The financial system of a country is very important towards development of a nation in the field of economics. The measures taken by the country through the financial system of the country with the correct approach is vital for the actual development of the country. The trend in the growth fully depends on the efficient and intense activities in the financial market place. The development of any country depends mainly on production and investment. The other factor which is important is the Gross Domestic Product or GDP.
When the effects of these growths or improvements happen in a country, the people enjoy a better standard of living with the rise in the income of the people and also better purchasing power.
Through the improved financial system, the relationship between the savings and investment become more pronounced. If all the savings are channelized to production then the production would increase and subsequently the GDP would increase. The increase in GDP is an indicator of the development of the economy of a country. The banks play a vital role as it can encourage people to save more by offering attractive financial plans. It can help the industrial growth by taking initiative to guide the industrial sector to produce more at a lower finance cost. It has been found in many countries where people do not know how the savings should be invested with good and assured return. So, the banks can guide people about correct choice of avenues for proper investment.
Every business enterprise requires two types of funds as loan from the banks for the business:
A new business enterprise requires fixed capital for investment in land, building, plants, equipments, etc. There are different ways through which the capital can be raised. At the start of a business, the capital is generally raised by the issue of shares and debentures. A share or a unit of ownership interest in a corporation or financial asset. The owner of the share is does not get the control of the company. But owning a share entitles the shareholder to get a proportionate share of the profit earned and dividend declared subsequently. A certain amount is generally contributed by the owners from his/their own savings.
This is required for the day to day operation of the organisation like payment to creditors, wages to workers, etc.This is also required to maintain the required stock, delay in receipt from debtors as the sales are generally on credit,
These two types of loans are most common types.However, there are some other types of loans being granted by the banks:
This is the account or a type of loan where the person/s can spend money beyond the amount lying in his/their account. This withdrawal is possible only when the bank has granted an overdraft facility to the particular business enterprise. This is required by the enterprise to carry on the day to day business.
Through this type of loan, an enterprise can get money from bank just after selling a product or completing a service. Whereas the amount would have been received from the customer/debtor as per terms fixed with a particular customer. The term can be for 30 to 60 days and the concern gets the fund immediately through this type of loan.
This is a type of loan which is sanctioned to a business concern when the concern has applied for a loan but has to wait for some time. When the concern is in a hurry to start the project but has shortage of fund, they are given a loan to tide over the crisis. The loan is recovered when the original loan is sanctioned.
Commercial banks in a country do not only deal with money but they lead a country towards economic growth and development. In the past, the banks were considered as the entities which hold the wealth of a nation. But now, they are considered to be the pool of resources which is necessary for the development of the economy. The commercial banks play a vital role towards the economic development. It has been realized long back that the development of the banking system of a country is a must for the overall economic development. A well-developed banking system is essential for the economic development of a country.
There are different ways by which the Commercial banks can help a country in the economic development. Some of them are:
For the economic development, fast rate of Capital formation is the most important factor. Many developing countries suffer from the slow rate of capital formation. The commercial banks encourage the people to increase the savings of the people and subsequent utilization of these savings in the investment. In this way, the banks help to channelize idle money lying with the people to the savings. Then this money is put into the system to help the formation of the capital.
People approach a commercial bank whenever there is need for loan. These may be required for various purposes and for various span of time. The bank is very important source of finance for industry and trade. As finance is a necessity to start a business and the continuance of the business, credit plays a big role in development. The commercial banks help the people connected with the business, industry, foreign trade, etc., and thereby become focal point in the economy.
The banks, either themselves or through agencies, are required to cultivate new ideas. Through these ideas or innovations, which are mostly financed by the banks, the enterprises take up new ventures. These loans help the organizations to try out new ventures or adopt a change in the method of production and by these changes; there is an increase in production and addition in wealth of the nation.
We have already discussed this at the beginning. The commercial banks play an important role in the implementation of the policy. These banks can control the availability of cash in the market. This control is required to control the level of inflation, to avoid destabilization of the economy, recession in the economy, growth of the economy etc.
The banks have to help the industries which need development by providing adequate funds for investment on necessary material, machines and other inputs.
The banks, through proper planning, can try to develop the industries all over the country to ensure balanced development of the country.
An Institution, such as the banking system, which should touch the lives of millions, has necessarily to be inspired by a social purpose and has to serve national priorities and the objectives. It is well known that a good banking system provides a firm and durable foundation for the economic development of any country.
