Importance of Banking


Importance of banking to an economy no emphasis. A well-organized banking system provides liquidity and mobility to the financial resources available in the economy. It helps the economy in the following regards.

Importance of Banking

  • Bring Economic Stability In The Country
  • Co-Ordinate Among All The Units
  • Accurate Investment
  • Capital Formation:
  • Creation Of Money
  • Encourage Saving
  • Facilitate Trade
  • Acceptance Of Deposits
  • Importance of banking in day to day life
  • Role of banks in the economy

The importance of banking industry are explain one by one; 

Bring Economic Stability In The Country: 

                  The banks play a prominent role in providing stability to a country economically. It helps in getting out of depression or inflation. During depression the banks follow a cheap money policy and generate money income which pushes up the consumption level and the economy gets price support to reactivate production units and the produced level is enhanced which raises the employment level.

            The investment rises to stimulate saving and to expand which further increases employment opportunities. Similarly the banks specially the central banks take certain measures to control inflation in the economy. The central bank through it is well adjusted monetary policy stabilizes the internal price level and thus facilitates economic & development in the country.

importance of banking
Importance of Banking

Co-Ordinate Among All The Units:

The banking system maintains a coordination among all the units which are engaged in banking functions. It consists of collecting of surplus money from the people and lending them to the entrepreneurs who utilize it for productive purposes.

               Creating a country wide circulation of money through remittance facilities.Activating idle money to make them productive Provide finance by credit accommodation to different sectors of the economy.

Accurate Investment:

               The banks constitute a source of accelerating investment in the economy.The funds collected from the depositors are used for financing development projects in the public and private sectors and for granting loans and advance for raising the production level of the country. 

Capital Formation:

                In any plan of economic development capital occupies a place of pivotal importance. Without capital nothing can be achieved effectively. Savings of the people is capitalized through lending by banks.

Creation Of Money:

              Banks create money in the sense that through credit granted to entrepreneurs, whether to the private or government agents they increase supply of money which they manage because of inflow of fund through deposits. The development agencies manage to bridge the gap between the income and expenditure and thus the development work continues undisturbed

Encourage Saving:

             The banks encourage saving by providing safe custody and making it a source of income to the persons who save. The people having surplus money arising out of saving, deposit it with the banks. The banks pay them interest and get them relief from burden of safety and other risks.

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Facilitate Trade:

             The banks facilitate trade by furnish information regarding financial stability and dealings of the parties in the market to customers. They provide remittance facility to the entrepreneurs and help them in the settlement of transactions even at far places.

Acceptance Of Deposits

           Acceptance of deposits is perhaps the major functions that a commercial bank performs. It accumulates the scattered savings of the individuals and offers them attractive incentives to make deposits in the form of profit. The bank accepts three types of deposits from the public.

a. Fixed Deposit Account
Money in this account is accepted for a fixed period of time and cannot be withdrawn before the expiry of that period.

b. Current Account
the deposits can withdraw money from this account whenever he wants to. The banks generally grant no interest.

Importance of banking in day to day life

Role of banks in the Economy 

Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged to depositors and borrowers respectively. The process done by banks of taking in funds from a depositor and then lending them out to a borrower is known as financial intermediation.

Through this process certain assets are changed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (saver) to those who do not have enough money to carry out a preferred activity (borrowers).

Banking grows on the financial intermediation capabilities of financial institutions that allow them to loan out money and receiving money on deposit. The bank is the most important financial intermediary in the economy as it connects surplus and deficit economic agents.

When you deposit your money in the bank, your money goes into a big pool along with everyone else’s, and your account is credited with the amount of your deposit. The role of the bank is to provide a safe place to keep your money and sometimes the chance to earn interest/profit on your deposits.

The current and savings A/c provide suitable ways for you to pay your bills without the hurry of using cash. At the same time, when you run short of liquidity, the bank is able to give you some advance to cover up for your shortfall through other depositors funds.

In the nonexistence of banks;

  • Where would you go to borrow money?
  • What would you do with your savings?
  • Would you be able to borrow (save) as much as you need,
  • When you need it, in a form that would be convenient for you?
  • What risks might you face as a saver (borrower)?

Because of the power of financial intermediation of the banks, these puzzles are resolved through the banking system hence they stop to be your problem but the banks problem.

Banks are important institutions in any society as they meaningfully fund to the development of an economy through simplification of business. Banks also facilitate the development of saving plans and are instruments of the government’s monetary strategy among others.

From the above discussion we conclude that importance of banking in our society have many advantages.

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