Wednesday, 13 August 2014

THE ROLE OF BANKS IN THE ECONOMY

The leading and fundamental role of banks is to serve as intermediaries in the making of payments. In this regard, banks transform inactive funds into active form, to capital to yield profit. Banks gather all kinds of money revenues and place them at the disposal of the capitalist class. As banking develops and becomes more sophisticated and concentrated in small establishments, they grow from modest intermediaries to powerful monopolies having the whole capital in an economy at their command. This capital belongs to capitalists, small traders, and the better proportion of the means of production and sources of raw materials in one or more countries. Contemporary financial systems contribute to the development of the economy and an improvement in the peoples’ standards of living. This happens through the provision of various services to the economy. These services encompass clearing and settlement systems to buffer trade, controlling financial resources between savers and borrowers, and various products to deal with risk and uncertainty. In this regard, banks as financial middlemen exist as efficient responses to the high cost of information in the financial market. They specialize in evaluating the credit worthiness of borrowers and offering incessant monitoring function to ensure creditors meet their obligations. Banks benefit from the services they offer by the spread between the rates they charge borrowers and the rates they offer to the accumulated pool of savers. On a similar point, banks offer a repository for savings, and then convert them into illiquid assets in the form of mortgages and loans to businesses. Banks are critical institutions in any society since they significantly contribute to the development of an economy through facilitation of trade. They also facilitate the growth of saving plans and are instruments of the monetary strategy of ant government. In addition, banks provide risk management services by allowing businessmen and households to pool their risks from variations in the financial and commodity markets.

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