This has been proved amply by the banking system in Bangladesh which is a small country in Asia. It is a very poor country with almost total dependence on agriculture. So, it was of high importance for the banking sector to reach out to the agriculture sector. With this aim in mind, the central bank (which is the controlling bank) of Bangladesh called Bangladesh Bank, took the necessary initiative to reach out to all the farmers for disbursement of agricultural loan.
Given the importance of banking sector’s financing in agriculture in facilitating inclusive growth in Bangladesh, the central bank of Bangladesh (Bangladesh Bank) have taken some initiatives to promote commercial bank’s agriculture financing. Already Bangladesh bank has set the target of agriculture credit disbursement of Bangladesh Taka15550 crore which is equivalent of US $ 1943 million for the fiscal year 2014-15 which is from 1 July 2014 to 30 June 2015. During the financial year from 1 July 2014 to 30 June 2015, the banks extended agricultural loan to more than 3 million agriculturists. Bangladesh took a drive to impress upon the whole population to open account in the bank. Due to this initiative, the Government was successful to open almost 10 million bank accounts. These accounts were opened with the requirement of a minimum deposit of Bangladesh Taka – 10 or US $ 0.12. The rate of interest offered was a bit higher than the normal rate of interest by 1% to 2%. Bangladesh Bank came out with the Agricultural & Rural Credit Policy and Program in the financial year 2014-15 with an offer of financial services at affordable costs to sections of disadvantaged and low-income segments of society. Through this road map, the Government wanted to cover as many people as possible for the agricultural credit. Through this initiative, the whole country was covered by the branches of the banks to cater to the maximum number of people. The presence of branches in the traditional brick and mortar was enhanced by the presence of banking advantages through the improved information technology.
The above plan was implemented to support the agriculture sector to make the country self sufficient in agriculture. Through this self sufficiency, the country would not be required to depend on other countries for import of food. With higher agricultural production, the income of the low-income segments would improve. The Government took another step by which it instructed all the private and foreign banks that a minimum of two percent of their total advances should be disbursed as agriculture loan. Systems have been implemented to help the agriculturist to get the loan easily, timely and without problem. It has been also ensured that the loans are paid only to the genuine farmers. Before implementation of the whole plan, measures were taken to ensure that loans are disbursed as per the policy of the Government and all the loans are recovered.
The banks were instructed that Camels rating (which is a supervisory rating system to classify a bank's overall condition) would be given on the basis of agriculture loan. This was done to encourage the banks to increase the agricultural loan for better rating. A better rating is important for a bank as it encourages the customers to come to the particular bank as they would feel that a bank with a higher rating would be convenient and helpful for their varied requirements.
The micro finance in Bangladesh was started by Professor Muhammad Yunus who is the recipient of Nobel Peace Prize in 2006. Professor Muhammad Yunus was born 1940 in Chittagong. In 1965, Yunus left Bangladesh to study at the University of Colorado and Vanderbilt University under a Fulbright Scholarship. He returned to Bangladesh in 1972. He established Grameen Bank in the year 1983. But he had started financing the poor agriculturists long back, 1976 to be specific. He started with a very small amount of loan to the farmers. The amount was as low as $27 and this amount was disbursed to 42 villagers who were in urgent need of money but could not arrange from any other source. The Bank believed in mutual trust and accountability and to prove the same, it became the first bank in Bangladesh which dropped the necessity of collaterals against the loan granted to the poor and down trodden. Due to this change in the basic concept of banking, the number of agriculturists and other poor people got the chance to avail of the banking facilities which was not available to them before. Grameen Bank entered the field with a clear objective of safeguarding the poor people from the oppression by the money lenders who were charging high rate of interest. When the people failed to repay, mostly due to bad crop or flood, the money lenders take away the land which is the only source of income for the cultivators. Professor Muhammad Yunus was a firm believer of the notion that if the agriculture segment receive loan, the agricultural production can rise and ultimately the standard of living of the mass would improve. The increase in agricultural production would help the nation to become self sufficient in food and would lead to save foreign exchange required for the import of the food grain. As per Professor Muhammad Yunus who is the founder of Grameen Bank and the Managing Director of the same, if finance is made available to the poor agriculturists with reasonable terms and conditions, the agricultural production is bound to rise.
A new methodology for lending was developed for the people. The term of loan repayment was changed from lump sum at the end of the term to daily repayment. The daily payment, when it became a problem of accounting due to increase in number of customers was changed to weekly. The loan is given for a fixed period of one year. The bank followed a system of group of five. These were formed among the customers. The group members are collectively responsible for all the group members’ repayment. It is said that the high recovery of loan was due to this mechanism.
