What is the role of banking in an economy?

Why are banks so important? What is the role of banking in an economy?
Why are banks so important?
What is the role of banking in an economy?
IMPORTANCE OF BANKING Banks plays a significant role in economic development. The overall economy of a country is absolutely dependent on the efficient banking system. Industrial, agriculture and commercial progress of a country is not possible without an effective banking system the importance of banking may be stated as follows.

CAPITAL FORMATION: Capital is life blood for all kinds of businesses and economic development of a country. Capital grows out from saving and Banks plays a prime role in accumulating capital by collecting small savings of the people. Thus bank renders a valuable service towards the development of a country by encouraging the growth of capital.

DEVELOPMENT OF TRADE AND INDUSTRY: Bank utilizes their collected funds by advancing loans to commercial and industrial sectors that enhance to the trade and industries, level of production and creating new jobs in the economy.

Banks deal in foreign exchange by purchasing and selling foreign currencies, issuing letters of credit. They provide foreign exchange for import and export that enhance foreign trade.

INEXPENSIVE MEDIA OF EXCHANGE: Modern banking provides inexpensive media of exchange. Issuing of currency notes is a great achievement of modern banking. In addition, the cheques issued on the banks are frequently used instead of money in business transactions. Thus cheques economize the use of currency notes.

RESERVOIRS OF FUNDS: Bank acts as the reservoirs of money in the country. In times of economic crisis, the bank comes forward to help the government by advancing loans.

TRANSFER OF FUNDS: Bank facilitates the transfer of funds from one place to another safely and at a very cheap cost through bank drafts, telegraphic transfers, and traveler’s cheque, etc.

SERVICES TO CUSTOMERS: Banks perform various agency services on behalf of their customers. They collect or make payment of bills of exchange & dividend insurance premium on behalf of their customers.