What is the role of commercial banks in achieving economic development in developing countries ?
The general role of commercial banks is to provide financial services to the general public and all types of business, ensuring and/or helping sustainable development like economic, environmental and social.
They could provide cash needed by Small and Medium Size Enterprises when they are experiencing liquidity shortages...
They can also contribute to firms development in cooperation with Investment Banks.
With regards,
Joseph
Joseph Tshilomb Jonathan: Thank you for your answer
Commercial banks provide intermediary role between sectors of surplus fund and that of deficit liquidity. By so doing, they ensure financial inclusion, inclusive growth and sustainable economic development. They are the oil that lubricates the financial engine of the economy.
In modern market economies, part of the money supply is provided from "outside" the market, by the central bank, and the other part is created "inside" the market by the commercial bank in their activity of giving credit to profitable enterprises. With that, commercial banks perform two essential functions necessary for economic development: - First, by their uncoordinated action there is an "automatic" regulation of the supply and demand for money in the economy in a way that no central bank can have the knowledge to perform; and, second, by identifying profitable opportunities for lending, the commercial banks, again, by their uncoordinated actions, perform the allocation of the scarce resources saved in society to their most efficient uses, since only the most profitable business can pay the interests charged for the loans and still make a profit. I hope that helps! :-)
Olufunmilayo T Afolayan : Thank you for your answer
You may want to differentiate between international finance and domestic finance. Both can provide from a short-term to long-term financing to fill liquidity gap (for the case of short-term) and to investment (for the case of long-term), however, risk appetite and size of finance would be different. Therefore, naturally the objective of such finance would be different, too.
Banks play a very simple but key role in the economy; take excess money from the surplus units (individuals, households and some firms) and lend to the deficit units (mainly businesses). This traditional role of banks is called financial intermediation. Over time, banks have extended their roles to include facilitating payments, provision of online infrastructure, processing of international trade transactions, custodian services and a wide range of other services which vary according to host country regulations. All these services have both direct and indirect impact on the growth of the economy
Emeka Nwuba Thank you for your answer..
In recent studies, many researchers proved that there are vanishing effect of banks development on economic growth, and others found negative effect.
like: {Rousseau & Wachtel,(2011) : What is happening to the impact of financial deepening on economic growth?, Shen & Lee(2006) : Same financial development yet different economic growth--why? and Gründler (2019) : "The vanishing effect of Finance on Economic Development"}
In my experience as a banking officer, commercial banks can increase business growth, but not all commercial banks willing to finance new Small and Medium Size Enterprises because they think, New SMEs have high risks
I Made endra kartika Yudha Thank you for your answer..
Answer by asking. What is the role of banks in economies where they are less prominent, like the USA? How do these economies develop? What is the dynamics? Such illumination by contrast will show you the trusses you need for framing your answer.
Fred Amonya thank you, you give me a new perspective on how to deal with this issue.
Dear Colleagues and Friends from RG, The role of commercial banks in achieving economic development in both highly developed and developing countries can be large. whether it is big or small depends on the level of development of the banking system in a given country, including also what part of the national economy is the financial sector, including the banking sector. Sometimes in the circles of scientists studying this issue there are considerations whether the financial sector is not too developed in relation to other branches of the economy in some highly developed countries. Such considerations usually appear in the situation of research and analysis of the sources of the global financial crisis of 2008. The significance of the banking sector in the national economy is determined, among others, by factors such as the level of technological development of online banking, the implementation of ICT and Industry 4.0 information technology in banking, the level of financial capital that banks use to conduct lending, the effectiveness of credit risk management improvement processes, the quality of loan portfolios , efficiency of banking supervision institutions and central banking, etc. I conduct research in this area. The conclusions of the research I published in scientific publications that are available on the Research Gate portal.
Best wishes
Dariusz Prokopowicz
The most important factor in economic growth is the banking system. At present, the relationship between the development of the banking system and economic growth is of great importance, since stability and further growth of the country's economic potential, individual sectors of the economy, as well as strengthening its position in the international market, depend on their effective functioning and correctly chosen methods.
Along with the rest of the financial system, the commercial banks help in achieving economic development through the following functions: They provide payment services which reduces risk elements for businesses, they match saving and investment for individuals and firms, they allocate credit more efficiently, they help increasing asset liquidity. private Development Banks, in particular, play a distinguished role in the aforementioned functions.
"Banks have always played an important position in the country’s economy. They play a decisive role in the development of the industry and trade. They are acting not only as the custodian of the wealth of the country but also as resources of the country, which are necessary for the economic development of a nation. The general role of commercial banks is to provide financial services to general public and business, ensuring economic and social stability and sustainable growth of the economy" ( KALPANA and RAO , 2017: p1 ).
It is not easy to find the correct measure for commercial banks impact on the economy. Empirical results may have differeing results. One can imagine a robinson crusoe economy using barter and a modern economy using money as a medium of exchange. Efficiency is an important criteria. How to isolate this measure for banks in a world with so many variables? Intutively we know that commercial banks play an important role in achieving economic development.
Many roles, the key role is capital formation and productive investment
They play a key role in providing the capital for growth of the Economy.
The banking sector represents important piler in economic development via the control of monetary policy operations.
Sorting out (sustainable and innovative) investment pathways for firms and households via the fiat credit monopoly; mischief of this monopoly leads to economic crisis, because central banks can only police the accumulated errors of borrowers and lenders.
Commercial banks contribute to economic development, as well as the rest of the financial system, by performing the following tasks: they offer payment services, which lowers risk factors for businesses; they match saving and investment for people and businesses; they allocate credit more effectively; and they aid in increasing asset liquidity. Particularly in the aforementioned tasks, private Development Banks play a noteworthy role.
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