Role Of Banks Of The Economy

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Role Of Banks in the Economy A bank is defined as a financial institution with the primary purpose of accepting money from depositors and lending loans to borrowers. Depositors are usually people or companies with surplus money who deposit their money in the bank in order to save while borrowers are people who do not have enough money to carry out desired activities thus they borrow from the banks. The banks make profit from the differences in the interest paid to the depositors and the interest rate charged to the borrowers. This process of accepting money from a depositor and lending them out to borrowers is known as financial intermediation and banks are thus also financial intermediaries (Abel, 2013). A strong banking system is very…show more content…
Thus in this way the banks are ensuring that the capital lent out is used in productive investments. This is beneficial for growth of the economy (Drigă and Dura, n.d.). Banks also help in promoting balanced development in the economy. By providing loans to investors in less developed areas, banks help these areas develop and this in turn, increases investment, trade and production in the economy. Banks help increase the amount of money in circulation by creating credit and lowering rates of interest charged. They also play a vital role in implementation of the monetary policy. The central bank of a country controls and regulates the volume of credit and helps bring stability and economic growth to the country. The private sector plays a vital role in proper and fast development of the country and banks help increase the participation from the private sector by encouraging entrepreneurships. Banks have made it possible to transfer money easily from one place to another thus facilitating distant transactions hence improving internal and external trade markets (HubPages, 2015). Banks therefore, connects the surplus and deficit economic agents and also ensures that there is optimum utilization of the available capital. Hence the efficiency of the banking system is a key determinant of sustainable growth. Overview of the Malaysian Banking System Before its
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