Importance of Banks in the Economic Development of a Country

Importance of Banks in the Economic Development of a Country

What is a bank? We all know that the term ‘bank’ refers to any establishment licensed to accept deposits, pay interest, clear cheques and offer Business Working Capital Loans. They also provide a range of other financial services such as it allows the customer to warranties their money on which bank offers interests.

How does a bank operate and makes a profit? They use a relatively simple business model; they use customer deposited money to lend to other customers on a higher interest rate than they offer to depositors. This difference between the two interest rates is effectively the profit margin for banks; they play an essential role in the economy, providing finance to businesses who wish to invest and expand thus driving economic growth.

Not just they drive economies, but they also offer a range of benefits that are as follows:

Safety of Deposits- Banks is financial institutions that are seen as a secure place to deposit money. It would be merely impractical and risky to keep all your savings under your bed or in the home.

Interest on deposits- Most of the commercial banks bank out there pay interest on deposits. The stakes on current accounts are relatively low, but for saving funds, the interest rate can be significant.

Offering Loans- Perhaps this is the essential functions that bank offers, it helps businesses and individuals with the money that they need to expand and improve their standard of living. It is also helpful for the bank as it allows them to increase their profit in the long run. Also, Business Term Loan come in different types of categories that are as follows:

  • Personal loan
  • Car Loan
  • Home Loan

Capital Formation- The banking sector of the economy is devoted to the holding of financial assets for others and investing those financial assets to generate more wealth. The banking industry such as central reserve bank looks into the regulation of banking activities by other banks, insurance, mortgages, investor services, and credit cards. Banks have always been an essential pillar in the country’s economy; they play a decisive role in the development of the industry and trade.

There are particular types of banks that facilities different kinds of economic activities. Nowadays in every country, there is a central reserve bank which controls the actions of all other banks, acting as a custodian to all the smaller banks, endeavours to keep the price level steady, and holds the rates of foreign exchange.

Banks play an essential role in the financial system and our economy. It is one of the critical pillars of the financial system that allocate funds from savers to borrowers in an efficient manner. Their sole purpose is to provide specialized financial services so that the entire economy works efficiently. Every country has a central bank that acts as a watchdog or keeps an eye on the banks so that the banks don’t go bankrupt or consumer lose the trust in the banking system.

David Lockhart