary funding source in most banks by volume. Option B is incorrect since governments do not normally fund commercial banks through regular grants; such support is exceptional and limited. Option C confuses fee income with funding; fees contribute to profit but do not represent the main stock of funds that back loans. Option E is a distractor with no basis in real banking practice, as lottery winnings and prize money are not systematic funding sources.

Common Pitfalls:
Students sometimes overemphasise bank capital because it is highlighted in discussions of capital adequacy and regulation, forgetting that deposits are the main liability category. Another pitfall is to think that fee based models have replaced deposit based funding, which is not accurate for most commercial banks. Some learners also misunderstand the difference between revenue (income) and funding (liabilities). Keeping the balance sheet view in mind helps avoid these mistakes and answer questions about bank funding correctly.

Final Answer:
Customer deposits such as savings, current and term deposits, which form the major portion of bank liabilities.