By definition, a commercial bank refers to a financial institution that offers investment advice to its clients, issues loans, takes deposits thus ensuring the stability of an economy and maintenance of social stability. The clients can be individuals, businesses and even government. Commercial banks also provide a variety of other services including custody and guarantees, credit cards, trade finance, cash management, and settlement. In a developing economy, commercial banks play a critical role trade and industry development. The banks provide the financial resources necessary for industrialization and influence on how the resources are utilized. For an economy to progress, the presence of a growing and structurally sound banking system is required. The main roles and contributions of commercial banks in a developing country as discussed below.
1. Capital formation through savings mobilization
The rate of savings in developing nations is low due to their low incomes and commercial banks step in to encourage savings through their widespread branches in the country. To promote the savings culture, the banks provide incentives such as low charges on funds remittance and interest on deposits. Further, the savings of the few rich are also mobilized and then all savings are utilized for productive purposes to businesses and entrepreneurs. Therefore, banks assist in capital formation in developing countries.
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2. Industrial sector financing
The savings mobilized are provided to corporate and individuals inform of short term and medium term financing. The financing provided increases the economic activities of the industrial sector. Developing countries like India are able to acquire short-term loans while due to their incomes, Latin American countries like Guatemala are able to obtain medium-term loans that last up to three years. Other countries like Korea advance long term loans. On top of that, largescale industries get their shares and debentures underwritten. These make the commercial banks not only financiers but also providers of the capital market in the undeveloped countries.
3. Provision of trade.
In developing countries, commercial banks finance both internal and external trade. Both retailers and wholesalers are provided with loans to allow stocking of goods that they sell. Additionally, they facilitate place to place goods movement by giving provisions like discounts and acceptance of bills of exchange and drafts issuance among others. On top of that, through financing, the commercial banks provide foreign exchange facilities to those importing and exporting goods.
4. Provision of agricultural finance
Provision of short-term and medium-term loans to farmers is among the roles of commercial banks that assist the extensive agricultural sector in developing countries by. This is facilitated by opening branches in rural areas to allow farmers to access credit directly. However, for proper agricultural development like to adoption of modern methods of farming and mechanization of operations or improving their farms, the banks should amend their policies to favour granting long term loans in the agricultural industry. Besides that, animal husbandry, horticulture, pisciculture, and dairy farming are also offered financing. Therefore, all credit requirements of the diverse rural population in these countries are met by commercial banks.
5. Employment generating activities financing
Through loans provision, commercial banks in developing countries are the financiers of employment generating activities. Students are funded in their institutions of higher learning from universities to middle-level colleges, and the loans are repaid after school. Further, young entrepreneurs are advanced loans as well as other people who possess technical education so that they can establish their businesses. Therefore, in developing countries, the bank not only assist in forming human capital but also boosts entrepreneurial activities.
