Thursday, May 3, 2018

Importance of banking industry

Kelvin Mkwawa

Kelvin Mkwawa 

By Kelvin Mkwawa

The banking sector is an important sector for the stabilization of financial systems. It plays a critical role in the economy of our country; It facilitates the flow of funds in our economy and ensures financial resources are allocated efficiently towards promoting economic development and growth. Banks are embedded in our everyday lives and activities – withdrawing salaries, paying bills, and saving for our future. The banking industry is fundamentally an industry of trust and its stability depends on public confidence so when the public starts to distrust banks, it will affect its operations hence its stability. Banking instability may lead to a financial crisis with adverse consequences for the economy hence it is vital to have a sound, stable, and healthy banking industry. In this article, I will explain why the stability of our banking system is important to our economic welfare.

The performance of the banks is central in achieving the financial stability of the country. It is evident that the baking system is complex, big, and interconnected with every other sector of our economy and is an important driver of our future GDP growth. Before I explain why the stability of the banking sector is important, let me briefly state the negative effects of instability of our banking system in our economy:

• It can increase the tax burden to us as taxpayers, when the government is forced to take over the failing banks and compensate the depositors (when the banks default), there will be less funding left for other development projects.

• Decline in lending to private sector since banks can’t take risks due to their instability .

• Furthermore, imagine if the households could not get a short term fund such as salaries to support their daily activities or imagine how long it will take someone to be a home owner if they have to pay for their home in cash with no mortgage.

Now let’s look at the benefits of a stable banking industry:

* A stable banking sector facilitates the day-to-day financial transactions. These financial transactions include salaries payment, business transactions, payment of utility bills, foreign transactions, for instance the exportation and importation of goods, and as well as normal household purchases.

* It has the capacity to mobilize lending to those who need financing for both personal and business needs.

* It encourages savings and the deposit of funds from the public which can be accessed through various channels such as, ATMs and mobile wallets.

Additionally, with a stable banking industry, diaspora can send remittances through financial institutions.

It’s the sole responsibility of our regulator, the Bank of Tanzania (BoT), to ensure our banking industry is stable by strengthening regulation and supervision of the banking sector, encouraging prudence on the part of lending, enhancing market discipline through increased transparency, and using monetary policy instruments to address any potential instability in our banking system. To sum it up all, it is imperative to have a stable banking system as it plays a critical role in our economy. We have seen the benefits of stability in our banks which includes the smoothing of all financial transactions inside and outside the country, and the ability to lend to the public which enhance the lives of the people. Promoting financial stability should be the highest priority of our policy makers thereby ensuring the public confidence on our baking system remains strong in any given time.

Furthermore, it is not hard to see that if the banking system is not stable, the people and the country as a whole will suffer severely. Thus the stability of the banking system is a necessary condition for ensuring sustainable economic growth in the long term.