Banking Sector as a Conduit for Economic Growth

Posted by alice hall on March 9th, 2020

The banking sector plays a pivotal role in the growth of any economy. As it is one of the main pillars that support and bolsters capital formation and investment. Banks are the main intermediaries between the savers and utilize that saving for business growth purposes.

To attract savers, banks offer various innovative products and services. Such as saving accounts, term deposits, etc. And now they are venturing into digital banking comprising of internet and telephone/mobile banking to name a few products, to facilitate customers. Although there is a need to employ technologies like blockchain and more common use of APIs should be made, especially in the areas of payments and trade finance, as is currently happening, especially in the west. Where Fintechs are collaborating with banks to develop tech platforms, that automates the long, cumbersome and paper-based banking processes.

The other type of fund based facility that banks offer is of a longer-term nature. That is medium and long term financing. The purpose of these facilities is to finance fixed assets, such as land, building, machinery, etc. The main focus is on capacity enhancement. However, the long term financing is not a forte of commercial banks, as their funds are mainly of short term nature. So, there could be an instance of mismatching of funds in this scenario. Besides the long tenure of this kind of facility makes it riskier.

The third type of products and services mainly focuses on facilitating international trade. International trade mainly takes place via four routes i.e. Open account, advance payment, documentary collection, and documentary credit. In the open account domain, the exporter ships the goods and is paid later by the importer. In advance payment mode the importer or buyer makes payment in advance to the exporter or seller and receives the goods later. In the documentary collection process, the exporter sends documents such as Bill of lading, invoices, packing list, etc. to the importer.

Pakistan enjoys a vibrant and strong banking sector conducive to economic growth. Mainly due to the close vigil kept on it by the central bank. As per the statistics made available by State Bank Of Pakistan. The banking sector registered considerable growth in the period Dec 2017- Dec 2018. The deposits grew by 5.88% during this period, while advances showed growth of 12.74%. There were 33 scheduled banks operating in Pakistan at the end of 2018. The branch network of these banks also showed an upward trajectory

There is one exception to the above, i.e. the prudent management of monetary policy, The unusually tight monetary policy creates scarcity of capital and investment and the double whammy is that. it induces banks to take refuge in safer assets, like government securities and enjoy risk-free plain vanilla returns/spreads. Rather than diverting their capital towards the private sector. (Althogh the Islamic banks might be the exception to this rule,) enabling them to employ this capital towards raising output and subsequent enhancement of GDP.