Question: Critically discuss the role of commercial banks in economic development of Pakistan.

Answer: The banking sector in Pakistan has been going through a comprehensive but complex and painful process of restructuring since 1997. It is aimed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. Commercial banks play an important role in economic development of country. Economic development involves investment in various sectors of economy. Pakistan is a developing country and its financial sector consists of different types of institutions. Commercial banks are major part of Pakistans financial sector. In the economic development of a country commercial banks play an important role. The outstanding macroeconomic performance of Pakistan in the last five years portrayed Pakistan as an example of successful economy.

Commercial Banks:
A commercial bank is a type of financial intermediary and a type of bank. An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.
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If the banking system in a country is effective, efficient and disciplined it brings about a rapid growth in the various sectors of the economy.

The following is the significance of commercial banks in the economic development of a country.

Banking Law and Theory

Role of Commercial Banks in Development of Economy Development of Industry:

With the growth of commercial banks in the 19th and 20th century there came a vast expansion in the industry. Banks were opened especially for the promotion of industry in Pakistan e.g. industrial development bank of Pakistan (IDBP), Pakistan industrial credit and investment corporation (PICIC), National Investment trust (NIT) etc. these banks provide loan for the growth industry but commercial bank also charges high interest rate on these loans.

Increase in Mobility of Capital:

Banks brings the borrowers and lenders together. Banks receive deposits from those who have it spare and give minimal amount of interest lend it to those who require it on high interest rates. In this way banks increase mobility of capital.

Swift Transfer of Funds:

Banks facilitate the transfer of money from one place to another. In the absence of banks it was very difficult to make payments at distant places. Now the banks have made it possible to make payments more easily and swiftly.

Credit Creation:
Banks are known as the lenders in money to create credit that is to issue loans is one of the basic functions of commercial banks. By this process banks provide loans to all the sectors of economy, which results in economic development.

Use of Modern Technology

In the present time, every sector of economy requires the use of modern technology for its growth and development. Banks provide funds which are used to import this technology.

Banking Law and Theory

Services of Trade information:

Commercial banks provide information relating to trade and industry through journals. The businesses get a lot of advantage from this information.

Savings:
Different savings schemes are introduced by the banks. On these saving schemes banks offer interest. This practice increases the tendency in public to save more. Due to increase in saving overall condition of economy improves.

Trade and Commerce:

Banks issue loans to the traders which promote both local and foreign trade. The use of cheques, credit cards, bank drafts, bill of exchange has improved both national and international trade.

House Building Loans:

Commercial banks provide loans to their customers for the purchase and construction of houses. House building finance corporation (HBFC) along with other banks is providing loans for this purpose due to which our construction industry has grown a lot.

Export Promotion:
Banks play very important role in the promotion of exports. In this regard banks provide loans, arrange payments and provide information regarding foreign exchange business and foreign markets.

Increase in Investment:
Commercial banks mobilize savings of the people. They make them available to the farmers and industrialists. By this, overall investment level in a country increases. Moreover commercial banks also invest their own.

Banking Law and Theory

More Production:
As a result of loans issued by banks the investment in the country increases and as a result the production level of a country increases too. The level of production when increased causes increase in gross domestic product (GDP).

Reduction in Unemployment:
Employment level in any country depends upon economic development. Because of the loans issued by the banks, the economic activity in a country increases and the level of unemployment decreases.

Agricultural Development:
Agriculture sector is one of the most important and major sector of our economy. Banks provide long term and short term loans o the farmers for the development of this sector. Zarai Tarqiati Bank Limited (ZTBL) is playing an important role in this regard.

New Enterprises:
Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production. The provision of timely credit increases the productive capacity of the economy.

Promote Capital Formation:

Banks promote capital formation by providing funds to different sectors of economy. Commercial banks accept deposits from individuals and businesses, these deposits are then made available to the businesses which make use of them for productive purposes in the country. The banks are, therefore, not only the store houses of the countrys wealth, but also provide financial resources necessary for economic development.

Banking Law and Theory

Implementation of Monetary policy

The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country. It helps in bringing price stability and promotes economic growth with in the shortest possible period of time.

Influencing economic activity

The banks can also influence the economic activity of the country through its influence on
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Availability of credit The rate of interest

If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development. A low rate of interest can encourage investment.

Monetization of the economy

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The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter.

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The use of money has greatly increased the volume of production of goods. The non monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks.

Optimum use of resources:

Because of the competition among the banks, the funds available in the country are used to the optimum level.

Conclusion:
It is evident from above discussion that banks play a very important role in the modern business world. A well organized banking system has become a necessity for all the sectors of an economy, in these days industry, trade, commerce and agriculture sectors are dependent upon the credit and banks dispersed this credit.

Banking Law and Theory