Role of Commercial Banks in Economic Development

Topics: Bank, Money, Finance Pages: 5 (1293 words) Published: December 10, 2012
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.”

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.” Banks plays a vital role in the economic development of a country. They accumulate the idle savings of the people and make them available for investment. They also create new demand deposits in the process of granting loans and purchasing investment securities. They facilitate trade both inside and outside the country by accepting and discounting of bills of exchange. Banks also increase the mobility of capital. They provide a variety of facilities for remitting a large amount of money from one place to another by the transfer of a mere slip of paper.

In a country like Afghanistan which is still in the initial stages of economic development. A well organized banking system is the need of the day. There is acute shortage of capital in Afghanistan. The banks can play an important role in promoting capital formation, in controlling speculation in maintaining a balance between requirements and availabilities and in directing physical resources into desired channels.

Commercial banks play an important and active role in the economic development of a country, if the banking system in a country is effective, efficient and disciplined; it brings about a rapid growth in the various sectors of the economy. The use of online banking is now on the increase. It has brought revolution in banking industry. The online banking which is the wave of future is now on the move in Afghanistan and is progressing satisfactorily. 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 investments. Land, Labor, 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 of the land, hire labor, pay for capital goods and pay for individuals with specialized skills. Detail role of commercial banks in economic development is given below: * Trade Development

The commercial banks provide capital, technical assistance and other facilities to businessmen according to their need, which leads to development in trade. * Agriculture Development
Commercial banks finance the most important sector of the developing economics i.e. agriculture, short, medium and long-term loans are provided for the purchase of seeds and fertilizer, installation of tube wells, construction of warehouses, purchase of tractor and thresher etc. * 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.

* 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. * 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...
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