Sound Banking System for Underdeveloped Countries


A sound and efficient banking system, which undertakes the responsibility of promoting economic growth in underdeveloped economies, must possess the following features:

(i) The system of branch banking is most suitable for the underdeveloped countries. More and more branches should be opened in rural and backward areas to encourage saving as well as banking habits in these areas.

(ii) The system of unit banking may be developed in the limited area, particularly in bigger cities to meet the local financial requirements of trade and industries. This will, on the one hand, reduce pressure on big banks and, on the other hand, check concentration of financial power in the hands of a few banks.


(iii) The banking system in the less-developed countries must aim at encouraging capital formation by increasing the rates of savings and investment in these economies.

(iv) The banking system in the underdeveloped countries should provide easy and cheap remittance facilities to enable the movement of fund from one place to another so as to promote trade and industry.

(v) The loan policy of banks in the underdeveloped countries should be rationalised in such a way that loans for productive purposes should be encouraged and loans for conspicuous consumption and for speculative activities should be discouraged.

(vi) The loan policy in underdeveloped countries should also not be restricted to short-term loans alone. The banks should also provide medium-term and long-term loans to developmental activities in these countries.


(vii) The banks should meet the different and changing needs of the underdeveloped countries. Credit facilities should be extended to the priority sectors, like agriculture and small-scale industries.

(viii) Efficient functioning of the banks will inspire public confidence in the banking system and popularize banking activities. This requires trained and efficient banking staff.

In short, comprehensive structural and functional changes in the banking system of the underdeveloped countries are needed. Only after these changes, the banks can be expected to play a proper role in promoting economic development in these countries.

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