In economic growth, the role of banks is to eliminate capital shortages by stimulating savings and

investment.

A sound banking system mobilizes the community's limited and dispersed assets and makes them open
for investment in profitable businesses.

Colin Clark, calculating the capital needs of China, India and Pakistan in 1950, found out that 12.5
percent of the national income would be saved in order to accommodate the growing labor force and
sustain the previous rate of growth growth.

Not only are capital stocks relatively small in underdeveloped countries, but the actual rate of capital
accumulation is also very low, as mentioned above. In underdeveloped countries, the extreme capital
shortage is expressed in the small amount of capital equipment per staff, and in inadequate knowledge,
training and science development.

In economic growth, these are significant handicaps and banks will play a valuable role here:

In economic growth, the role of banks is to eliminate capital shortages by stimulating savings and
investment. The limited and dispersed resources of the economy are mobilized by a sound financial
system and made available for investment in profitable businesses.

Banks perform two essential roles in this context:

(i) They mobilize deposits by providing competitive interest rates, while turning investments into
productive resources that would otherwise have remained inert.

(ii) spread these savings by means of loans between businesses linked to economic growth. They
facilitate the growth of agriculture, trade and industry in this manner.

It is hard to see how small deposits, in the absence of banks, might be encouraged or otherwise made
feasible. Who will share these savings to entrepreneurs is also difficult to see. It is through the agency
of the banks that savings from the society naturally flow into efficient networks.

The banks practice a degree of discrimination that not only guarantees their own stability, but also
allows efficient use of the community's financial capital. We see that the economic growth period in
India has coincided with a tremendous rise in bank deposits and bank offices.
Therefore, by mobilizing the community's financial capital and letting them flow into the desired
networks, banks have come to play a dominant and useful role in fostering economic growth. Indian
banks now play a very important role in promoting the country's economic growth.

One need only look at the effects of financial system breakdowns to realize the value of stable financial
processes, of which, sadly, there are several recent examples. Indeed, the IMF had reported, prior to the
start of the Asian crisis, that three-quarters of its member countries had suffered major problems in the
banking sector since 1980. Banking problems have troubled both industrial and developing market
economies, including the US, which weathered the 1980s and early 1990s savings and loans and
banking problems.

A country must be able to mobilize domestic investments and other streams of funds sufficient to
finance infrastructure and other productive investments over the long term. This involves an effective
banking system to be established that moves surplus funds from households and companies to
borrowers and investors. Equal and unbiased credit distribution accommodates economic growth,
resulting in increased national quality of living. Notwithstanding the widespread changes in the
intermediation mechanism, which have diminished the role of banks in favour of the capital markets,
the role of banks in direct intermediation and as financial risk managers remains important. Sound
commercial banks, particularly banks, remain an integral part of a sound economy.

Given the relative shortage of deposits, the largely underbanked population, and high investment needs,
successful financial intermediation is especially necessary in the case of most emerging market
countries. In developing market economies, the banking industry often appears to be more centralized
and accounts for a greater share of the domestic financial system, indicating that crises would have an
increased impact on the economy and on the fiscal costs associated with the bailout of banks.

Explanation:
References

Demetriades, P. O., & Hussein, K. A. (1996). Does financial development cause economic growth?
Time-series evidence from 16 countries. Journal of development Economics, 51(2), 387-411.

Demirgüç-Kunt, A., & Levine, R. (1999). Bank-based and market-based financial systems: Cross-
country comparisons. Available at SSRN 569255.

Demirgüç-Kunt, A., & Maksimovic, V. (2002). Funding growth in bank-based and market-based
financial systems: evidence from firm-level data. Journal of Financial Economics, 65(3), 337-363.

McKinnon, R. I. (2010). Money and capital in economic development. Brookings Institution Press.

Saint-Paul, G. (1992). Technological choice, financial markets and economic development. European
Economic Review, 36(4), 763-781.
Why does a sound banking system make a country so important?

Another prerequisite of a sound banking system is that it has to be safe. Since the bank holds people's
deposits, it must ensure the protection of their assets. It should, therefore, build stable loans and
investments and prevent unnecessary risks. Consequently, its depositors are losing money and enduring
hardships.

How does banking aid a country's economic development?In the modern economic world, the banking
system plays an important role. Banks accumulate people's savings and lend them to businesses,
individuals and producers. Banks thus play an important role in the development of new capital (or the
formation of capital) in a country, thereby supporting the process of growth.

In the economy, what is the position of the banking system?Banks borrow from surplus funds (savings)
from individuals, companies, financial institutions, and governments. ... The banking system helps to
efficiently channel funds from savers to borrowers through the process of taking deposits, making
loans, and responding to interest rate signals.

How do banks play a significant role in a country's development?Credit given by banks is crucial to the
development and economy of the country. By offering affordable loans, banks improve the
manufacturing sector. They're the backbone of trade in the world. Banks recruit a huge number of
people and to a certain degree solve the job as such.

