adminSanderson Abel
Banks aim to facilitate the effective use of funds ranging from individuals, farmers or the diverse small to medium enterprises players.
The financial system is expected to act as an intermediary for all resources in the economy. The sources of funds are provided by savings in both the private and public sectors as well as by the net inflow of funds from abroad.
They are collectively channelled through intermediaries such as banks. The intermediation function involves mobilising resources by providing the means for savers to hold monetary and financial assets and at the same time allocating these resources for productive investment.
What role do banks play?
Banks play a substantial role in mobilising savings to promote investments and growth. This function of banks is significant in an economy where in banks are dominant players in the financial markets. These roles can be summarised as follows;
Financial Intermediation – Mobilising and pooling financial resources from savers to borrowers.
Facilitating Trade – By managing and executing payments for transactions through national and international payment systems and platforms including mobile based systems;
Advising individuals and businesses on various issues pertaining to the products offered
Ensuring the optimal and efficient of scarce financial resources.
Mobilisation of resources both internally and externally for lending to those sectors in need of these resources;
Pooling, spreading and transferring of certain risk
What does bank credit entail?
One of the most important aspect of banks is offering credit. Banks are in the business of lending money. Each customer’s request, however, must be thoroughly evaluated to determine the likelihood that the loan will be repaid in full.
This is where a credit manager comes in. By evaluating the creditworthiness of applicants for loans and other types of credit, the credit manager plays a crucial role in increasing revenue and minimising losses for the company.
Bank credit is important for the efficient performance of any business enterprise which requires additional funds for capitalisation, working capital, and rehabilitation, as well as for the creation of new investments.
In any entrepreneurial endeavour, funds are required to bring together the other factors of production – land, labour, and capital – before production can take place. This is why credit becomes very important in the economy.
The availability of adequate credit is very critical as it influences what is to be produced, who produces it, and how much is to be produced. This derives from the intermediary role of banks, i.e., as a link between surplus and deficit units in the economic system.
The ability of the banks to provide adequate financing depends in the greater part, on the ability of the demand side to plan their productive activities well ahead and thus allow the financial services sector to also line up funding accordingly.
In a country in demand for long term finance for productive purposes increasing the amount of credit becomes of paramount importance.
The need to recapitalise industry and develop long term infrastructure on farms requires that the financial sector provide long term credit but the economy currently has not capacity to generate these sources.
The international financial markets are currently hesitant to provide funding with long term tenure hence making it impossible for the agricultural sector to be financed long term.
Faced with such a situation, there is need to priorities. Students of economics will understand that economics is all about prioritising given the limited resources against unlimited demands.
The important question among economic players and financial institutions is how much credit is adequate for the economy to grow.
The banking industry has taken some steps to stimulate sustainable development, however, more needs to done. Planning then lies at the heart of determining the quantum of credit adequate to retain the economy on the growth trajectory.
Planning can be defined as the process of thinking about and organising the activities required for achieving a desired goal. This thought process is essential to the creation and refinement of a plan, or integration of it with other plans; that is, it combines forecasting of developments with the preparation of scenarios of how to react to them.
An important but often ignored aspect of planning is the relationship it holds with forecasting. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. Hence at a national level the need to plan is important so that we are able mobilise adequate resources and deploy them to our best advantage.
Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008.
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