Impact of Commercial Banks in Economic Growth and Development

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Published on International Journal of Economics & Business
ISSN: 2717-3151, Volume 1, Issue 2, page 1 – 9
Publication Date: 2 November 2018

Alhaji Umar Lawal Aliyu
Faculty of Management, Department of Business Administration
LIGS University Hawaii, USA

Journal Full Text PDF: Impact of Commercial Banks in Economic Growth and Development.

The main objective of the thesis is to critically examine and analyse the effect of Commercial Banks in Economic Development. All sectors of the economy work in an inter-related and inter-dependent whole, therefore any malfunction of one or more sectors of the economy automatically affect the economy as a whole and so it is with the banking sector. Banks have always play an important role in a country’s economy all over the world irrespective of it economic and political policies. They are acting not only as the custodian of the wealth of the country but are also major contributors to economic development of countries all over the world. Commercial banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity so both developed and developing countries considers the service of the banking sector to enable its economy attain economic growth and development. According to Schumpeter (1934), commercial banking is one of the key agents in the whole process of growth and development of countries’ economies all over the world. Thus, the role of commercial bank in transforming the economic framework of countries all over the world cannot be over-emphasized. Therefore, achieving sustained economic growth and development within any economy can be possible amidst strongly to financial institution and precisely within the existence of a virile banking system.

Keywords: Bank, Central Bank, Commercial Bank, Development, Economic Growth, Fiscal Policy, Instruments, Monetary Policy.

1. Introduction
1.1 Background of the Study
It is well acknowledged in economics, Management, Business administration etc. that deposit taking banking institutions play a major role in promoting economic development through channelling of funds from those with excess to those in need for investment purposes. Scholars all over the world have asserted that there is close connection between commercial bank and economic growth and development. This is because, ordinarily, by the role and services commercial banks play which by simple mathematical logic would increase the GDP of a country. It is well acknowledged in economics literature that Central Bank of a country irrespective of the country’s economic or political policies play a major role in promoting economic development through the functions and services it renders.
However, for banks to be effective in fostering economic growth and development, it is important that the functions and services they provide to sectors of the economy that are essential for growth and development can act as catalysts to stimulate it. Furthermore, it is fundamental that banks effectively manage various risks that they are exposed to, in order to remain solvent in the end and be in a position to provide long-term capital to private and public sectors, which is more essential for economic growth and development.
Thus, for an economy to grow, it should have a well-developed and stable banking system that is resilient to external shocks to effectively play the role of financial intermediation, growth and development ……..

1.2 Statement of the Research Problem
The commercial banks all over the world are the common suppliers of funds for supporting domestic economic activities. Economist has acknowledged that the banking sector registers improved performance to growth and development at all the time. Whatever the case may be commercial Banks of all countries play a very significant role in the development of every economy. Empirical works that focused explicitly on banking sector performance and economic growth have yielded mixed results. Some of these works suggest that banking sector performance has affected positively and significantly on economic growth (see; Adelakun, 2010) while others reported an insignificant relationship between banking sector performance and economic growth (See. Ekpeyong & Acha, 2011; Odeniran & Udeaja, 2010).
However, other financial institutions such as pension funds, unit trusts and insurance companies also play a role in providing funds for domestic investment purposes, in that they also create a platform for raising domestic savings for economic growth and development. The role of non-banking financial institutions in providing funds for domestic investment is, however limited. This has therefore placed greater expectation on commercial banks to provide domestic credit that can stimulate the growth of the economy ……..