What is sound financial system?A country's financial system includes its banks, securities markets,
pension and mutual funds, insurers, market infrastructures and central bank, as well as its regulatory
and supervisory authorities.

Explanation:
I simply based my answers on my prior knowledge about the sound banking system,and I also took
some few research to support my details for me to address the question properly,I briefly explain how
important it is and how it really works within a country.
Absolutely right. The banking system is the sole panacea to all financial problems that an. economy
faces. It controls the forces of demand and supply in the economy.

Explanation:
The banking system controls the forces of demand and supply in the economy thus striking a balance in
the flow of goods and services in the state. The banking system controls these forces of demand and
supply through the use of interest rates to control the availability of capital to the private sector that
stimulates the economy with increased productivity. The banking system control inflation in the
country by regulating the supply of money otherwise referred to as the velocity of money in the
economy.

To appreciate the centrality of the banking system in the economy considers the financial crisis of 2008
which was orchestrated by banks absconding the default risk under the subprime plots mortgage
bubble. The illiquid banking system that followed forced the US federal bank to bail out all major
banks in the forbearance of the negative effects of a collapsed financial system.

The Financial crisis that was felt for the period 2008-2009 explains the place of banking in the
economy. The transfer from Bretton Wood's financial system of a fixed gold standard exchange system
came with illiquidity problems forcing a currency exchange system into place. Banking has been the
Major linchpin in ensuring the liquidity of most economies.
Banks have played a pivitol role in shaping country's overall economy. They play a decisive role in the
development of the industry, trade and commerce. They are playing multiple roles of not only acting as
the custodian of the wealth of the country but also as resources of the country, which are necessary for
the economic development of a nation as a whole.

Role of sound banking systems in overall economic development of a country

1. Capital Creation

Sound banking system mobilize the small and limited savings/deposits of the people scattered over a
wide area through their various branches placed all over the country and make it available for
productive purposes i.e. placing the deposits for who require them for other usages.

In present times, banks offer attractive and engaging schemes to attract the people to save their money
with them and bring the savings mobilized to the organized money market. Due to this function,
savings are productively used without remaining idle and are furhter used in creating assets, which are
low in scale of plan priorities.

2. Formation of Credit

Banks helps to create credit with the intent of providing more funds for development projects. This
leads to more production, employment, sales and prices and thereby causing faster economic
development of the country.

3. Channelizing and directing the Funds to Important Investment

Pooled savings needs to be distributed to different sectors of the economy with an aim to increase the
productivity and profitability of the nation. Thus banks acts as an chanelising partner to deviate funds
for important investments of the country.

4. Efficient and proper Utilization of Country's Resources

Savings combined and pooled by banks are utilized to a greater extent for development purposes of
various regions in the country such as Infrastructure, Employment, Purchase of goods etc. It ensures
fuller utilization of resources.

5. Encouraging Right kind of businesses

The banks help in rooting good development of the right type of industries by extending loan to right
type of persons. They help not only for industrialization of the country but also for the economic
development of the country. They grant loans and advances to manufacturers whose products are in
great demand in the marketplace. The manufacturers in turn then helps in increasing their products by
introducing new methods and ways of production and assist in raising the national income.

6. Bank Rating Policy

Economic experts are of the opinion that by revising the bank rates, changes can be made in the money
supply of a country. In countries like for example India, the RBI regulates the rate of interest to be paid
by banks for the deposits accepted by them and also the rate of interest to be charged by them on the
loans granted by them. So wherever the rates are less people tend to invest more.

7. Banking Monetize Debt

Banks convert the loan to be repaid after a certain period of duration into cash, which can be then
immediately used for business activities and investments.To sustain in the market as a process,
Manufacturers and wholesale bussinessman cannot increase their sales without selling goods on credit
basis. But credit sales could lead to locking up of capital. As a result of this, production may also be
decreased. As banks usually are lending money by discounting bills of exchange, business concerns are
able to carryout the economic activities without any hurdles.

8. Financing to the Government

Government plays a role as the promoter of industries in underdeveloped nations for which finance is
required. Banks provide long-term credit to Government by investing their funds in Government
securities and short-term finance by purchasing Treasury Bills.

9. Bankers as Employers

Post the nationalisation of the hu, bage banks, banking sector has grown to a great extent. Different
bank branches are opened in almost all the rural villages, which inturn lead to the formation of more
employment opportunities. Banks are encouraging people for occupying various positions in their
office.

10. Banks role as a Entrepreneur

Banks have played the role of developing overall businesses particularly in developing countries.
Developing of entrepreneurship is a complicated process, wherein It involves the creation of project
ideas, identification of specific projects suitable to local conditions, inviting new businesses to take up
these projects and provision of counseling services like technical and managerial guidance to them.

Banks are able to give 100% credit for deserving projects, which is feasible and economically viable.

Thus in this ways, sound banking systems in overall economic development of a country