What is the Role of Banks in the Economic Development of a Country?

Last updated on September 17th, 2022 at 06:50 am

What is the Role of Banks in the Economic Development of a Country?- As a country becomes more developed, one typically sees the capital markets playing a greater role in supplying financial products and services relative to that supplied by the banks. In many advanced economies.

The problem confronting any nation economy one may be tempted to ask ,what has been the role of financial institutions in general and commercial banks in particular ,either trying to remedy or revive the economy?

The answer to this is not far-fetched as commercial banks mobilize private savings into the economy; these savings are then utilized for the advancement of loans for investment . They do this by accepting deposits from the public and lending again to investors.These credit provided in the form of loans, overdraft discounted paper enable the bank to make profit.

Banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.

It ‘s no gain saying that finance is the life wire of any organization or nation. Most investors with laudable business initiatives are unable to initiate it or actualize them due to lack of funds .In the same way, many businesses are unable to grow or expand while some may even fold up due to inadequacy of finance to continue operation .

It’s therefore the role of commercial banks and other banking institutions to provide loans as capital for both individuals and firms to meet the loan requirement in order to boost business activities.Bank lending helps to boost the amount of money in circulation .

consequently leading to higher rate of economic activities, changes in money supply and lending or credit availability affect the consumption pattern and the government spending and well as investment

The banking lending stirs the economy by helping in importing global trade for viable customers wishing to import goods from another country, there is a tendency that the customer would not be able to finance such goods or commodities for production especially due to the exchange rate difference and also due to non availability of foreign exchange .

In this respect, banks become very hands-on in helping the customers with a loan and foreign currency to finance such a transaction. In this article we will discuss about the role of banks in the economic development of a country.

You can also Read: History and origin of Banking in Nigeria

The role of banking to any country is to create wealth through demand deposit by lending, though include the following;

1. Credit creation:

Commercial bank create money that is demand deposits or bank money when they make loans. The creation of demand deposits by bank lending is the most important source of money in any nation economy. The ability of commercial bank to create money depends upon the size of it’s excess reserves. Commercial banks can lend amount equal to the size of it’s excess reserve.

Commercial bank at times ,reduce the size of the money supply by converting the amount that they hold in form of three major asset that is cash, loans and investment.

Making loans sometimes help to reduce the cash held especially when is above minimum requirement. Bank loan and investment are used to finance production, distribution and real investment.

2. Depository function

Commercial bank hold different kind of deposits there are the current account,savings account and the fixed deposit account in case of Nigeria.

3. Payment and collection

Commercial bank do the business of payment and collection. The channels through which funds move constitute the payment and receiving of check or cash ,draft, money transfer are routine activities of the bank.

4. Trust Service

Managing trust accounts is not a traditional bank service. The trust assets managed by bank are owned by individuals , businesses and pension funds, sometimes bank manage trusts for minors and those judged  incompetent.

The bank also manage a trust account on behalf of estate beneficiaries. One of the largest groups of assets managed by banks is pension funds, employee benefit account and agency accounts they also serve and as transfer agents, dividend disbursing agents.

5. Foreign Banking

Banks perform the roles of foreign banking through their 7.foreign branches. A foreign branch can provide valuable information on local economic environment ,laws and customs for the firms doing business abroad and also assist in converting of foreign exchange.

6,Saving Accumulation and investment.

The bank do the role of saving accumulation and investment through the saving process. The purchasing power of the bank are diverted from current consumption into the market for capital goods. Saving are invested into real sector of the economy: the productive capacity and the real wealth of the economy are increased
.
I] Bank helps to channel savings into productive uses, through short term lending
Ii] Bank supplement or provide liquidity to other savings institutions and investment media

7.Leasing

Leasing is the use of property or equipment in exchange for rent .it is a specialized form of lending which is dominated by merchant banks. This kinds of equipment leased include transport equipment , land ,computers and heavy machinery. The bank retain tittle to the property leased: the individual or businesses lessor is able to use there service from the leased asset.

8.Dealership in Security and foreign Exchange

Banks are dealers in government securities and foreign exchange .Banks are allowed to maintain trading inventories on transaction in foreign exchange and securities

9. Growth of entrepreneurship –

By providing capital to entrepreneurs and investing in productive purposes, banks encourage self-sufficiency, reduce joblessness and promote the right industries.

10. Credit creation –

Apart from increasing the money in circulation, bank deposits also make their way to industries, to help them create productive assets. This credit has a multiplier effect on the economy.

11.Wealth creation

Business owners borrow from banks the money needed for the purchase of raw materials and to meet other requirements such as working capital. The bank can operate as custodian for all investment securities, and provide safety deposit boxes, letters of credit for investment opportunities, as well as act as a trustee for wills and investment funds.

12.Banks arrange for the sale of shares and debentures

Thus, business houses and manufacturers can get fixed capital with the aid of banks. There are banks known as industrial banks, which assist the formation of new com­panies and new industrial enterprises and give long-term loans to manu­facturers.

Other service are:

The financial institution render additional service to the public such as
I] Assist the public in safe deposit facilities ,hold securities and other valuable terms for safekeeping for the customers

Ii] They also provide credit information to their business customers
Iii] Banks are involved in direct bill-paying or act as agent for collection of bills. example is electricity bills, phone bills, DSTV bills etc.

Conclusion:

The banking system plays an important role in the modern economic world. Banks collect the savings of the individuals and lend them out to business- people and manufacturers. Bank loans facilitate commerce. , banks act as advisers, counselors and agents of business and indus­trial organizations. They help the development of trade and industry.

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