The Role of Banks in the Economy.

Commercial banks are vital institutions that play an important role in the economy. Before banks were invented, individuals would walk around with stacks of cash in the form of silver and gold coins when going to make a purchase. There was also no institution to hold people’s cash and individuals would store their cash within their houses or in funny locations within their homesteads. There were no lenders at that time as well and individuals would resort to shylocks who charged exorbitant interest on cash advances. Times were tough back then and the invention of commercial banks sorted some of these issues out. To understand the importance of banks in the economy, here are some of the roles banks play in economic development and prosperity.

  1. They hold cash deposits.

If you have more cash than you need for your immediate needs, banks provide you with a safe place to store that extra cash. You can store your cash as long as you need to and easily access it when you need to use the funds. In fact, your cash will earn interest when you choose to hold it in a savings account as opposed to a current one. The interest rates on cash deposits vary across different banks and you should shop around for the best rates before choosing a bank for your cash deposits.

  1. Credit provision.

Credit advances promote economic development by allowing small and large business owners to invest more cash than they have at hand. This allows businesses to get their operations going immediately by providing them with all the cash they need to purchase raw materials, machinery and to pay for office space. Without credit advances from financial institutions, business owners would have to save to be able to acquire all the funds needed to set up their business and this could take a very long time. Banks usually charge interest on the loans they advance to individuals and businesses with the rates charged dependent on the credit history of the applicant. When taking loans for their businesses, business owners should shop around for the banks with the best terms so as to avoid paying more interest than you should for your loan. Read more here on the best banks for small businesses.

  1. Cash remittance.

To acquire the goods and services that you need, you will have to make a payment using cash or through other methods such as bank checks and money orders. Commercial banks and other financial institutions aid with this by helping individuals and businesses make cash transfers for their purchases. Individuals and businesses are able to do so safely and this eliminates the need to carry huge amounts of money which is quite risky. Cash transfers can also be made internationally and this has helped businesses increase their footprint by making external trade possible.

  1. Rapid economic development.

In an effort to spur development in a certain area of the economy, banks may advance loans and other investment aid to individuals and businesses in that area. If commercial banks feel that there is a need for more development in agriculture, they may decide to issue favorable loans to farmers so as to increase agricultural activities in that area. They may also hire experts in that area to help individuals and businesses who choose to invest in that area make the best decisions about their businesses.

  1. Promote entrepreneurship.

It’s no secret that entrepreneurs run the world. From an idea, entrepreneurs are able to develop multi-billion dollars businesses such as the Apple’s and Starbucks of today. The journey to entrepreneurial greatness starts with an idea but implementing those ideas requires cash and a lot of it. Budding entrepreneurs may not have all the cash needed to implement their business ideas and that’s where banks and other financial lenders come in. Such institutions provide entrepreneurs with all the cash they need to set up their businesses. By providing them with such funds, commercial banks, therefore, promote entrepreneurship. To accesses cash for their businesses, all that budding entrepreneurs need to do is to prove that they can pay the loans back and they can do this with their credit scores.

  1. Investment advice.

Banks also offer advice to their customers on matters of investment. Some even have fully functional investment departments to help their customers make good investment decisions. You may lose your hand-earned cash if you choose to invest your money in the wrong project. Officers in the investment department will let you know if your choice of invest is good or not. They can also recommend viable investment options depending on the amount of cash that you have to invest.


Banks play an important role in the society. Businesses and individual can approach them if they need help with funding for their businesses or personal needs.

Author: Oliver Curtis

Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.

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