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- ROLE OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT
Posted by : Ahsan Khan Monday, 23 April 2012
Various economists have different views about the role of commercial banks in economic development. Schumpeter says, “It is the banking system which serves as a key agent along with the entrepreneur in the process of economic development”. According to Prof. Cameron in his “Banking and Economic Development”, “a banking system may make a positive contribution to economic growth and development.”
WHAT IS COMMERCIAL BANK?
A commercial bank is something with which every one of us is well known. However different bankers and economists have defined it in a different way:
According to Kent:
“An organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure.”
According to Banking Companies Ordinance 1962:
“Banking means the accepting for the purpose of lending or investing of deposits of money from the public repayable in demand or otherwise and withdraw-able by cheque, draft order or otherwise.”
From above definitions, we conclude that bank is an institute, which is established for the depositing, withdrawing and borrowing money.
WHAT IS ECONOMIC DEVELOPMENT?
“It refers to the process whereby the total supply of goods and services of the society increases leading towards improved living standards.”
Commercial banks play an important role in the process of economic development, which is clear from the following points:
1) Capital Accumulation or Formation
Capital formation refers to the increase in the existing stock of capital goods in an economy. Commercial banks remove the capital deficiency by encouraging saving and investment. The commercial banks can promote capital formation in the country by moving the resources to the productive uses. Rate of capital formation is 5 % in Pakistan.
2) Mobilization of Savings
There operates vicious circle of poverty in developing countries like Pakistan. So, savings remain at the lowest level. Savings of people are very low due to international demonstration effect in Pakistan. Banks are playing important role in the mobilization of saving by introducing a variety of saving schemes. Banks induce the people to earn interest through saving and it provides various facilities in a country to create a will and power to save. Domestic savings are 9.5 % of GDP.
3) Availability of Funds
An additional point of role of banks is more availability of funds. Poor population has poor resources for the economic development in poor countries like Pakistan. the activities like inventions and innovations, research and development and initiatives (effectiveness in responding to challenges) are impossible due to insufficiency of funds in these countries. Banks remove the deficiency of capital by providing different types of funds that leads to economic development.
4) Attaining Self Sufficiency
A major problem faced by the developing countries is burden of foreign debts and dependence on other countries. Commercial banks provide incentive for the entrepreneurs to take risks and to use idle resources for more and better production. So, banks are helpful in attaining self-sufficiency. Banks provide loan to develop the various economic sectors. It results in reduction in imports and increase in exports. Accordingly, banks are very important to achieve the self-sufficiency.
5) Implementation of Modern Technology
Economic development without use of advanced and the most up-to-date technology is impossible. Almost in all the economic sectors backward techniques of productions are used due to poverty in third world countries like Pakistan. Commercial banks provide more funds to people to make it possible to use the modern techniques of production. Due to implementation of modern technology, there is increase in production level, decrease in cost and save in time.
6) Development of Agriculture Sector
All the regions and all the sectors of the economy are not equally efficient and developed in an economy. There is big need to develop the backward regions and sectors for the economic development. Rural areas and agricultural sector is still backward n Pakistan. Banks are playing an important role in the development of rural and agriculture sector. A special bank ZTBL has a major role in development of rural and agriculture sector. Growth rate of agricultural sector is 1.2 %.
7) Development of Industrial Sector
Industrial sector is the backbone of their economies in rich nations. It is still backward in Pakistan and other poor countries. Commercial banks provide different types of loans for the development of industrial sector. Some special industrial development commercial banks i. e., PICIC, IDBP etc. are provided their remarkable services for the development of industrial sector. Industrial development leads to agricultural development and it results in economic development. Growth rate of industries is 1.7%.
8) Expansion of Market
Commercial banks help in the expansion of market. They help in the formation of sound economic infrastructure in order to raise living standards and to expand trade and commerce of an economy. Commercial banks cause development of industrial as well as agriculture sector. Accordingly, there is expansion of market that results in economic development.
9) Research and Development
Commercial banks, sometimes, provide finances for research and development, which leads to inventions and innovations. Various institutes in Pakistan are operating by the loan provided by the banks. Modern techniques are established and these are applied to economy in research institutes. Due to use of modern techniques of production, better quality and more quantity is produced which leads to improve the living standard of population.
10) Essential for Foreign Trade
Foreign trade is one of the most important needs of all the countries of the world. Today international trade, without involving banks, is so difficult. International trade is necessary for the economic development. Commercials banks are helpful in increasing international trade through following ways:
i. Provision of credit facilities
ii. Low rate of interest for the exporters
iii. Opening of letter of credit (L/C)
iv. Arrangement of foreign exchange
v. Opening of foreign currency accounts
vi. Commercial banks have $ 2.2571 billion of foreign exchange reserves
11) Remove Budget Deficits
The commercial banks are very helpful for the government. Now a day, the government has to face the budget deficits because of increased expenditures and falling revenues. In this situation, government has to depend upon deficit financing to meet the budget deficits. To cover the gap between the expenditures and revenues, government borrows from the banks. As a result, the development process can be started through borrowed money from banks. Budget deficit is 5.3 % of GDP.
12) Optimum Utilization of Resources
Commercial banks help in the just and optimum allocation of resources. Some mega projects cannot be started due to the lack of capital. Commercial banks provide loans and remove the problem of deficiency of capital. Due to use of resources in an economy, there is increase in production, income and employment etc. Increase in these things leads to economic development. Natural resources contribute to GDP just less than 1 %.
13) Surplus in Balance of Payment
Developing countries are facing the problem of deficit in their balance of payment. Commercial banks are helpful to overcome this problem. Due to commercial banks, a country can improve its economy and can attain the self-sufficiency all this causes in favourable balance of trade. So, banks are helpful for the surplus in balance of payment.
14) Creators and Distributors of Money
Creation of money and distribution of money are the two main objectives of commercial bank. Commercial banks move the finances toward productive uses. There are a lot of problems in the way of economic development like inflation, deflation, low investment and saving etc. All these problems are possible to remove through creation and distribution of money by commercial banks. So, fluctuation in the supply of money can attain the economic development.
15) Provision of Valuable Services
The commercial banks are providing a lot of valuable services for the economic development. Some of the most important services provided by commercial banks are as under:
i. Due to use of credit instruments like cheques, drafts and bills of exchange, banks have reduced the use of currency at the cheapest costs and in the safest manner.
ii. Banks serve as business and commercial agents of their customers.
iii. Banks provide locker facility.
iv. Banks accept the various utility bills.
v. They guide the investors while making investment decisions.
vi. Banks advance loans for education in foreign countries.
16) Modern Facilities
Now commercial banks are providing various modern facilities like:
i. PC & Internet banking since 2003, PC banking available to all HBL customers in 14 cities.
ii. ATM & Online facilities & Balance ready cash etc.
iii. Mobile Banking and Call Centres, Smart Card and Debit Card.
iv. DD issuance, Statement inquiry and credit cards.
We conclude from above discussion that finance is life-blood of production and the banks are the departmental stores of finance. Commercial banks enjoy a very typical and dominated position in the present day economic world. We conclude that economic development, without banking system, is impossible.