The Role of Banks in Economic Development

The Role of Banks in Economic Development



The Role of Banks in Economic Development

The importance of banks in the economy because they offer financial services to individual, businesspeople, and government. The specific methods through by banking contributes on economic development and the significance of its position will be evaluated by this article.

Financial Intermediation

To begin with, one of the key functions of banks is to play a role of financial intermediaries. This helps Savers to save up more by allowing banks to accept their deposits, then the banks can lend these deposits to borrowers, therefore; increasing investment in businesses through the money deposited They make it easy to distribute resources and develop economies.

Credit Creation

Banks can also generate their own credit. Creating of new money is realized through bank lending. The capacity to create credit poses an important tool that promotes economic growth by raising amount of money that can be channeled to investment and consumption.

Payment Services

Banks also play an essential role in rendering payment services. Banks help in the movement of money from one person or institution to another, a crucial aspect of transacting in an economy. This function has taken on even greater significance in the digital era wherein increasingly many transactions are carried out through the internet.

Risk Management

The management of risk is important in the economy and banks are equally integral. They cover a variety of policies like deposit insurance and credit guarantees to protect customers from losing money. Due diligence is also carried out by banks when lending to borrowers in order to ascertain if the borrower’s creditworthiness.


Finally, banks are critical for growth of financial systems and economy by offering financial services like mobilization of savings, creation of resources, credits, transactions facilitation, risk management etc. Economic growth and development could come to a stop without banks. Thus, policy-makers should design an environment conducive to a stable, effective, and highly competitive banking sector.

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