Role Of Commercial Banks In Economic 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: Role Of Commercial Banks In Economic Development
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 the above definitions, we conclude that the bank is an institute, which is established for the depositing, withdrawing and borrowing money. Role Of Commercial Banks In Economic Development. 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.”
Role Of Commercial Banks In Economic Development
Capital Accumulation or Formation.
Capital formation refers to the increase in the existing stock of capital goods in an economy. Commercial banks remove 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.
Mobilization of Savings.
There operates a vicious circle of poverty in developing countries like Pakistan. So, savings remain at the lowest level. Savings of people are very low due to the international demonstration effect in Pakistan. Banks are playing an 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.
Availability of Funds.
An additional point of the 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 lead to economic development.
Attaining Self Sufficiency.
A major problem faced by developing countries is the burden of foreign debts and dependence on other countries. Commercial banks provide an 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 a reduction in imports and increase in exports. Accordingly, banks are very important to achieve self-sufficiency.
Implementation of Modern Technology.
Economic development without the 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 the implementation of modern technology, there is an increase in production level, decrease in cost and save in time.
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 backward regions and sectors for 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 the development of rural and agriculture sector. The growth rate of the agricultural sector is 1.2 %.
Development of Industrial Sector.
The 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 the industrial sector. Some special industrial development commercial banks i. e., PICIC, IDBP, etc. are provided their remarkable services for the development of the industrial sector. Industrial development leads to agricultural development and it results in economic development. The growth rate of industries is 1.7%.
Expansion of Market.
Commercial banks help in the expansion of the 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 the development of industrial as well as the agriculture sector. Accordingly, there is an expansion of the market that results in economic development.
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 the economy in research institutes. Due to the use of modern techniques of production, better quality and more quantity are produced which leads to improving the living standard of the population.
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 economic development. Commercials banks are helpful in increasing international trade through the following ways:
- Provision of credit facilities,
- Low rate of interest for the exporters,
- Opening of letter of credit (L/C),
- Arrangement of foreign exchange.
Remove Budget Deficits.
The commercial banks are very helpful for the government. Now a day, the government has to face budget deficits because of increased expenditures and falling revenues. In this situation, the government has to depend upon deficit financing to meet the budget deficits. To cover the gap between the expenditures and revenues, the government borrows from the banks. As a result, the development process can be started through borrowed money from banks. The budget deficit is 5.3 % of GDP.
Optimum Utilization of Resources.
Commercial banks help in the just and optimum allocation of resources. Some megaprojects cannot be started due to a lack of capital. Commercial banks provide loans and remove the problem of deficiency of capital. Due to the use of resources in an economy, there is an increase in production, income and employment, etc. Increase in these things leads to economic development. Natural resources contribute to GDP by just less than 1 %.