SIGNIFICANCE OF BANK CREDITS TO THE GROWTH OF FIRMS

Commercial banks are known for the provision of loan and advances to both private and public sectors of the economy. This they do as a way out of the menace of financial trap, which befall all the economic agents.

Commercial bank credits are important to businesses because it makes financing of agricultural, commercial, and industrial activities of a nation possible. Production, transportation, wholesale, and retail activities are made possible through financial aid from the commercial bank credits especially in moving goods and services to the final consumers.

This unit discusses the activities of commercial banks in the areas of extension of credits to the private and public sectors of an economy. It also explains the working of credits in terms of its redemption, repayment etc. to the bank.

OBJECTIVES

At the end of this unit, you should be able to:

• discuss extension of credits to the private sector 
• discuss extension of credits to the public sector. 

Extension of Credits to the Private Sector

Business enterprises benefit from deposits, loans and advances provided by banks in many ways. Banks make it easier to buy goods and services using chequebooks, therefore helping both consumers and businesspersons solve problem of carrying bulky cash around for transactions.

In addition, loans and advances from banks help consumers improve their standard of living by taking loan, for instance, to purchase cars, houses, and other expensive consumer goods that they otherwise could not have been able to afford. This in turn, relief producers of their inventory thereby, enhancing business activities. Loans and advances help businesspersons finance, expand and produce new goods thereby increasing rate of employment and enhancing economic growth. Since banks want their loans and advances paid, they choose borrowers carefully and monitor performances of the company’s managers closely. This helps ensure that only the best projects are financed and that companies are run efficiently, and thus creates a healthy and efficient economy.

Extension of Credits to the Public Sector

In the public sector(in Nigeria), the government uses the Central Bank of Nigeria (CBN) to direct the commercial banks to provide about 50 per cent of their loan- able funds to some specific sectors of the economy, such as agriculture, manufacturing, etc. Government also obtains bank loans and advances to provide essential services such as water, electricity, roads, health, and the provision of security to all the citizenry.

Government also allows banks to participate in some government ventures through equity participation based on Public-Private Partnership (P3), which also boost the economic activities in the country. Government in its bid to increase economic activity in the country serves as a guarantor to economic agents through the Guarantee Bank Scheme.

CONCLUSION

Bank loans and advances, as seen in the above discussion, are one of the significant contributions of banks to the development of both private and public sectors. Apart from increasing economic activities, bank credits also enable an individual to consume those expensive goods which ordinary would not have been able to consume. Bank loans and advances heightened economic activities especially in the manufacturing, commercial and transportation sectors and therein boost the economy of the country.

SUMMARY

This unit highlighted the contribution of bank loans and advances to the growth of not only the firms but also the economy as a whole. The unit discussed the contribution of bank loan and advances to the private and the public sectors. It also showed the importance of bank credits as a tool for economic growth.