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September 23, 2019

Linking Banks and Economics Growth

Economic growth is usually associated with technological changes and an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. We should study last year’s Financial Statements. Economic growth can be measured in normal terms including inflation and adjusting for inflation. Economic growth can also be defined as in increase in a nation’s output which is most commonly measured by GDP. The health banks and the health of economy are inseparable; we can say otherwise that the financial is a cornerstone of the nation’s economic resilience.
It is envisioned that the financial system will develop to become a stable, sound and market-based financial system that would support efficient mobilization and allocation of resources necessary for economic diversification, sustainable growth and poverty reduction. The banking industry plays a vital role in the state economy. Beyond providing a range of important financial services the banking industry is a major contributor to gross domestic product (GDP), employment and information and technology (IT) investment. Additionally the banking industry supports to the state by paying tax and dividends each year.
Strong economic growth has benefits for both the general community and for banks. To achieve economic growth two options are available: using resources extensively (that is producing more by using more of the available resources) or intensively (that is producing more while using the same amount of available resources). However, the key to sustainable economic growth is to use resources intensively that is to realize productive gains. Productivity gains can be made at both the micro and macro level.
Due to the types of functions carried out by banks they are affected differently by economic growth than other industries. Firstly economic growth can lead to increased lending by banks. As business with increased profits and confidence looks to expand, their demand for (and ability to service) lending increase. Secondly, asset quality as measured, for example by banks’ loan provisioning or non-performing loan rates, will generally improve as unemployment falls. Thirdly, economic growth can lead to improve access to funding for banks. As foreign investors confidence grows so too does their willingness to invest.
In this regard key objectives that should be achieved in pursuance of the vision for the financial system including as deepen the financial market to enable banks and other firms with the means for effective liquidity management, price discovery, cost reduction and enhance capital formation, have a viable pro-poor and effective rural finance system for providing affordable financial services to enable the poor to enhance income and reduce poverty, strengthen that credit culture, put in place ways and means of ensuring that proper mechanism is put in place to prevent and detect money-laundering activities through market discipline and transparency in the conduct of financial services business and enhance legal, accounting and auditing systems that promote the rule of law in commercial and financial transactions and support good governance by promoting transparency, accountability and predictability.
Reference:   1.     Background to the Financial sector Development Plan (African continent)
2.     ABA Occasional Paper (Brendon Harper, Senior Policy Analyst)

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