Role of Banking System in Economy

By | October 23, 2021

In today’s world, bank plays a very important role in the economic activities of human life. The overall development of any country can not be imagined without the efficient and effective development of banking system. So, today let’s see some of the major role of banking system in the economy.

Role of Banking System in Economy

Major Roles of Banking System in Economy are:

  • Capital Formation
  • Better Utilization of Resources
  • Expansion of Credit
  • Development of Agriculture
  • Increase in Employment
  • Safety of Wealth
  • Transfer of Money
  • Aids to Government

The speed of economic development highly depends on the development of financial institutions in a country because banks plays great role in the mobilization of capital. USA, UK, Japan, Germany etc. are some examples of developed countries which has highly advanced banking system.

Role of Banking System in Economy

Capital Formation: Bank is a place where people keep their savings mainly with the purpose of getting interest, and strong securities. In short, it collects deposit from people and provides loan for investment in different productive sector such as industry, business, agriculture etc. So, bank helps for capital formation within the nation.

Better Utilization of Resources : For the better utilization of resources, different kinds of investment are required. For this bank arranges the required amount of capital for the sake of investment. So, bank plays an important role for better and maximum utilization of production factors like men, money, material and machine.

Expansion of Credit : Expansion of credit is highly essential for the economic development of any country. Bank collects money from general public as deposit and made it available to the debtors as loan. It also issues letter of credit in different forms such as cheque, travel cheque, letters of security etc. so that cash money should be taken out from bank or could be carried on easily. This helps in the expansion of transactions of the entire sector.

Development of Agriculture: Agriculture is the fundamental economic sector for the most of the developing countries in the world. Adequate investment is required for the rapid development of agriculture. Hence, banks in the form of agriculture development bank provides different types of loans to the farmers with the purpose of developing agriculture sector.

Increase in Employment : The development of banking system results in the development of entire sector of the country such as industries, factories, business, commerce, agriculture etc. And development of these sectors creates more employment opportunities. Many people get employed when these sectors are developed.

Safety of Wealth: In today’s world, people feel very insecure of their wealth such as gold, silver and money etc. Therefore, bank provides a safe and secure place where people can keep their money, gold, silver and other ornaments. It locker facility to people for the safety of people’s wealth. People realize that bank is the most safest place for their property than their home.

Transfer of Money: In today’s modern world, bank plays a very Important role for the transfer of money from one place to another or from one country to another. People doesn’t have to carry money and take it to the other place. Bank uses different mediums for the transfer of money such as SWIFT, Remittance, RTGS etc.

Aid to Government : Banks directly and indirectly provides different kinds of help to the government. Government mainly uses to borrow debts from the banks or by means of the bank. On the other hand, bank also helps government to sell government properties, share, debentures etc.

Different Types of Bank and Their Roles in the Economy

There are many different types of banks and they all serve different purposes in the economy. Some banks focus on commercial banking, some focus on retail banking, and others focus on investment banking. The type of bank you should choose depends on your specific needs.

Commercial banks play a major role in lending money while savings banks play a minor role in lending money but they have more influence in the economy because they have more control over what is saved by individuals and businesses.

Major Roles of Central Bank in The Economy

The role of central bank in the economy can be understood as regulatory, monetary, and lender of last resort.

The regulatory role of the central bank is to regulate the banking sector, control inflation and maintain financial stability. The monetary role is to regulate the supply of money in order to achieve a target inflation rate and manage interest rates. The lender-of-last-resort function ensures that banks have sufficient liquidity at all times.

Major Roles of Commercial Bank in The Economy

There are many roles that commercial banks have in the economy. They provide loans to consumers and businesses, which are used to fund economic activities. They also provide liquidity to the markets by investing in government securities, foreign exchange, and other money market instruments.

3 Main Roles of Any Commercial Bank are:

  1. Collection of Deposit
  2. Providing Loan
  3. Transfer of Money

Commercial banks also offer checking and savings account services, which is a major source of revenue for them. These accounts allow customers to deposit funds and withdraw cash from ATMs. Commercial banks also offer credit cards, mortgages, home equity loans, auto loans and student loans.

Major Roles of Development Banks in The Economy

Development banks have a major role in the economy by providing financial assistance to companies. They are also responsible for the development of their nation’s economy.

  • They provide loans, equity financing, and guarantees to firms that need help with capitalization or face difficulties in obtaining financing from private sources.

Development banks play a vital role in developing countries because they help those nations who need more aid than others and assist them with economic growth.

Major Roles of Finance and Cooperatives in The Economy

The finance sector is also one of the most important sectors for economic growth. It provides capital to businesses and individuals and it also helps to maintain a stable currency, which is crucial for an economy’s stability.

Cooperatives are enterprises that are owned and controlled by their members who share the profits or benefits. They can be found in many sectors, including agriculture, manufacturing, services, etc. Cooperatives play an important role in providing for people’s needs and goals without exploiting them financially or physically.

The 4 major roles of finance and cooperatives in the economy are:

– They provide a means to save and borrow money.

– They help people to invest in different kinds of assets.

– They provide credit to individual consumers and businesses.

– They help to redistribute wealth more equitably.

To sump up, development of banking system plays a very important role for the overall sector of the economy. It improves economic condition, living standard of people, improves saving habit and help in the monetization of economy.

Read Our Other Articles:

How to Spot, Prevent and Report Banking Fraud

Types of Risk in Banking Sector

How Do Banks Make Money on Savings Accounts?

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