What Is the Role of Banks in Economic Development?

Banks play a crucial role in economic development. For the local community, banks provide access to funding and financial services to both local business and citizens, as well as the money banks invest back into the community through employee payroll, business investments, and taxes. On a larger scale, national banks offer similar access to credit and financial services to larger businesses, local governments, and in some cases international customers. Investments made by national banks are spread widely across the nation, therefore influencing economical development across an entire country or geographic region.

The specific role of banks in economic development varies, depending on scope. Primarily, the participation of banks in economic development focus around providing credit and services to generate revenues, which are then invested back into a local, national, or international community. The specific roles banks play in the economic development of a small community differ from the role banks play in national or international economic development. Although the role can vary, factors such as access to credit and bank investment policies or practices remain constant, no matter the scope of economic development.

To illustrate the different roles of various banks in economic development, one may consider a national bank with numerous local branches throughout a particular region. Locally, the bank provides both consumers and commercial organizations with mortgages, lines of credit, bank accounts, and various financial services, such as portfolio management and employee payroll services. Fees generated for services are invested back into the local community through sponsorships, providing low-cost funding for socioeconomic programs and investing in local government or business ventures. Nationally, the bank provides the same financial services to large corporations and state or regional governments, in addition to consumers and small business. Rather than investing revenues in just local economies however, the bank also invests in state-wide, regional, or national businesses; socioeconomic programs; and traditional stock market investments.

International banking influences economic development on a grand scale. A bank that does business internationally plays a much different role than local or national banks in economic development. Providing loans and other financial services to entire countries and national governments gives such banks sweeping influence over the economic growth of a particular country or region. Both positive and negative effects are realized, depending on the actions of international banks toward governments.

The economic hardships of the early 21st century provide a prime example of the possible negative role of banks in economic development. Many countries, including the United States and countries in Europe, experienced a slowing of economic growth early in the 21st century. Numerous factors such as high unemployment, bad investment performance, and political uncertainty helped create an environment of distrust and decreased confidence between international banks and governments with formerly strong national economies. This resulted in reduced credit rankings of several countries and increased interest rates for credit extended to those governments. Such increased costs rippled, raising interest rates for government loans to businesses and individuals and reducing the funding available for socioeconomic programs like education and healthcare.