Grameen Bank has become very big with the time. The total number of borrowers has gone up to 7.87 million. Out of these borrowers, 97% is women. It has got 2,556 branches and still growing. The villages covered by the bank are amazing. It is 84,388 with more than 23 thousand employees. During the period from 1983 when it opened, the bank has disbursed Bangladesh Taka 1,230,000 million which is equivalent to US $ 15,275 million. The bank has got a very good rate of recovery of loan at 98%. So, the mutual trust is giving very good result.
Yunus then set out to develop a lending methodology that would work for his impoverished clients. Rather than have a large lump sum payment at the end of the loan period, he structured the loans with minuscule daily payments in order to detect problems early and to increase borrowers' confidence. This was soon changed to weekly payments to reduce the accounting load. The term of the loans was set at one year.
Another unique feature was the group of five that prospective borrowers had to organize. All the members would be collectively responsible for each individual's loan. Besides peer pressure, the groups were also a source of mutual support, and a large reason Grameen would be able to boast repayment rates in excess of 97 percent. Five percent of each loan went into a group fund that served as a kind of insurance
The way the Grameen Bank supported the micro economic program successfully; many countries like the Philippines, Malaysia, Vietnam, South Africa, and Bolivia have taken up banking business in the same way.
In earlier days, Grameen Bank was seen as the bank for the Beggars s their main clientele was poor. The rich and the middle-class people tried to avoid microcredit because to borrow from them was beyond their dignity and sometime they were forced to sit with poor people.
After the success of Grameen Bank, many micro finance institutions have come up in Bangladesh. This sector is dominated by NGO or non- governmental organizations. These are known as NGO- MFIs. The financial services are not for profit. The institutions which are working in this sector can be broken into three categories:
b) non-bank government departments and agencies;
c) Non-profit NGO-MFIs (in addition to Grameen Bank)
. The success of microcredit in Bangladesh has led the government to use it as a major tool in the strategy for reduction in the level of national poverty. As the MFIs have become very popular with the people, many such institutions have opened up. It has been found in Bangladesh that the Government tried to improve the economic condition of the country through popularizing the microfinance and the people of the country grabbed the opportunity with both hands. The improvement of financial growth of the people through microfinance has been done mostly through the organizations which do not belong to the Government. The government gave and arranged major policy decisions to make the microfinance sector to be the largest in the world.
The total populations who are interested to take part in the micro-finance have been divided under four categories and the amount of loan available to them is also fixed. These are:
1. Hardcore poor – who are eligible for loan from Bangladesh Taka 500 to 5,000. These are equivalent to US$ 6 to US$ 62
2. Moderately poor – Eligibility is from Bangladesh Taka 5,000 to 30,000. These are equivalent to US$ 60 to US $ 373. This amount is normally invested in small trades like poultry and livestock, fisheries, etc. These loans are given for a period of one year and are repayable on a weekly installments basis. The interest rate generally varies between 20 to 30% per annum.
3. Small and marginal farmers- Eligibility is from Bangladesh Taka 10,000 to50, 000. These are equivalent to US$ 124 to US$ 621. In this segment, the penetration of the Micro finance institutions is limited. It follows the group loan policy as started by Grameen Bank.
4. Micro entrepreneurs - Eligibility is from Bangladesh Taka 30,000 to 500,000. These are equivalent to US$373 to US $ 6211.
There is very good growth in this sector. Unfortunately the data capturing in the country is not good. As such, accurate and current figures are not available and the figures being given are old. The growth of number of borrowers is:
1. 2003 – 1345 million
2. 2004 – 1562 million
3. 2005 and 2006 figures are not available
4. 2007 – 2679 million
So, from 2003 to 2007 that is in five years the number of borrowers has gone up from 1345 million to 2679 million. This is a growth of borrowers by 99.18%. From the above discussion, it can easily be said that banks can be used to promote the economic growth of a country with the support from the Government.
Alamgir, Dewan A. H. Microfinancial Services In Bangladesh. 1st ed. Dhaka: Credit and Development Forum, 1999. Print.
Sarker, Sandip, Sujan Kumar Ghosh, and Mollika Palit. "Role Of Banking-Sector To Inclusive Growth Through Inclusive Finance In Bangladesh". Studies in Business and Economics 10.2 (2015): n. pag. Web.
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