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The Role of Commercial Banks in Economic Development

Updated on July 7, 2015

Commercial Banks: Role in Financial Markets and Economic Growth

For centuries, the banking sector has been a pillar of economic prosperity. Indeed, history provides us with some startling information about how banks financed imperial ventures in newly acquired colonies. Over time, banks have become a crucial force for savings and investment.

Land, labor, capital, and expertise are the basic economic resources available to business. However, to make the use of these resources, a business requires finance to purchase land, hire labor, pay for capital goods, and acquire individuals with specialized skills. And that's where commercial banks come in. Read on to find out how commercial banks contribute to the economy, financial marekts, and economic growth.

  • Trade Development. Commercial banks provide capital, technical assistance and other tools to businessmen according to their need, which helps to develop trade.
  • Agricultural Development. Commercial banks finance the most important sector of developing economics i.e. agriculture. Short, medium and long-term loans are provided for the purchase of seeds and fertilizer, the installation of tube wells, the construction of warehouses, the purchasing of tractors, threshers and other equipment, etc.
  • Industrial Development. The countries that concentrated on their industrial sector made rapid gains 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 accelerate the rate of a country's capital. Capital formation refers to increases in the number of production units and improvements and dissemination in technology, plants, and machinery. Banks finance the projects responsible for increasing the rate of capital formation.
  • Development of Foreign Trade. Commercial banks help traders from two different countries do business together. Letters of credit are issued by the importer’s bank to the exporters to ensure the payment. The banks also arrange foreign exchange.
  • Money Transfers. Commercial banks provide the facility of transferring funds from one place to another which leads to the growth of trade.
  • Higher Productivity. A good banking system helps increase production in all sectors of the economy by strengthening the capital structure and the division of labor

  • Transportation. Commercial banks finance the transportation sector, which reduces unemployment on one hand and increases the ease of movement on the other. Remote areas are linked to main markets through developed transport system.
  • Safekeeping of Valuables. Businesses and individuals can confidently deposit surplus money in banks. Banks also provide them lockers to keep precious articles and necessary documents safe.
  • Better Savings Rates. Commercial banks persuade the people to save more. Different saving schemes with attractive interest rates are introduced for this purpose. To that end, the bank opens branches in urban and rural areas to attract depositors.
  • Construction. Commercial banks provide credit for the purchase or construction of houses.
  • Government Loans. By providing funds for government development programs, commercial banks help the government ensure economic stability.
  • Higher Employment Rates. A country’s economic prosperity depends on the development of trade, commerce, industry, agriculture, transportation, and communication, etc. These sectors are financed by the commercial banks, which increases employment opportunities.
  • Paper Money. Cheques and drafts etc works like money. So there's no need to make coins out of precious metals, which could reduce a country's reserves that could otherwise be used for other, more important purposes.
  • More Credit. Commercial banks are factories of credit. They do so much with the money they collect in deposits by lending it out at interest. Through the process of credit creation, commercial banks finance all sectors of the economy, making them more developed.

  • Financial Advice. Commercial banks also give useful financial advices to promote the business their customers' businesses.
  • Investment Opportunities. Commercial banks mobilize people's accumulated savings. Banks make these savings farmers, traders and industrialists in the form of loans for the development of agriculture, trade and industry.
  • Monetary Policy. Under the supervision of a central bank, all scheduled commercial banks work toward implementing the objectives of a country's monetary policy. This concerted effort makes economic development possible.
  • Better Technology. The use of modern technology in less developed countries is only possible due to commercial banking, who provides the funding for it. These funds are utilized for the import of modern technology from developed countries.
  • Export Promotion Cells. In order to boost the exports of the country, the banks have established export promotion cells to guide and inform customers.
  • Economic Prosperity. A country's economic prosperity depends on a number of factors, including the a strong commercial banking sector. A sound banking system promotes economic well-being by providing them short, medium and long-term loans.
  • Training Centers. Commercial banks establish many training centers for their employees so as to modernize the banking system. In this way the banking experts improve their abilities and help the country develop.


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      Kundai 18 months ago

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      danielabram 5 years ago

      Do you think the Canadian banking system or American banking system is better than the other? Especially considering how the Canadian banks weathered the 2008 financial crisis, while the American banks received bailouts.

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      Kashif 6 years ago

      I was looking for this information for my research work. Thanks for this sharing.