Q.5. Discuss the importance of a bank for a
country.
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
monetory policy stablises 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.
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.
1. 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.
2. 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.
3. 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.
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