Importance of Banks

Importance of Banks in Economic Growth and Development

Banks are considered to be special. The reasons for why banks are special are reflected in their roles and functions and its impact on the economy. The bank plays many roles in the financial system. Banks are considered custodians of public savings. This is because banks take care of individuals’ savings while having a responsibility of making these funds available to their customers at any point in time. This exposes banks to liquidity risk. Banks also play a delegated monitoring role. The banks act as owners of the funds received from depositors and they screen and select the right people to give the funds to and following this they monitor the borrower to prevent loss of funds. This improves the effectiveness and efficiency in the allocation of credit in the economy. This also contributes to efficiency in the economy because banks are trying to match funds with the right users who will generate the greatest benefits from these funds. The bank also puts pressure on the borrowers to perform and also make sure they perform efficiently. Overall this means that financial intermediation by banks promotes economic growth.

The role of Banks in Economic Development:

* To provide the necessary lending to viable initiatives aimed at growth and expansion of the respective sectors.

* The promotion of capital formation: accepts deposits from businesses and individuals and make them available for productive purposes. Not only stores wealth but provides financial resources for economic development.

* Investment in new and existing enterprises: banks provide loans to entrepreneurs to invest in new enterprises and adopt new methods of production. A timely provision of credit where it may have taken a longer period for the businessman to accumulate the initial capital injection.

* Balanced development of different regions: transferring surplus from developed regions to less developed regions.

* Influencing...