Roles of Commercial Banks in Economic Development


Commercial banks hold an important position in the economic development of a country. Commercial banks are the major participants in a financial system and are major stakeholder of economic activities in an economy. They are one of the most prominent institutions that play a decisive role in the development of individuals and businesses. In functionality, commercial banks are the custodian of the wealth of the country. They are the manager of funds in an economy. They have a prominent role to play and some of such roles of commercial banks are:

  1. Capital Formation
  2. Credit Creation
  3. Channelizing fund
  4. Bank rate policy
  5. Finance to Government
  6. Banks as Employment
  7. Banks for Entrepreneurial Development

Capital Formation

Savings and Investments are fundamentals for capital formation. Banking institutions have savings as their primary function. Savings from the individuals and institutions with excess funds is lend to the one who is looking for funds, either for consumption or investment. And investment leads to capital formation. Banks play a critical role for the circulation of money in the market among the businesses i.e. capital.

Apart from this, commercial banks have the responsibility of managing the funds. They mobilizes the passive money into active investment by utilizing such funds. Savings for someone is capital for someone and commercial banks manages this transmission of funds.

Credit Creation

Credit Creation is the extended function of bank deposits. Banks create a pool of deposit in the form of saving from the individuals with excess funds or from individuals who wish to get future benefit from the fund. All these collected funds are disbursed in the form of loans to the borrower.

Advancing such loans doesn’t pay the borrower in cash rather only gives him the guarantee which is withdrawn after requesting a cheque. There are two main aspects of credit creations:

  1. Liquidity: The bank must grant loans to maintain the liquidity raised from the deposits
  2. Profitability: The major objective of banks is profit-creation and banks must provide loans to fulfill this objective. Deposit at low interest rate and lend at higher interest rate.

There are some of the limitations of Credit Creation:

  • There are chances of loans turning into bad debts.
  • Interest rates charged on loans are always greater than the interest rate for deposits.

Channelizing Fund

Banks are responsible for circulating the funds in an economy. Accepting deposits and lending loans are two primary functions of banks. Banks mobilize the deposits and invest in productive purposes. Banks manages the demand and supply of the funds in a market. Disbursement of loan in various productive sector of the economy is only possible from the deposits by the customers. Such transfer of funds from one hand to another hand in a regulated manner increases the economic activity in the country.

Bank Rate Policy

Central banks regulate all the banking and financial systems in any country. Central Banks regulate the money supply in a country with the help of bank rate and monetary policy. The bank regulates the rate of interest given on the deposits and rate of interest charged on the granted loans. Commercial banks execute the guidelines to let the economy run.

Finance to Government

Government is the last resort for all the industries/businesses in any economy. For this, finance is needed and banks provide finance to the government by investment in various government securities and investment plans. There are short term and long term financial requirements and to raise those financial needs government has short-term offerings such as treasury bills and long-term offerings such as development bonds.

Bank as Employment

Banking is a service oriented business and the banking industry is ever growing since the beginning. It serves a considerable number of customers hence requires a larger human force. Banks operate in branches to serve the customer base and they regularly create new employment to serve. In FY 2017, banks gave the highest number of employment i.e. 21 percent of total employment created in the year.

Bank for Entrepreneurial Development

Banking roles as entrepreneurs is due to the recent development in the sector. Banks have undertaken the role to act as a support factor in the development of entrepreneurs. Banks welcome the creative and innovative plans and support them with their financial needs. Government and central banks now promote entrepreneurship and have requested banks to project potential projects. Therefore, today’s banks support projects and ideas throughout their process. Banks provide all sorts of financial assistance to the projects that are technically feasible and economically viable.


Leave a Comment