A Well developed banking system helps in economic development in a modern economy. The role of the banking system in an economy can be explained as:
1. Mobilization of savings
Banks encourage thriftiness and saving among the people. Since banks provide attractive interest on saving and fixed deposits, people are encouraged to save more. Banks make it possible to collect small savings for all parts of the country. The resources so mobilized are channelized in productivity Investments.
2. Capital formation
Capital formation is crucial for the economic development of a country. Bank collect idle money from people. This money is channeled by banks to individuals, businesses, and the government for productive investments. This increases capital formation by increasing productive investments.
3. Monetization of the economy
The spread of Bank branches to the rural areas encourages banking habits in people. People keep their money in banks and withdraw at the time of need. This leads to the monetization of rural areas. It is easier to implement government monetary and fiscal policies effectively in a monetized economy.
4. Promotion of employment
Unemployment is a serious problem, that may result in severe social, political, and economic consequences. Banks finance agriculture, industry, trade, and Commerce and also make direct investments in different sectors. All these increased economic activities and promote employment opportunities.
5. Upliftment of the poor
Banks make available loans to rural people at a reasonable rate of interest. This helps farmers to undertake agriculture and non-agriculture works. And this has helped to increase the employment level, income level, and standard of living of the poor.
6. Promotion of entrepreneurship
The role of the private sector is crucial in accelerating the pace of economic growth. Banks increase private sector participation in economic development by making available the loans at a reasonable rate of interest. In a developing country like Nepal lack of entrepreneurship has been a great obstacle to development. Hence, the role of the bank cannot be underestimated.
7. Rapid economic development
Banks can contribute substantially to economic development. The rapid industrialization in America, Japan, Germany, and France was made possible by banks. Banks also provide loans to agriculture, industry, and trade as per their requirements and thus accelerate the pace of economic growth.
8. Safety of wealth
Banks collect people's money and keep them in safety. in addition, banks provide interest on deposits. People can keep their valuables in the 'safe deposit vault' of the banks. These particles reduce unnecessary expenditure and increase savings.
9. Remittance of money
Money can be transferred easily from one place to another and from one country to another with the help of the bank. it has facilitated transactions in distant places. this, in turn, has expanded internal and external trade.
10. Saving of precious metals
At present, economic transactions are made through currency notes, cheques, drafts, bills of exchange, etc. In the absence of banks, the transactions would have to be made through precious metals. There is Saving in the use of precious metals. These metals can be used in other important works.
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