Commercial banks plays a vital role in every field of economic activity of the country. They are regarded as the wheels of modem economic system as shown by the following points.
Commercial banks help to mobilize savings of the people for productive purposes. They collect scattered and idle savings of people, pool them together and make fund available for productive purposes.
With the existence of commercial banks and with attractive incentives such as high interest rates etc, the people are encouraged to save more.
Commercial banks provide short-term and medium-term loans for industries, trade and commerce at reasonable rates of interest. Easy loans attract the investors to invest in new enterprises. The banks act as a brigade between savers and investors.
Development Of Agricultural Sector:
Commercial banks provide easy loans to farmers for the purpose of buying tractors, threshers, installation of tube-wells, purchase of fertilizers, seeds, etc. The provision of loans to agriculture sector has greatly helped in increasing agricultural production and income of the farmers.
Promotes Foreign Trade:
Commercial banks promote foreign trade,by financing the foreign trade of a country by granting loans, opening letter of credit, discounting foreign bills of exchange and issuing bank drafts.
Development Of Industrial Sector
Commercial banks provide short-term and medium-term loans to industry. Commercial banks not only provide finance for the development of industry but also help the industry in many other ways. Commercial banks play an important role in expansion and development of industrial sector in a country.
Development Of Commerce And Trade:
Commercial banks provide loans to retailers and wholesalers to stock goods in which they deal. Banks have facilitated the business community for the development of commerce and trade in the country.
Finances Government Projects:
Commercial banks help the government when it faces financial crisis. In order to provide funds or public projects, banks purchase government securities. This is a type of loan to the government for the purposes of development projects, etc.
Raises Employment Level:
Commercial banks advance loans to young educated and technically trained persons in establishing their own businesses. The banks are not only helping in human capital formation but also increasing employment opportunities in the country.
Better Standard Of Living:
Commercial banks help to increase business activities within the country. As a result employment opportunities increase. It gives rise to the national income as well as. per capita income of the individuals. People get opportunity to improve their standard of living.
Capital formation means an increase in the stock of capital goods in the economy such as increase in number of production units, plant, machinery etc. Economic development is not possible without high rate of capital formation. The commercial banks play an important role in all the three stages of capital formation.
The commercial banks help in achieving the balanced development in different regions of the country. Banks help to transfer the resources and funds from developed areas to the under developed areas of the country. This helps to increase the investment, production and employment level in under-developed areas.
Implementation Of Monetary Policy:
The central bank of the country forms the monetary policy to control and regulate volume of credit in the country. The commercial banks help the economic growth of the country by following the monetary policy of the central bank.
Expansion of Credit:
Commercial banks can promote the economic activity by expansion of credit. Banks grant more loans and advances. Through the expansion of credit, banks increase the supply of money and contribute for the development of infrastructure in the country.
Use Of Modern Technology:
Commercial banks provide funds for the import of modern technology from developed countries. Thus due to commercial banks, under-developed countries can avail their benefits of modern technology.
Export Promotion Cell:
The commercial banks have established export promotion cell in the country. They provide important information about trade and economic conditions to the exporter free of cost. This helps to increase in the export of the country.
Attaining Self Sufficiency:
The main problem of poor and underdeveloped countries is foreign debt and dependence on developed countries. Commercial banks provide easy loans and advisory services to business community. Through bank the resources of the country are utilized for the most productive purposes which help in the process of attaining self sufficiency.
In addition to the above, the commercial banks provide the following services for promoting economic development in the country. Commercial banks provide funds for research and innovation to individuals and different research institutes. Banks help in the growth of new enterprises by providing funds for their development. Banks provide services for the transfer of money from one place to another.
Banks are playing an important role for the collection of cheques, bills of exchange, demand drafts etc. Banks are rendering services by facilitating remittances from abroad. Commercial banks collect Zakat from their account holders and deposit the same in the Central Zakat Fund, according to Zakat and Usher Ordinance 1980. It helps the government to improve the economic conditions of poor and to reduce unequal distribution of income.
The commercial banks are so much important in the modern business world that the commercial life will be paralyzed if banks stop their functions for a day or two. So, commercial banks are essential for domestic and foreign trade, industries and commerce in particular and economic development in general.
In the words of Stevenson:
"Banks are custodian and distributors of liquid capital which is the life-blood of our commercial and industrial activities."