alexa
Indianmoney.com Missed Call Number
Home Articles Role of Banks in a Developing Economy

Role of Banks in a Developing Economy

IndianMoney.com Research Team | Updated On Monday, November 17,2014, 05:08 PM

5.0 / 5 based on 1 User Reviews

Role of Banks in a Developing Economy

 

 

Banks play a very important and dynamic role in the economic development of every nation. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries can be categorized into :

  • Promoting capital formation
  • Encouraging innovation
  • Monetization
  • Influence economic activity
  • Facilitator of monetary policy

Promoting capital formation


A developing economy needs a high rate of capital formation to accelerate the speed of economic development, but the rate of capital formation depends upon the rate of saving. But in underdeveloped countries, savings are very low. Banks afford facilities for saving and, thus encourage the habits of thrift in the community. They mobilize the idle and latent capital of the country and make it available for productive purposes.

Encouraging innovation


Innovation is another factor responsible for the economic development of a country. The entrepreneur in innovation is largely dependent on the mode in which bank credit is allocated and utilized in the process of economic growth. Bank credit facilitates entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

Monetization


Banks are the manufactures of currency notes. Banks monetize debts and also assist the backward subsistence sector of the rural economy by expanding their branches in to the rural areas. They should be replaced by the modern commercial bank’s branches.

Influence economic activity


Banks can influence economic activity in a country by their influence on the interest rates and many other factors. They are in a position to influence the rate of interest in the money market through the supply of funds. Banks may follow an economical money policy with low interest rates which will tend to stimulate economic activity.

Facilitator of monetary policy


Thus monetary policy of a country must be conductive to economic development. But a well-developed banking system is an essential pre-condition to the effective implementation of monetary policy. Under-developed countries can never ignore this fact.

 

Did you find this article useful? You can Rate us
5.0 / 5 based on 1 User Reviews
Article Author

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

Subscribe to our Youtube Channel

 
Get the Best Financial Advice on Personal LoanClick Here

Most Popular

Why one must never neglect estate planning

07 January 2014, Tuesday

Things to Know About Hybrid Mutual Funds

26 November 2013, Tuesday

What is Car Insurance? Why is it important?

21 October 2009, Wednesday

Latest Stories

Personal Loan for Self Employed

19 September 2018, Wednesday

What Is A Government Bond?

19 September 2018, Wednesday

Unsecured Loan

18 September 2018, Tuesday

MCLR vs Base Rate

18 September 2018, Tuesday

Popular Tags

GST
UK
 
Get the Best Financial Advice on Personal LoanClick Here

Calculators

Get It now!