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Role of Commercial Banks in Economic Development – Commercial Banks | Management Notes

Role of Commercial Banks in Economic Development

An important part of the economy is the commercial banking sector. They create liquidity and capital in the market, in addition to providing consumers with an essential service. Customers deposit funds in their accounts, and then they lend them out. This ensures liquidity. As a result of these activities, commercial banks create credit that leads to an increase in production, employment, and consumer spending, thereby boosting the economy.

Among the sources of financing for small businesses are commercial banks. As financial intermediaries, commercial banks play a crucial role in economic development. Commercial banks play a vital role in facilitating the flow of investment capital throughout the market. Commercial banks are the primary means of allocating capital in the economy through the lending process. Therefore, commercial banks are heavily regulated by a central bank in their country or region. A central bank may, for instance, require banks to maintain sufficient reserves. The central bank holds some of banks’ consumer deposits as a cushion in case the general public withdraws funds in a rush.

Following are the points that clearly explains the Role of Commercial Banks in Economic Development of the Country.

  • Trade Development
  • Agriculture Development
  • Industrial Development
  • Capital Formation
  • Development of Foreign Trade
  • Transfer to money
  • More production
  • Development of Transport
  • Safe Custody
  • Increasing in Saving
  • Construction of Houses
  • The assistance of the Government
  • Increased in Employment
  • Saving in Metallic Reserve
  • Credit Creation
  • Proper use of Money
  • Financial Advice
  • Increased in Investment
  • The success of Money Policy
  • Use of Modern Technology
  • Export Promotion Cells
  • Economic Prosperity
  • Training Center

Trade Development: Traders benefit from the assistance, capital, and other facilities of commercial banks as per their need, resulting in a growth of trade.

Agriculture Development: Financial institutions provide short, medium, and long-term loans for the most important sectors of the developing economy, including agriculture, tube well installation, warehouse construction, tractor and thresher purchases.

Industrial Development: Industrialized countries have developed rapidly. Commercial banks have recently helped South Korea, Malaysia, Taiwan, Hong Kong, and Indonesia develop their industrial sectors.

Capital Formation: A country’s capital formation can be increased by commercial banks. As a result of capital formation, more production units, technologies, plants, and equipment are added. They fund projects that increase capital formation.

Development of Foreign Trade: Businessmen can conduct business in two different countries with the assistance of commercial banks. Banks issue credit certificates to exporters in order to ensure payment. Foreign exchange is also provided by banks.

Transfer to money: The banking system makes it possible to transfer funds from one place to another, thus enabling trade to grow.

More production: In all aspects of the economy, a good banking system results in greater productivity. Capital structure and division of labor are strengthened, which increases the productivity of the economy.

Development of Transport: The transport sector is financed by commercial banks. As a result, unemployment has been reduced and transport facilities have increased. The improvement of transportation facilities has enabled remote areas to connect with major markets.

Safe Custody: Having surplus money in the bank can relieve stress for individuals and businesses. For the safety of their valuables and necessary documents, banks also provide locker facilities.

Increasing in Saving: Increasing in savings is an important goal of commercial banks. To this end, banks offer various savings schemes that offer attractive interest rates. There are now urban and rural branches of the bank.

Construction of Houses: Customers can borrow money to buy or build a house from commercial banks.

The assistance of the Government: Besides providing funds for economic stability, commercial banks also assist in developing programs.

Increased in Employment: Trade, commerce, industry, agriculture, transportation, and communications are all crucial to a country’s economic growth. Commercial banks finance these sectors and employment opportunities are growing.

Saving in Metallic Reserve: Checks and drafts work like money. As a result, less precious metals are needed for coinage, and other metals can be preserved.

Credit Creation: Commercial banks are often referred to as credit factories. These financial institutions do more than just collect deposits from people.The creation of credit by commercial banks allows all sectors of the economy to become more advanced because of the money they receive.

Proper use of Money: By depositing their savings in banks, people accumulate vast amounts of money along the way, which they can use in the right way for a wide variety of projects.

Financial Advice: Financial advice is one of the most valuable services that commercial banks provide to their customers, in addition to financial benefits.

Increased in Investment: Commercial banks raise public savings. For the development of agriculture, trade, and industry, they make these resources available to farmers, traders, and industrialists.

The success of Money Policy: Commercial banks operating under the Central Bank’s supervision strive for success and achievement in monetary policy. Commercial banks’ combined efforts contribute to economic development.

Use of Modern Technology: It is only possible to use modern technology in the least developed countries if they have access to advanced commercial banking, as it can be their primary source of funding. Through these funds, modern technology is imported from developed countries.

Export Promotion Cells: Export promotion centers have been set up at banks to provide guidance and information to exporters in order to boost exports.

Economic Prosperity: The development of commercial banking plays an important role in a country’s economic prosperity. Long-term, short-term, and medium-term loans are all part of a sound banking system that promotes people’s economic positions.

Training Center: To update the banking system of a country, commercial banks set up many commercial training centers for their employees. These training programs enhance banking expertise and help to contribute to a country’s development.

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