The role of commercial banks in the development of economy mohsin hassan alvi

THE ROLE OF COMMERCIAL BANKS IN THE DEVELOPMENT OF ECONOMY


MOHSIN HASSAN ALVI
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CHAPTER 1: INTRODUCTION
Objective
Financial stability is always being a preference of developed countries to bring stability in economic background and achieving maximum growth and development in this competitive era.
Background and Context
The financial analysis of organizations undergoes by the process of assessing the fluctuations in profitability. The analysis is done by keeping the market value and capitalization in mind to compare the progress with market’s standard (Al-Nimer & Sleihat 2015). Financial statements are the main tools to measure organization’s current financial condition. The profitability ratios give a concise depiction of profitability details and can represents the factors, which are leading the organizations towards growth every year (Burger, Damijan, Kostevc, & Rojec 2014).
The profitability of organizations has ultimate impact on the economy of country and affects the world at some point. Banks, as a financial organization, has the responsibility to designate enough financial resources to run a smooth cycle of financial activities and profitability generation (Ferreira 2012).
It has been observed that banking markets in Europe are in extreme struggle these days, and facing competitive challenges to chase the market expectations. Many factors can impact the profitability of banks, which may include technological advancements, flow of expenses, and globalization along with some internal organizational elements (De Bandt & Davis 2000). A Malaysian study suggested that high credit, high expenses and high loans can influence the profitability ratio negatively. On the other hand, inflation was found to be a profit causing element in Malaysia (Sufian 2009). Banks are the most important entities, which participates directly and indirectly in the financial sustainability of countries. Higher rates of financial sustainability interfere with the economical circumstances. Therefore, it can be said that banks indirectly play a significant role in the economical environment of countries. On the other hand, banks can also cause financial and economic crisis by letting the financial profitability down.
The banking sector is one of the major organizations who are directly contributing in the economy of several countries (Sufian & Habibullah 2009). To strengthen the prosperity of banking sector, understanding of financial status is essential amongst investors and stakeholders (Rajan & Zingales 1998).
The relationship between organizational profitability and economical environment has been the focus of attention of researchers since many years (Aggarwal 2013). A positive relationship was found between profitability and economic environment of country (Qi et al. 2014).
The banking system was very strong and growing rapidly before the financial crisis in 2008. This region of the world includes in the world’s biggest banking industry which contains both national and international banks. In 1990s, the total assets in banking industry were estimated as £1,266 billion, which had a fast development till 2003 an increased three times more, approx £4234 billion. The current ratio of banks’ assets is measured by £8 trillion (Persson & Ruparel 2012).
The countries, which are suffering from economical crisis, can take help from banking sector. Economic growth depends both on bank and market development, so implementation of workable policies in these two fields can actually help the government.
Even though, all countries have different perceptions about their economical development and its relationship with financial struggles in banks. Some countries, like Germany and Japan consider their banking sector as the backbone of their economy. In both of these countries, banks play a significant role in financial matters and capital mobilization, while the economy is more dependent on its market’s profitability, after the crisis in its banking sector. But, it is constantly struggling in maintaining the previous standards of its banks to upgrade the economy. Because, developed countries usually progress in the field of banking and achieve richness by making their financial condition and economical status of the country. Successful banks give the investors more chances to rely on and invest their assets to generate profit and earn income. So, there is no doubt to say that developed countries give opportunity to their public to invest assets in a reliable sector, which pay off the expectations and promotes profitable outcomes.
The competition in banking sector is becoming higher in developed countries, just because of stable financial elements and improved efficiency in providing services to customers (Degryse & Ongena 2001). Financial profitability is measured by ratios. Amongst other financial ratios, ROA (Returns on Assets) and ROE (Returns on Equity) are most commonly used in estimating organizational profitability.