Image source: © Rawpixelimages | Megapixl.com

The banking sector is unquestionably the backbone of a nation’s financial structure. Banks help keep the wheels of the economy going by performing many crucial functions. Most of us would be familiar with the lending function of banks, but their role in the economy goes beyond that.  

Image Source: Pexels 

Think of it this way- the entire economy’s money is linked to the banking sector. So, each dollar in your wallet or your bank account is somehow generated, managed, and regulated by the banking industry, and in that way, the government accounts for it. 

This explains why robbers choose bank vaults as their “final heist” location. That is where they believe all the money is. But a more accurate description would be that banks hold a percentage of the money in all accounts as physical cash. The other part exists in electronic records and is not a tangible asset that can be stolen.  

A closer look reveals that banks are merely intermediaries in the overall financial structure. Part of their job is also regulating the monetary flow by keeping track of borrowers and helping move money across various economic segments. The more the difference between the interest rate banks pay the depositors and what they receive from borrowers, the more money banks make. Here is a closer look at the role of banks in the economy.

Economic development 

Mostly each of us operate a savings account with our bank, wherein we deposit our earned income. This saved money by thousands of account holders helps banks perform their primary function as a lender. Additionally, these savings are also helpful in mobilising funds across various sectors that require capital. In this way, a balanced flow of money allows simultaneous economic growth across various sections of the economy.  

Providing a higher standard of living 

Banks help facilitate some of the expenses that individuals may be unable to afford otherwise. Think of how many mortgages or car loans are taken out each year. All these loans help individuals live better life with more convenience.  

Image Source: Pexels 

Transmitting monetary policy 

Another crucial part played by commercial banks is passing on the monetary policy to the customers. Monetary policy is a mechanism the central bank uses to regulate money flow in the economy. Commercial banks facilitate a part of this transmission as they pass on interest rate changes to the consumers.     

A dependable source of finance 

Most organisations and individuals depend on banks for financial aid. However, if banks fail to perform this crucial function, there could be severe repercussions for the entire economy. This means that banks need a well-regulated environment that removes the possibility of failure. To ensure this, banks have specific capital and liquidity requirements that help them meet their current payment obligations. 

To conclude, the more developed a nation's banking system, the healthier that nation’s economic growth. 

You can learn more about banks and financial institutions through our specialised course on the subject- How Banks And Financial Markets Work.

Disclaimer

This content, including but not limited to, any courses, modules, factual information, data, text, reports, ratings, images, photos, graphics, graphs, charts, animations, and video (Content Platform) is a service created by Kalkine Group entities under the brand name ‘Kal-Edtech+’ and/or (Kalkine Group, we, or us), generally limited to publicly available factual information, educational material, and discussion and is available for personal and non-commercial use only.

The principal purpose of the Content Platform is to educate and inform and it does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Any company or investment mentioned in the Content Platform is purely used to illustrate an example for educational purposes only and does not represent a recommendation or advice by Kalkine Group for you to invest in this financial product.

Some content on this Content Platform may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion.

Kalkine Group strongly recommends that the viewers of the Content Platform seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary to determine whether any investment mentioned on this Content Platform is appropriate for you. Kalkine Group hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental, or other consequential damages arising from any use of the Content Platform, which is provided without any warranties or representations by Kalkine Group to you.

Any statements expressed in the Content Platform, is purely factual and educational in nature which are gathered from facts that are publicly available, and do not necessarily represent the views or opinions of Kalkine Group unless stated otherwise.

Some of the content that may be used on this Content Platform are copyright to their respective owner(s). Kalkine Group does not claim ownership of any of the content used on the Content Platform, unless stated otherwise. The content and materials that may be used on the Content Platform are taken from various sources, including licence(s) to use the content and materials, or are believed to be in public domain [through the creative commons license (CC0)]. We have used reasonable efforts to accredit the source wherever it was indicated as or found to be necessary. All trademarks, brands and logos generally identified either with the symbols TM or ® which are used on this website are either owned by us or we have a licence to use them.

Your access to the Content Platform does not license you to use those marks in any commercial way without our prior written permission. The Content Platform may contain links to external websites that are not provided or maintained by or in any way affiliated with the Content Platform, Kalkine Group. Please note that Kalkine Group does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites and services, including pricing.

If you have questions or comments about a particular page or a document, please contact [email protected] and please reference the web address of the page or document in question.