Roles of Bank in Economic Development
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Roles of Bank in Economic Development

Roles of bank in economic development In any plan of economic development, capital occupies a position of central and strategic importance. No economic development of sizable magnitude is possible unless there is an adequate degree of capital accumulation. A very important characteristic of an under-developed economy is deficiency of capital which is the result of low savings made by the community

Roles of bank in economic development

In any plan of economic development, capital occupies a position of central and strategic importance. No economic development of sizable magnitude is possible unless there is an adequate degree of capital accumulation. A very important characteristic of an under-developed economy is deficiency of capital which is the result of low savings made by the community. Backward economies hardly save 5 per cent of the national income, whereas they should save and invest at least 15 per cent. In 1950, Colin Clark, estimating the capital needs of China, India and Pakistan, pointed out that they must save 12.5 per cent of the national income to absorb the increasing labor force and maintain the past rate of increase in productivity.

In the under-developed countries, not only is the capital stock extremely small but, as pointed out above, the current rate of capital formation is also very low. The serious capita' deficiency in under-developed countries is reflected in the small amount of capital equipment per worker and in limited knowledge, training and scientific advance. These are serious handicaps in economic development and here the banks can play a useful role.

The role of the banks in economic development is to remove the deficiency of capital by stimulating savings and investment. A sound banking system mobilizes the small and scattered savings of the community' and makes them available for investment in productive enterprises. In this connection, the banks perform two important functions:

(a) They increase deposits by presenting smart interest rates, thus changing savings, which or else would have stayed lifeless, into active capital; and (b) they dispense these savings via loans amongst ventures which are associated with economic growth.

It is difficult to see how in the, absence of banks small savings could be stimulated or even made possible. It is also difficult to see who would distribute these savings among entrepreneurs. It is through the agency of the banks that the community's savings automatically flow into channels which are productive.

Thus, the barks play a central and helpful role in promoting economic growth by marshaling the financial assets of the society and by channelizing it into the preferred channels.

 

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Comments (1)

Gazu, this wonderful view of the banks as the careful and watchful custodians of the finances of their valued clients is, I am afraid, from Cloud Cuckoo Land. Banks used to be caring and watchful, now they are manipulative and greedy.

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