Banks play a vital role in the economy. They facilitate commercial exchanges between individuals and companies, provide financial liquidity to both, finance investments, and manage money.
Here are some examples of the role banks play in the economy:
Facilitating commercial exchange: Banks help individuals and companies transfer money quickly and easily, making trade between them smoother.
Providing financial liquidity: Banks supply liquidity to individuals and companies, helping them meet their financial obligations.
Financing investments: Banks offer funding to individuals and companies wishing to invest in new projects, supporting economic growth.
Managing money: Banks assist individuals and companies in effectively managing their funds, helping them achieve their financial goals.
Banks are a fundamental pillar of the global economic structure. We cannot talk about an efficient and advanced financial system without recognizing the important role banks play in developing economies and supporting financial activities. The functions of banks range from providing traditional banking services such as opening accounts and granting loans, to overseeing monetary policies and facilitating the flow of money within the economy.
In this article, we will explore in depth the role of banks in promoting economic growth, supporting projects and individuals, as well as their impact on overall financial and economic stability.
Basic Functions of Banks
The basic functions of banks are also known as banking functions. These functions vary, so we will discuss them in some detail.
Accepting Deposits
Banks collect deposits from the public, and these deposits include different types, such as:
Savings Deposits:These deposits encourage saving habits among the public by motivating them to store their money. They feature a low interest rate, currently around 4% annually.
Fixed Deposits:A specific amount is deposited once for a certain period, with a higher interest paid on this amount.
Current Deposits:These accounts are operated mainly by businessmen, allowing them to withdraw funds freely without earning any interest.
Recurring Deposits:These accounts are mainly used by salaried individuals and small traders, where withdrawals are not allowed until after a specified period, and higher interest is paid on these deposits.
Granting Loans
Banks offer various loan and credit services to different segments of society, whether individuals or commercial companies. These services are important to meet clients’ financing needs, whether to expand business operations or cover personal needs.
Overdrafts: This type of credit allows current account holders to access a negative balance, enabling them to transact amounts exceeding the funds deposited in their accounts. This service is provided after customers submit additional guarantees, and the interest fees on overdrafts are higher than those on deposits.
Cash Credits: Clients are allowed to obtain cash credit up to a predetermined limit, against suitable guarantees such as tangible assets or other securities. The repayment period for these credits is longer than for overdrafts, and the loan amount depends on the guarantees provided.
Loans:Loans are among the most common forms of financing, where specific amounts are given to bank clients for fixed periods, whether short, medium, or long term. These loans are usually secured against tangible assets or other guarantees.
Bill Discounting:The bank can provide funds by discounting or purchasing local and foreign bills of exchange. This service allows clients to get immediate financing upon presenting the bill, and the amount is collected at maturity.
In summary, banks provide a wide range of financial services, including loans and credits, to meet clients’ needs and help them achieve their financial goals efficiently and in an organized manner.
Agency Functions
Banks offer various agency services to their clients, including:
Money Transfers: The bank handles transferring money from one place to another according to the client’s instructions.
Collection of Checks and Bills:The bank collects the amounts of checks and bills on behalf of clients through its clearing department.
Periodic Payments: The bank pays recurring bills such as electricity, rent, and insurance according to the client’s instructions.
Portfolio Management:The bank buys and sells stocks and government bonds on behalf of clients and manages investment portfolios in ways that achieve their financial objectives.
Collection of Regular Income:The bank collects salaries, pensions, dividends, and other recurring revenues on behalf of clients.
Other Agency Functions:The bank represents clients in dealings with other entities, acting as custodians, executors, advisors, or administrators to facilitate financial operations and manage affairs effectively.
Utility Functions
Banks carry out a variety of services including financial and public utility functions, such as:
Issuing Drafts and Letters of Credit: Banks issue drafts to facilitate money transfers between locations, issue letters of credit to support international trade and imports, and also provide travelers' checks.
Treasury Facilities:Banks offer treasury services to securely store valuable documents, gold jewelry, and other assets.
Subscription to Shares:Banks enable clients to subscribe to shares and bonds through the commercial banking services department.
Foreign Exchange Transactions:Banks allow clients to trade in foreign currencies and convert money between different currencies.
Project Reports: Banks can prepare project reports on behalf of clients to provide technical support and expertise.
Social Welfare Programs:Banks implement social welfare programs such as literacy initiatives and public care campaigns to support the community.
Other Utility Functions: Banks also provide additional services such as financial assessment and advice for clients, credit information gathering, and traveler screening services.
The Importance of Banks
Banks are among the most important financial institutions in the world, playing a vital role in enhancing the economy and stimulating economic growth. They are not just centers for exchanging money and providing financial services, but are the backbone of the financial system that supports investment and economic development. Their benefits are many, and we will discuss them in some detail:
Financing Economic Growth: Banks are a central hub for providing financing to companies and individuals, which contributes to boosting economic growth and encouraging investments across various economic sectors.
Providing Financial Services: Banks offer a wide range of financial services such as current accounts, savings accounts, personal and business loans, investment services, and insurance, making it easier to manage money and achieve financial goals for individuals and businesses.
Enhancing Financial Stability: Banks play an important role in enhancing financial stability by providing financial tools and products that help manage financial risks and reduce fluctuations in financial markets.
Promoting Financial Inclusion: By offering diverse financial services and making them accessible to a broader segment of the population, banks contribute to promoting financial inclusion and enabling ordinary individuals to access and use financial services sustainably.
Supporting Innovation and Development: Banks play a vital role in supporting innovation and development by providing funding and support to startups and innovative projects, which fosters innovation and contributes to economic advancement.
Achieving Economic Stability: Banks also contribute to economic stability by managing liquidity and providing loans to governments and companies, thereby strengthening confidence in the financial system.
Providing Online Banking Services: With technological advancements, banks today offer their services through online platforms and mobile applications, which simplify banking operations and provide greater convenience to customers.
The Role of Banks in the Economy
Understanding the role of banks in the economy is extremely important. Banks play a vital role in stimulating economic growth and directing financial flows within the economy. Below is an overview of the role of banks in the economy:
Financing Businesses and Projects: Banks provide the necessary financing to companies and individuals to achieve their economic goals. This can be through business loans, mortgage financing, or other services.
Managing Deposits and Current Accounts: Banks serve as a secure repository for customer deposits. They offer current account management services that facilitate payment and transfer operations for both individuals and companies.
Providing Other Financial Services: In addition to financing and managing deposits, banks provide many other services such as investment services, insurance, Islamic banking in some markets, and more.
Influencing Monetary Policies: Central banks play a crucial role in determining monetary policies such as interest rates and the amount of money in circulation, which significantly affects interest rates and inflation levels in the economy.
Enriching the Economy with Data and Information: Banks hold vast amounts of financial data and economic information, which can be used for economic analysis and guiding economic policies.
Encouraging Innovation and Entrepreneurship: Banks provide funding and support to startups and innovative projects, which enhances economic diversification, innovation, and sustainable growth.
Regulating Liquidity and Ensuring Financial Stability: Banks play an important role in regulating liquidity levels in the economy and providing financial stability through risk management and directing financial flows.
In summary, banks are a fundamental pillar in the structure of the economy. They significantly impact economic growth and stability by providing financing, managing deposits, shaping financial and monetary policies, and offering financial services and support to companies and individuals.
