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Edited by Philip Arestis and Malcolm Sawyer
Chapter 18: The Role of Banks in the Context of Economic Development with Reference to South Korea and India
Santonu Basu* Introduction Banks provide a number of ﬁnancial services to all modern economies and three are most important, namely oﬀering deposit facilities to savers, intermediating between lenders and borrowers and providing a payment mechanism. These services play not only an important role in the functioning of modern economies but are also crucial for economic development. Banks as deposit-taking institutions not only oﬀer an opportunity to very small savers to convert their savings in the form of ﬁnancial assets by oﬀering loans to borrowers, but also provide borrowers with an opportunity to invest these funds proﬁtably. It is these investments in various projects that ultimately enable the economy to prosper. Banks create long-term loans from a very large number of short-term deposits. To do so they use the law of large numbers, which suggests that, while an individual’s withdrawal patterns are not predictable, when it is applied to a very large number of depositors, withdrawal patterns are predictable. These loans are transferred in the form of deposits and used as a means of payment. Thus in a peculiar sense banks play a coordinating role between various economic agents via these three services. The crucial point to note here is that it is the bank’s ability to create credit or loans which is central not only to the functioning of the economy but also in the context of development. Therefore, development or the growth of the banking sector is crucial in the context of economic development. In...
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