ECONOMIC FUNCTIONS OF BANK

BY: MARK R. NAMBATAC

INTRODUCTION

Overview of Banks
Main Functions of Banks
Philippine Banking System
Role of Banks in National Development
Role of Commercial Banks in Economic Development
Justification for Bank’s Existence
Conclusion
Overview of Banks

 The modern banking industry is a network of financial institutions licensed by the state to
supply banking services. The principal services offered relate to storing, transferring,
extending credit against, or managing the risks associated with holding various forms of
wealth. (International Encyclopedia of the Social Sciences, 2008 Thomson Gale)

 Banks of the Philippines have all the general services provided by American banks, as well as
some targeted banking services such as rural and microenterprise banking. Philippine banks
are well regulated and have a substantial assets available for commercial lending. (https://
www.business.com/articles/banks-in-the-philippines-industry-overview)
Overview of Banks

 The banking sector was always deemed to be one of the most vital sectors
for the economy to be able to function. Its importance as the “lifeblood” of
economic activity, in collecting deposits and providing credits to states and
people, households and businesses is undisputable. In all economic systems,
banks have the leading role in planning and implementing financial policy.

 Banks exist to earn money the same as any other business.

Overview of Banks
 They do this through charging interest on their lending and through charging
various fees for their services.
 Financial stability is one of the major factors for accelerating the rapid
development of country, and therefore commercial banks are playing an
important and active role in the economic development of a country. If the
banking system in a country is effective, efficient and disciplined; we can
ensure the economic prosperity which is the base stone to brings a rapid
growth in the various sectors of the economy. (Role of Commercial Bank in
Economic development in India(Shameer Abdul Shukoor. K.P)
Functions of Banks
Philippine Banking System

 Universal and commercial banks represent the largest single group, resource-wise, of financial
institutions in the country. They offer the widest variety of banking services among financial institutions.
In addition to the function of an ordinary commercial bank, universal banks are also authorized to
engage in underwriting and other functions of investment houses, and to invest in equities of non-allied
undertakings.

 The thrift banking system is composed of savings and mortgage banks, private development banks,
stock savings and loan associations and microfinance thrift banks. Thrift banks are engaged in
accumulating savings of depositors and investing them. They also provide short-term working capital
and medium- and long-term financing to businesses engaged in agriculture, services, industry and
housing, and diversified financial and allied services, and to their chosen markets and constituencies,
especially small- and medium- enterprises and individuals.
Philippine Banking System

 Rural and cooperative banks are the more popular type of banks in the rural communities. Their role is to
promote and expand the rural economy in an orderly and effective manner by providing the people in the
rural communities with basic financial services. Rural and cooperative banks help farmers through the stages
of production, from buying seedlings to marketing of their produce. Rural banks and cooperative banks are
differentiated from each other by ownership. While rural banks are privately owned and managed,
cooperative banks are organized/owned by cooperatives or federation of cooperatives.

 The BSP likewise releases selected statistics on non banks with quasi-banking functions . This group
consists of institutions engaged in the borrowing of funds from 20 or more lenders for the borrower's own
account through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes for
purposes of relending or purchasing receivables and other obligations.
Role of Banks in National Development
 1. Capital Formation: Banks play an important role in capital formation, which is essential for the economic
development of a country. They mobilize the small savings of the people scattered over a wide area through their
network of branches all over the country and make it available for productive purposes. Now-a-days, banks offer very
attractive schemes to attract the people to save their money with them and bring the savings mobilized to the
organized money market. If the banks do not perform this function, savings either remains idle or used in creating
assets, which are low in scale of plan priorities.
 2. Creation of Credit: Banks create credit for the purpose of providing more funds for development projects. Credit
creation leads to increased production, employment, sales and prices and thereby they cause faster economic
development.
 3. Channelizing the Funds to Productive Investment: Banks invest the savings mobilized by them for productive
purposes. Capital formation is not the only function of commercial banks. Pooled savings should be distributed to
various sectors of the economy with a view to increase the productivity of the nation. Then only it can be said to
have performed an important role in the economic development of the nation.
 4. Encouraging Right Type of Industries: The banks help in the development of the right type of industries by
extending loan to right type of persons. In this way, they help not only for industrialization of the country but also for
the economic development of the country. They grant loans and advances to manufacturers whose products are in
great demand. The manufacturers in turn increase their products by introducing new methods of production and
assist in raising the national income of the country.
Role of Banks in National Development
 5. Bank Monetize Debt: Commercial banks transform the loan to be repaid after a certain period into
cash, which can be immediately used for business activities. Manufacturers and wholesale traders cannot
increase their sales without selling goods on credit basis. But credit sales may lead to locking up of capital.
As a result, production may also be reduced. As banks are lending money by discounting bills of exchange,
business concerns are able to carryout the economic activities without any interruption.
 6. Finance to Government: Government is acting as the promoter of industries in underdeveloped
countries for which finance is needed for it. Banks provide long-term credit to Government by investing their
funds in Government securities and short-term finance by purchasing Treasury Bills.
 7. Bankers as Employers: After the nationalization of big banks, banking industry has grown to a great
extent. Bank’s branches are opened in almost all the villages, which leads to the creation of new
employment opportunities. Banks are also improving people for occupying various posts in their office.
 8. Banks are Entrepreneurs: In recent days, banks have assumed the role of developing
entrepreneurship particularly in developing countries like India. Developing of entrepreneurship is a complex
process. It includes the formation of project ideas, identification of specific projects suitable to local
conditions, inducing new entrepreneurs to take up these well-formulated projects and provision of
counseling services like technical and managerial guidance. Banks provide 100% credit for worthwhile
projects, which is also technically feasible and economically viable. Thus commercial banks help for the
Role of Commercial Banks in Economic Development

