Economic development depends on business prosperity, and doing business, especially in the manufacturing and service sectors, requires capital for a kick-start and cash for daily activity. Banks as a source of that cash and money for initiation expansion and everyday activity businesses play a significant role.
Economic Growth of Developing Countries and Banks
Three major factors contribute to the development of the economy, and these are:
• Agriculture
• Industry
• Service
And each of these broad economic sectors consists of subsectors that directly contribute to the economic development; the following information provides brief information of some successful subsectors
Looking at the growth of GDP of last three decades of countries like Southeast Asian countries, it is seen that these countries GDP’s have grown more than ten times in the previous three decades from 1990 to 2020, and the reason for that boom was the stable and constant growth of following sectors, (datacommon/ WorldBank.org)
- Capital Investment in RMG, Petroleum, Electric and electronics industries
- Remittance earning
- Agricultural sector
- Small and Medium loans
- Growth of service sectors of both Private and Public sectors
(Economy of southeast asia)
And in the inherent player in the success of these subsectors in the banking sector,
Role of Banks in the in the Economic Development of a Country
There are many roles a bank offer to the economic development of a country. A country largely dependent on a bank as the banking industry has the direct access and control to the money supply of a country. Here we have discussed the major roles of the banks in the economic development.
Capital Formation
By mobilizing small savings of the people using its branches, banks form the larger amounts of capital for investment and lending purposes, and banks usually do it using different schemes, and Interest rate banks attract people with surplus money they have. Later on, this formulated capital is invested in private and public sectors by lending and direct investment. Capital Formation is one of the significant roles for the economic development of a country.
Creation of Credit
Banks ( commercial Banks ) create credit by giving loans as advances and buying securities. The loans granted as advances are formulated through reserves; banks create credit by providing loans, but the money is not transferred to the borrower as cash rather, the loan amount is transferred to the borrower’s account.
Facilitation of International Trade
The economic development of a country, especially the developing countries, largely depends on the amount of international trade they do; international trades, which consist of import and export, play a vital role in determining the trade balance and cash flow of a country. The smooth flow of import-export requires smooth financial transactions between parties of both importing and exporting countries. Here bank plays a vital role by working as a middle man of banking transection of International trade, strong banking transection is required to grow international trade which can be seen in the case of above-mentioned countries in case of Bangladesh the growth of export was an all-time high in the first quarter of FY 2021-22 with a percentage of 22.62, and that was the result of outstanding performance of commercial banks of Bangladesh. (Bangladeshs-exports-register-record)
Role as the Agent of Share Market
Expansion of public companies requires more capital; however, having the opportunity to issue share and due to requirements of big sum of money, public companies often issue shares and bonds in the capital market, and Investment Banks playing the role of investment agent takes the responsibilities to do all work for the issuance of both shares and debenture.
Creation of Employment
Banks create employment for people in both active and passive ways. In an active way, banks give work opportunities in the bank; just by looking in the case of Bangladesh, the growth of the banking sector can be seen. In the past 50 years, In Bangladesh, the total number of banks has grown to 63 with direct jobholders of 182610, besides that bank helps to create a new business, which intern creates new jobs and employment opportunities for people. (job creation scenario in Bangladesh )
Facilitation of Domestic Trade
- Promissory Note
- Bills of exchange or commercial bills
- Treasury Bills (T-Bills)
- Call and Notice Money
- Inter-bank Term Market
- Banker’s Acceptance, etc.
Price Stability
Price stability means the balance between the amount of money circulation required in a country and the amount of available money in a country; when a country has more money than it actually requires, it is called an inflation situation, and when a country has less money available than required, it is called deflation, both cases are harmful to stable growth of trade thus the economy of a country,
Price stability is one of the important matters of the economy. Without a stable price, a country cannot bring stability in the trade as well. The economic progress of a country is dependent on price stability,
And banks can maintain this price stability using some instruments such as interest rate,
When a country requires mild inflation, then by order of central bank, banks, offer more interest in deposit to increase saving in the country and when a country requires deflation then by order of the central bank commercial banks decrease the rate of interest in deposits making more cash available in the hand of public, this is how banks help to maintain price stability.
Small Loans in Agriculture Sectors
Agriculture sectors worldwide have experienced remarkable progress thanks to the extensive research in agricultural crops and their successful implementation; however, in developing countries, the success of the agriculture sector is the result of the contribution of banks in providing small loans to farmers who have skills but lacks required money for corps cultivation, besides may incentives from banks such as 10 taka account helped poor farmers to open a bank account at the lowest cost possible and get help from the bank, at the end of December 2015 there were 89 lac farmer bank account with 159 crores which increased to 97 lac account and 406 crores at the end of December 2020. (The Financial Express), (the daily observer)
These are the significant roles that banks play in a country for leading the countries’ economy to constant development.
Related Reading
- Benefits of Having a Current Account
- Benefits of Having a Saving Account
- Exchange Bank Explained
- Retail Bank Explained with Examples
- Fixed Deposit Account
Bibliography
- Bangladeshs-exports-register-record. (n.d.). Retrieved fromhttps://thefinancialexpress.com.bd/economy/bangladeshs-exports-register-record-6037pc-growth-in-oct21-1635907585
- datacommon/ WorldBank.org. (n.d.). Retrieved from https://datacommons.org/place/country/BGD?utm_medium=explore&mprop=amount&popt=EconomicActivity&cpv=activitySource%2CGrossDomesticProduction&hl=en
- Economy of India . (n.d.). Retrieved from https://en.wikipedia.org/wiki/Economy_of_India
- Economy of southeast asia. (n.d.). Retrieved from https://www.britannica.com/place/Southeast-Asia/Economy
- job creation scenario in Bangladesh . (n.d.). Retrieved from https://thefinancialexpress.com.bd/views/job-creation-scenario-in-the-banking-sector-1584373890
- the daily observer. (n.d.). Retrieved from https://www.observerbd.com/news.php?id=314771#:~:text=Besides%2C%20banks%20allow%20finance%20in,(different%20uncommon%20crop%20productions).
- The Financial Express. (n.d.). Retrieved from https://thefinancialexpress.com.bd/views/views/economic-growth-in-bangladesh-and-the-role-of-banking-sector-1547220114
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