The Banking Sector has for centuries now formed one of the pillars of economic prosperity. Indeed history provides us with some starting information regarding how banks provided finance for imperialist ventures in newly acquired colonies. Over time banks have formed an important part in providing an avenue for both savings and investment.

Roles of Commercial Banks In Economic Development

Land, labour, capital and entrepreneurs are the basic economic resources available to business. However, to make the use of these resources, a business requires finance to purchase land, hire labour, pay for capital goods and pay for individuals with specialized skills. In a country like Pakistan, the people suffer from lack of savings to set up business. This gap has to be filled by the massive resources of the banking sectors. Detail role of commercial banks in economic development is given below:

1. Trade Development:

The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade.

2. Agriculture Development:

Commercial banks finance the most important sector of the developing economies i.e. agriculture. Short, medium and long-term loans are provided for the purchase of seeds & fertilizer, installation of tube wells, construction of warehouses, purchase of tractor and thresher etc.

3. Industrial Development:

The countries, which concentrated on industrial sector made rapid economic development. South Korea, Malaysia, Taiwan, Hong Kong and Indonesia have recently developed their industrial sector with the help of commercial banks.

4. Capital Formation:

Commercial banks help in increasing the rate of capital formation in a country. Capital formation means increase in number of production units, technology, plant and machinery. They finance the projects responsible for increasing the rate of capital formation.

5. Development of Foreign Trade:

Commercial banks help the traders of two different countries to undertake business. Letter of credit is issued by the importer’s bank to the exporters to ensure the payment. The banks also arrange foreign exchange.

6. Transfer of Money:

Commercial banks provide the facility of transferring funds from one place to another, which leads to the growth of trade.

7. More Production:

A good banking system ensures more production in all sectors of the economy. It increases the production capabilities of the economy by strengthening capital structure and division of labour.

8. Development of Transport:

The commercial banks financed the transport sector through Prime Minister’s Transport Scheme. It has reduced unemployment on one hand and increased the transport facility on the other hand. Remote areas are linked to the main markets through developed transport system.

9. Safe Custody:

The business concerns and individuals can make themselves tension free by depositing their surplus money in banks. The banks also provide them the facility of lockers to keep their precious articles and necessary documents safe.

10. Increase in Saving:

Commercial banks persuade the people to save more. Different saving schemes with attractive interest rates are introduced for this purpose. Number of bank branches is opened in urban and rural areas.

11. Construction of Houses:

Commercial Banks provide credit facilities to their customers for the purchase or construction of houses.

12. Assistance to Govt.:

By providing funds to government for development programme the commercial banks share the government for economic stability.

13. Increase in Employment:

A country’s economic prosperity depends on the development f trade, commerce, industry, agriculture, transport and communication e :. These sectors are financed by the commercial banks and employmc it opportunities are increasing.

14. Saving in Metallic Reserve:

Cheques and drafts etc. work like money. In this way the need < f precious metals to make coins reduces and metallic reserve of the count y can be utilized on other important matters.

15. Credit Creation:

Commercial banks are called the factories of credit. They advance much more than what they collect from people in the form of deposits. Through the process of credit creation, commercial banks provide finance to all sectors of the economy thus making them more developed than before.

16. Proper use of Money:

People deposit their saving in the banks, so the scattered money becomes a huge amount in this way, which can be used for different projects in a proper way.

17. Financial Advices:

Commercial banks also give useful financial advices to promote the business of their customers, besides credit facilities.

18. Increase in Investment:

Commercial banks mobilize savings of the people. They make them available to the farmers, traders and industrialists for the development of agriculture, trade and industry.

19. Collection of Zakat:

In Islamic countries or states, commercial banks also play important role for the system of zakat. They collect zakat from people and distribute the same among the beneficiaries.

20. Success of Monetary Policy:

Under the supervision of central bank, all scheduled commercial banks make effort for the success and objectives of monetary policy. This joined effort of commercial banks makes the economic development possible.

21. Use of Modern Technology:

The use of modem technology in less developed countries is only possible in the presence of developed commercial banking as it can be the main source of their funds. These funds are utilized for the import of modem technology from developed countries.

22. Export Promotion Cells:

In order to boost the exports of the country, the banks have established export promotion cells for the information and guidance to the exporters.

23. Economic Prosperity:

Economic prosperity of a country depends on number of factors including the development of commercial banking. A sound banking system promotes the economic status of the people by providing them short, medium and long-term loans.

24. Training Center:

Commercial banks established many trading centers for their employees to modernize the banking system of a country. In this way the banking experts enhance their abilities and contribute towards the development of country.

Roles of Commercial Banks In Economic Development

Introduction

Commercial banks play a crucial role in the economic development of a country. They serve as financial intermediaries, facilitating the mobilization of savings and allocation of capital for productive investments. In this article, we will explore the various roles of commercial banks in economic development and understand their significance in fostering growth and stability.

The Significance of Commercial Banks

Commercial banks serve as a bridge between savers and borrowers, facilitating the flow of funds in an economy. They play a pivotal role in allocating financial resources to different sectors, thereby contributing to overall economic development. Here are some key roles of commercial banks in driving economic growth:

1. Mobilizing Savings: Commercial banks encourage individuals and businesses to save their surplus funds by providing a safe and convenient platform. By offering attractive interest rates and facilitating easy deposit and withdrawal processes, banks foster a savings culture in the society.
2. Capital Formation: Banks help in the creation of capital by channeling savings towards productive investments. They carefully evaluate the creditworthiness of borrowers and finance projects that have the potential to generate income and employment opportunities. This capital formation leads to increased productivity and economic growth.
3. Credit Intermediation: One of the primary functions of commercial banks is to provide credit to individuals, businesses, and government entities. By extending loans and credit facilities, banks facilitate the smooth functioning of business activities and fuel entrepreneurial ventures. This credit intermediation boosts investment, consumption, and overall economic activity.
4. Payment System: Commercial banks enable the smooth and efficient functioning of the payment system in an economy. Through services like checks, electronic transfers, and credit/debit card transactions, banks facilitate the easy movement of funds between individuals, businesses, and institutions. A robust payment system is crucial for promoting economic transactions and ensuring financial stability.
5. Risk Management: Banks play a vital role in managing financial risks in the economy. They offer various risk mitigation instruments like insurance, derivatives, and hedging products to individuals and businesses. By providing these risk management tools, banks ensure stability and resilience in the face of economic uncertainties.
6. Promoting Financial Inclusion: Commercial banks play a significant role in promoting financial inclusion by providing banking services to individuals and businesses who were previously unbanked. Through initiatives like basic savings accounts, microfinance, and mobile banking, banks extend their services to underserved populations, improving access to credit, savings, and other financial services.
7. Supporting Monetary Policy: Central banks use commercial banks as intermediaries to implement monetary policy measures. By adjusting interest rates, reserve requirements, and liquidity ratios, central banks influence the lending and deposit rates of commercial banks, stimulating or curbing economic activity as needed.

Conclusion

Commercial banks play multifaceted roles in promoting economic development. They mobilize savings, allocate capital, provide credit, facilitate payments, manage risks, promote financial inclusion, and support monetary policy. Their efforts contribute to the overall growth, stability, and prosperity of a nation. As key players in the financial system, commercial banks are vital for driving economic progress and fostering a thriving economy.