Why banks are important in an economy Bank is an organization or financial institution whose current operations are accepting deposit money and giving loans (slideshareinc 2012), bank is one of the type of financial intermediary(state of Connecticut). Understandings of a bank are varying, depending on the views of people. In past, bank only place to saving and borrowing money. Now understanding of the bank is growing with the development of the bank function in today’s modern life.
For example as an executive payment and storage of valuables (Demand Media, inc 2012) The Function of a bank is to ensure the safety and soundness of banks, maintain the efficiency financial structure and financial system, maintain financial balance or stability and secure costumer from abuses (Dileep Mehta and Hung-Gay Fung 2004)On the other side, bank also manages financial in a country (Franklin Allen and Elena Carletti 2008) There are many types of bank, such as saving banks, commercial banks, industrial bank and central bank (preserveArticles. com 2012).
Differences of bank type will impact to the usage and function of a bank such as central bank can create money to be used in country, but commercial bank or saving bank only can save costumers money that they deposit and give loans to other who need it. Let us look deeper into the Role of a Central Bank in a country, as well as its importance in helping developing countries to have a stable economic growth and for developed countries to maintain its economic growth (preserveArticles. com 2012). Bank has a very important role especially in those developing countries.
Since the developing countries do not have well-organized money and capital markets, a Central Bank will provide a solution to develop the banking and financial system in the country. Thus, in a long term, Central bank will aim to achieve a stable economic growth for the country as well as internal stability by adopting such a monetary policy that can control inflationary tendencies and ensure price-stability, since developing countries are vulnerable to inflationary pressures (PreserveArticle. com). Other than that, Central Bank can also act as a promoter.
By using its credit control instruments (i. e. , bank rate, variable cash-reserve ratio, etc) it can provide an incentive for people to have confidence in developing a banking habits and improve the investment rate in the country (PreserveArticle. com) In developed countries maintaining a good financial system is the main objective of the Central bank. Thus having a good financial system, will ensure the country to be able to avoid booms and bust cycles, as well as inflationary scare. After that being achieved, improving the country’s economic growth would be the next step in the agenda.
From the understanding of the bank, it can be concluded that bank does not give or create new wealth to the country except Central bank. It happen because Central bank who can create money only one, the other just commercial bank. Most of the banks are just doing the saving and borrowing. Bank plays an important role in the economy of the State, because they take advantage of the savings or deposit from the costumers and mobilize the savings money for investment or rising capital of a country (Blurtit. itd).
Bankstypicallyprovide loanstoagriculturalorindustrialsectors, so thatsectorcan increase quantitiesandquality oftheproducts. When the quantities and quality of the product are increase, it will impact to economy growth for country. Before bank loan money to borrowers, firstly they will find the borrower identity, then after that they will check it whether this candidates worthy to get the loan or not. One of the examples how bank can check the candidate is use Debt- to equity ratio. Bank will examine or screen debt-to-equity ratio of the borrowers.
Debt-to-Equity ratio means the ability of the borrower to repay. To get debt-to-equity ratio it is measured from total liabilities divided by share holders Equity. The higher debt-to-equity ratio of the borrowers it is mean the borrowers are aggressive in financial growth (Dileep Mehta and Hung-Gay Fung 2004). Banks functions are not only to lend money to a person, business or country. The Bank also serves to stabilize economic regions. Usually, other developed countries will also help developing country which sustain economies problems such as America provides funds to Indonesia (Bencivenga and Smith 1991).
Such are the significance influences a Bank can offer to its country’s economics, provide stability, improve wealth, and create new opportunities (Blurtit. itd). Bank also gives a signal to other institutions such as insurance the credit worthiness of a borrower. So the insurance may consider wether they will give an insurance or not to that person. What will happen if there is no Central Bank in a country? In reality, a country may survive without a central bank. For the example is Republic of Panama. This country has survived without central bank ntervention for years. It can happen because Panama has a successful and stable macroeconomic environment (mises. org n. d. ). But after several years Panama was caught in accumulating malinvestment, it causes bad credit in the country. But there is no central bank to provide cheap credits. Though Panama’s law enforce a reduction in business costs which will eventually restore the recession to equilibrium, the recession lasts longer than it would has there been a Central Bank to provide a necessary monetary policy (mises. org n. d. ). Bank as a Financial Institution
Bank is the one example of Financial Institution. Role of Financial Institution is providing financial services for customer and help them to invest their money to the right organization to get a profit, and another important roles of Financial Institution (Bank) is to scrutiny financial transaction such as: reduce fraudulent when any financial transactions is make by people or organization (Fitch 1993). The examples of financial institution beside bank are brokers, insurance company, and deposit taking institutions (The Times 100 & Wilson and Wilson Publishing Ltd 2012).
Financial institution also held an important role in the economic world. It attracts new investors to investon current products and services, and also creates a new financial product (i. e. , different risk and couple investment opportunities with other services) (Bodie, Kane and Marcus 2011). The other benefits of Financial Institution (Bank) may provide for the economic is to provide economic of scale to reduce risk and increase returns (Economies of Scale n. d. ).
The way of economic of scare work is decrease the cost of production (raw material) and increase in production, example: Hence is producing 100 copies of magazine and it might cost $3000 but when they are producing 1000 copies of magazine it only cost $4000. Because the main cost is come from editing and design (Economist Newspaper Limited 2012). But business may not be able to produce so much because of financial barriers. From now banks have to contribute to loan money so they can produce more. In this case, both sides got some benefits, like for hence magazine business; they can produce their product more.
On the other side the bank can earn interest on the money that they lend to (Mr George EkegeyEkeha). Efficiency and effectiveness in bank will impact to various sectors of economy or businesses. Bank can get their capital from the costumers who deposit their money. The money that got will give significant impacts to economy as that money are used for productivity in country. In this case, banks act as lenders of money to big business, so the company can more productive. It will give positive impact to the country’s economy (Money Lenders n. d) Conclusion
In conclusion, Bank is one of the example of Financial Institution and very important in economy. It can be seen that people need a bank to save their wealth. Even a country also need bank to control the economy and financial growth in the country. The Function of a bank in the country is to ensure the safety and soundness of banks, maintain the efficiency financial structure and financial system, maintain financial balance or stability and secure costumer from abuses. Without a bank economic and financial state will have chaos. Although, there is a country that can survive even though there are no central bank.
But in the end they also encountered financial problems and economic growth in the country. May be out of sight of customers, the bank simply save and lend money. But when we look deeper into the role of a bank, they are helping in the development of the economy of a country. Differences of bank type will impact to the usage and function of a bank. References RudoChengeta. 2009. Inportance of bank in an Economy. http://www. slideshare. net/RChengeta/importance-of-banks-in-an-economy (Accessed August 18, 2012) Howard F. Pitkin. 2012. Bank and our Economy. http://www. ct. ov/dob/cwp/view. asp? a=2235&q=297884 (Accessed August 18, 2012) Franklin Allen and Elena Carletti. 2008. The roles of Banks in Financial System. http://fic. wharton. upenn. edu/fic/papers/08/0819. pdf(Accessed August 18, 2012) What are the Important roles played by Central Bank in Developing countries. http://www. preservearticles. com/201012291869/role-of-central-bank-in-developing-countries. html(Accessed August 19, 2012) David Saied. 2007. Panama has no Central Bank. http://mises. org/daily/2533(Accessed August 17, 2012) Kathryn Zipfel. What is the importance of the