ICom Notes Class 12 Banking Importance of Banks

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IMPORTANCE OF A BANK

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

1. 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.

2. CO-ORDINATION 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.

3. 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..

4. ACCERATE INVESTMENT

The banks constitute 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.

5. CAPITAL FORMATION

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

6. 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

7. 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 offer them attractive incentives to make deposits in the form of profit. The bank accepts three types of deposits from the public.

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.

Current Account

The deposits can withdraw money from this account whenever he wants to. The banks generally grant no interest on this account. On the other hand it levies certain charges on the customer for the services rendered by it.

Saving / Profit & Loss Sharing Account

All the banks in Pakistan nearly have started accepting deposits only under Profit and Loss Sharing Accounts where the depositors share in profit and loss instead of getting interest (Commonly known as Profit).

ADVANCING LOANS

The second important function of a commercial bank is to advance loans. The banks advance certain types of loans to their customers such as:

Ordinary Loans

Here the banks give a specified sum of money to a person or firm against some collateral security. The loan money is credited to the account of the customer and he can withdraw the money according to his requirements.

NON-COMMERCIAL FUNCTIONS

The non-commercial functions of the commercial banks are as follows.

i. Agency Functions

Commercial banks act as the agents of their customers and perform agency functions as transfer of funds from one place to another. Collecting customers funds and crediting the same to their accounts. Purchase and Sale of shares and securities, collecting dividends on the shares of the customers and payments of insurance premium on policies of the customers.

ii. Purchase and Sale of Foreign Exchange

The bank also carries on the business of buying and selling of foreign currencies Ordinarily their functions is performed by specialized banks known as Foreign Exchange Banks.

iii. Financing Internal & Foreign Trade

The bank finances internal and foreign trade through discounting of exchange of bills. This discounting business greatly finances the movement of internal and foreign trade.

iv. Creation of Credit

When the bank grants loan to its customers it opens an account in the borrowers name and credits the amount of the loan. Since the deposits of the bank circulate as money the creation of such deposits lead to a net increase in the money stock of the economy. This is known as Creation of Credit

v. Miscellaneous Functions

Bank performs different kinds of various services other than described above such as collect utility of bills on behalf of Government and other authorities. Provide valuable advice to customers about trade and business provide information about sale and purchase of shares and act according to Government policy like deduction of Zakat and Islamic blessing System etc.