The Relationship Between Banking Access And Economic Development

Various studies have shown that there is a positive link between economic growth and financial access. A 1939 study by Joseph Schumpeter, one of the leading modern economists, concluded that banks play an important role in the development of technology and economic development.

“Capitalism is that form of economy in which innovations are carried out by borrowed money”. – Joseph Schumpeter

By consolidating the deposits of small depositors, helping to bring the production process from a few limited and unskilled people to skilled and energetic people, securing capital for the most productive and profitable project out of various available projects, capital at cheap interest rates Banks and financial institutions are assisting in the economic development of the country by adopting other methods including providing. A study by Robert King and Ross Levine in the early 1990s found that a 10 percent increase in the ratio of broad money to GDP would increase the country’s gross domestic product by 1 percent annually.

In ancient society, banks acted as a medium of exchange. In the medieval period, the bank used to act as a banker, but in the present 21st century, the bank does much more than what it has traditionally done. 

The services provided by banks and financial institutions are sure to grow even faster in developing economies, especially in Asia, where, according to economists, an additional 1 billion middle-class people will emerge by 2030.

As banks and financial institutions move into more lucrative sectors, it is not yet clear how important they are to the development of the economy. As financial institutions provide different types of services, there is no formal study on which services are helpful for the development of the country and which services are not necessary for the development of the country. 

Even in our country, the fact that the number of banks and financial institutions has increased geometrically in the last few decades is not a lie. The central bank is trying to reduce the number of banks by increasing the capital of banks and financial institutions and providing various incentives to banks and financial institutions to go through the process of mergers and acquisitions.
If the increase in the number of banks in the country leads to economic development and poverty reduction, then Nepal should be on the list of developed countries today. This is because a large number of banks, development banks, financial companies, savings and credit cooperatives, and microfinance are providing various services. However, the presence of banks and financial institutions is, directly and indirectly, supporting the economic development of the country.

Studies so far have shown that the benefits to society due to microfinance can be divided into short term and long term. Although there have been some short-term gains in the short term, there has been no positive impact on long-term advances such as growth in education, improvement in health, and women’s empowerment.

Another study has found that if banks adopt a flexible repayment structure, the bank’s credit investment is likely to go to a more productive sector. However, the risk of bank repayment on time also increases.

If there is no easy availability of banks and financial institutions in society, it will be difficult for poor people to push their immediate expenses for some time. Therefore, with the easy availability of savings plants, some economic progress can be achieved through savings by doing less important transactions at that time. 

In a country where all people have access to finance, the government’s social policies can be easily implemented. Through a strong and efficient financial market, other social benefits can be reaped, including an increase in the standard of living of the people, a reduction in the cost of doing business, an increase in economic activity, and the development of the private sector. Therefore, in conclusion, financial access has contributed positively to the country’s economic development and employment growth.  

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