Monsters are the things the gods created to harass the mortals and prevent them from destroying the world. It doesn't always work. As a general rule, monsters exist for two purposes: terrorizing innocents, and dropping loot.
Monsters spontaneously spawn all over the place. Most appear in dungeons (which also spontaneously spawn), but some appear in open areas in the wilderness. No one knows why, not even the monsters themselves. It’s thought that there’s an Elemental Plane of Dungeons and/or Monsters that keeps spitting them out, or possibly a god that enjoys the chaos.
Monsters are the primary source of treasure in the world. Though you can go mine ore in the ground and such, it’s just a lot harder than finding an orc dungeon or a dragon lair and raiding it for theirs. No one knows exactly how monsters come by their loot, and when asking the few monstrous NPCs, each has a different answer (“I bought it,” “I found it,” “I ate it off some adventurer,” etc.) This is especially odd in the case of things like gibbering mouthers, black puddings, insect swarms, and other things that shouldn’t really need it.
Where you recover the loot from depends on the monsters. Humanoids are usually carrying it or have it stashed nearby. Dragons have their hordes. Some monsters hold it in their stomach, or even a special “treasure organ” you have to find and slit open. Others simply seem to spawn treasure when killed. (Complete with a little “poof” and the tinkle of bells.) This has led some to hypothesize that each monster is actually a link to the fabled Elemental Plane of Loot, and if you could harness them you could get access to it. (The last researcher to try jumped into a dragon’s mouth and hasn’t been heard from since. The hopeful take this as evidence that he made it.)
A few monsters manage through luck, determination, or bribery to attain NPC status. (Meaning the Plot tends to simply flow by them, instead of eddying around them like it does for normal monsters.) These "Monstrous NPCs" and are thus off the kill-on-sight list, though they have to advertise it to avoid “accidents.” In cities it's generally assumed that any monster wandering around is a card-carrying NPC and not just a wandering monster, though in the countryside things get hairier. Possibly this is why many monstrous NPCs join adventuring groups, since that at least gives them a ready source of backup if things go south.