Role of Banks in Economic Development

Referring to one of my article titled “Classification of Banks,” I would like to re-affirm that when banks are classified accordingly, they could be an advantage to the economic development of the nation. Banks are significant in mobilization of financial resources from Non-productive to productive and to constructive channels of development. It is not possible to think of development without appropriate network of commercial banks. The present rate of economic growth in developed countries is sustained and enhanced with the help of banks. It goes without saying that the absence of sound Banking, developing countries cannot hope to join the rank of advanced economies. Yet, our banks could be mobilized to finance part of the national development for example Water and electricity projects, since they have the capital.

Banks accelerate the economic growth of a country in the following ways:

Capital formation; this function of commercial banks is to accept deposits. People deposit their savings in banks, which later result in capital formation. The capital formation provides basis to the economic development of the country.

Bank and level of economic activities; the level of business activity, the mood of business community and expansion and contraction in business activities depend largely upon the policies of banking institutions. Banks create credit based on their primary deposits.

Provision of Finance and Credit: The other important function of banks is advancing loans. Nobody can be self-sufficient in finance. Banks provide finance and credit to trade and industry.

Distribution of fund between Region; banks also help in proper allocation of funds among different regions. Banks operate primarily for profit. Introducing of branch banking system makes it possible for banks to choose different regions. Banks help in the transference of surplus funds from regions where they are not wanted so much to those regions where they can be more purposefully and efficiently employed.

Expansion of the Market- Banks play catalytic role in extending the size of the market. The businesspersons who are afraid of extending their field of operation in far off market due to paucity of fund and risks involved in such business operations are encouraged and supported by banks in number of ways example act as an intermediary or issue letter of credit.

Allocation of Funds between Regions- all regions of the country are nor equally developed. Certain regions are more developed than others are. Banks have surplus funds that can be send to less developed regions. Banks can influence the direction of economic activity through rationale lending policy and many other functions to mention a few.

After looking at these functions, there is a good argument that our banks are not supplementary to our economy. Banks should take up some of the responsibilities for predetermined profit and social obligations to the country.

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