2.1.6. Benefits of commercial
bank activities for the economy
The deposit and loan services provided by
commercial banks benefit an economy in many ways. First, checking accounts,
because they act like cash, make it is much easier to buy goods and services
and therefore help both consumers and businesses, who would find it
inconvenient to carry or send through the mail huge amounts of cash. Second,
loans enable consumers to improve their standard of living by borrowing money
to purchase cars, houses, and other expensive consumer goods that they
otherwise could not afford. Third, loans help businesses finance plant
expansion and production of new goods, and therefore increase employment and
economic growth. Finally, since commercial banks want loans repaid, they choose
borrowers carefully and monitor performance of a company's managers very
closely. This helps ensure that only the best projects get financed and that
companies are run efficiently. This creates a healthy, efficient economy. In
addition, since the owners (stockholders) of a company receiving a loan want
their company to be profitable and managed efficiently, bankers act as
surrogate monitors for stockholders who cannot be present on a regular basis to
watch the company's managers.
The checking account services offered by
commercial banks provide an additional benefit to the economy. Because checks
are widely accepted as payment for goods and services, the checking accounts
offered by commercial banks are functionally equivalent to real money, that is,
currency and coin. When they issue checking accounts they, in effect, create
money without the federal government having to print more currency. Under
government regulations in many countries, commercial and other banks must hold
a reserve of paper currency and coin equal to at least 10 percent of their
checking account deposits.
Because commercial banks attract large amounts of
savings from depositors, they can make many loans to many different customers
in various amounts and for various maturities (dates when loans are due). Banks
can thereby diversify their loans, and this in turn means that a bank is at
less risk if one of its customers fails to repay a loan. The lowering of risk
makes bank deposits safer for depositors. Safety encourages more bank deposits
and therefore more loans. This flow of money from savers through banks to the
ultimate borrower is called financial intermediation because money flows
through an intermediary that is, the bank (James, M. J., 2009:6).
2.1.7. Commercial banks in
Developing Countries
The type of national economic system that
characterizes developing countries plays a crucial role in determining the
nature of the commercial banking system in those countries. In capitalist
countries a system of private enterprise in banking prevails. In state-managed
economies, banks have been nationalized. Other countries have patterned
themselves after the social-democracies of Europe; in Egypt, Peru, and Kenya,
for instance, government-owned and privately owned commercial banks coexist. In
many countries, the banking system developed under colonialism, with banks
owned by institutions in the parent country. In some, such as Zambia and
Cameroon, this heritage continued, although modified, after decolonization. In
other nations, such as Nigeria and Saudi Arabia, the rise of nationalism led to
mandates for majority ownership by the indigenous population.
Commercial Banks in developing countries are
similar to their counterparts in developed nations. They accept and transfer
deposits and are active lenders, especially for short-term purposes. Other
financial intermediaries, particularly government-owned development banks,
arrange long-term loans. Commercial banks are often used to finance government
expenditures. The banking system may also play a major role in financing
exports (James, M. J., 2009:12).
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