1. Banks promote capital formation

2. Investment in new enterprises
3. Promotion of trade and industry
4. Development of agriculture
5. Balanced development of different regions
6. Influencing economy activity
7. Implementation of Monetary policy
8. Monetization of the economy
9. Export promotion cells
Role of Commercial Banks in Economic Development

 1. Banks promote capital formation:

 Commercial banks accept deposits from individuals and
businesses, these deposits are then made available to the
businesses which make use of them for productive purposes in the
country.
 The banks are, therefore, not only the store houses of the
country’s wealth, but also provide financial resources necessary
for economic development.
Role of Commercial Banks in Economic Development

 2. Investment in new enterprises:

 Businessmen normally hesitate to invest their money in risky
enterprises. The commercial banks generally provide short and
medium term loans to entrepreneurs to invest in new enterprises
and adopt new methods of production.
 The provision of timely credit increases the productive capacity of
the economy.
Role of Commercial Banks in Economic Development

 3. Promotion of trade and industry:

 With the growth of commercial banking, there is vast
expansion in trade and industry.
 The use of bank draft, check, bill of exchange, credit
cards and letters of credit etc has revolutionized both
national and international trade.
Role of Commercial Banks in Economic Development

 4. Development of agriculture:
 The commercial banks particularly in developing countries are now
providing credit for development of agriculture and small scale
industries in rural areas.
 The provision of credit to agriculture sector has greatly helped in
raising agriculture productivity and income of the farmers.
Role of Commercial Banks in Economic Development

 5. Balanced development of different

regions:
 The commercial banks play an important role in achieving balanced
development in different regions of the country.
 They help in transferring surplus capital from developed regions to the less
developed regions.
 The traders, industrialist etc of less developed regions are able to get
adequate capital for meeting their business needs.
 This in turn increases investment, trade and production in the economy.
Role of Commercial Banks in Economic Development

 6. Influencing economic activity:

 The banks can also influence the economic activity of the country through its
influence on
 a. Availability of credit
 b. The rate of interest
 If the commercial banks are able to increase the amount of money in
circulation through credit creation or by lowering the rate of interest, it
directly affects economic development.
 A low rate of interest can encourage investment.
 The credit creation activity can raise aggregate demand which leads to more
production in the economy.
Role of Commercial Banks in Economic Development

 7. Implementation of Monetary policy:

 The central bank of the country controls and regulates volume of
credit through the active cooperation of the banking system in the
country.
 It helps in bringing price stability and promotes economic growth
with in the shortest possible period of time.
Role of Commercial Banks in Economic Development

 8. Monetization of the economy:

 The commercial banks by opening branches in the rural and
backward areas are reducing the exchange of goods through barter.
 The use of money has greatly increased the volume of production of
goods.
 The non monetized sector (barter economy) is now being converted
into monetized sector with the help of commercial banks.
 9. Export promotion cells:
 In order to increase the exports of the country, the
commercial banks have established export promotion cells.
 They provide information about general trade and economic
conditions both inside and outside the country to its
customers.
 The banks are therefore, making positive contribution in the
process of economic development.
Role of Banks in 21st century

 The commercial banks are now not confined to local banking.

 They are fast changing into global banking i.e, understanding the
global customer, using latest information technology, competing in
the open market with high technology system, changing from
domestic banking to investment banking etc.
 The commercial bank are now considered the nerve system of all
economic development in the country.
Conclusion

 Have been called upon to help achieve certain socio-economic objectives

laid down by the state.
 Used to sub-serve the national policy objectives of reducing inequalities
of income and wealth, removal of poverty and elimination of
unemployment in the country.
 In the modern world, banks are to be considered not merely as dealers in
money but also the leaders in economic development.
Conclusion