Role of Banks in Entrepreneurship Development

role of bank in entrepreneurship development

Banks impact the development of entrepreneurship in developed and developing countries like Nigeria.

What is the role of the bank in entrepreneurship development? The banks provide loans to entrepreneurs. The entrepreneurs can use the loans to fund their startups. Besides loans, banks offer a means of security to the deposits by entrepreneurs. 

I couldn’t find the right information on the role of banks in entrepreneurship, so I researched the topic in and out and wrote the ultimate article about it for you. So if you’re interested in learning more about the role of banks in entrepreneurship development, then…keep reading!

Role of Bank in Entrepreneurship Development

The banks play an important role in the development and promotion of entrepreneurship. There are entrepreneurs out there who want to start their own business but lack capital. Banks are one of the ways that entrepreneurs use to fund their businesses.

It is difficult for most entrepreneurs to raise funds through equity because they lack financial knowledge. And, without funds, businesses can’t grow. So loans are the primary source of funding for entrepreneurs. 

Apart from providing loans, banks also give other benefits to the entrepreneurs such as:

1) Banks Keep Money and Assets Safe. Banks are a secure way to keep valuable assets and money safe. For example, most deposits are insured by the Federal Deposit Insurance Corp in the bank. 

2) Banks Allow Borrowing Funds. Entrepreneurs can use the deposits to borrow funds from the bank.

3) Good Payment System. In today’s era, the payment system has improved. They are allowing fast fund transfers which are crucial for business. The improved payment system has enabled entrepreneurs to transfer money immediately. 

4) Banks Are Excellent Advisers. Banks can give valuable advice to young entrepreneurs to invest their money in stocks or commodities. Other than advice on investments, they also show methods covering raising capital, reorganization of a company, tax-related matters, and so on. 

5) Entrepreneurial Education. Bank also plays a vital role in entrepreneurship promotion by providing entrepreneurship education. 

Role of Bank in Economic Development

The role of the banks is of great importance in economic development. 

One of the primary functions of banks is savings accounts. People deposit money in their savings accounts for a small amount of interest. The bank further lends the money to business owners or individuals looking for consumption or investment. 

The investment further leads to capital formation, which is excellent for economic growth

The bank charge higher interest rates on loans than the interest rate for the deposits. Hence, the banks also profit from this. 

The banks also use the deposits for other investments in the country. Thus, contributing to the economy. 

Also, the government can benefit by taking financial help from the bank. The government can invest the funds in securities and other investment plans. 

Banks can also provide employment opportunities as banks have branches in different cities. People can apply for jobs in banks. So it decreases the unemployment rate of the country. 

Problems Faced by Entrepreneurs While Accessing Finance 

Sometimes, getting access to the funds is not so easy for entrepreneurs. Some problems that entrepreneurs face are: 

1) Banks need conventional security or insurance for lending money. And, most business people can’t offer insurance. Hence, the bank rejects the application for the loan. 

2) The banks sometimes find the small business less profitable. And, lending money for such enterprises is riskier as their return on investment is less. All this creates difficulty for the entrepreneurs to get a loan from the bank.

3) Taking a loan from the bank is a lengthier process because it takes an extended period to process a business loan application. Getting a business loan can affect an entrepreneur as sometimes loans are needed immediately to sustain the business. 

4) To get a loan, banks need a business plan. A business plan is a roadmap of the business. The business plan contains estimated expenses of your staff salary, inventory cost, rent of the outlet, and so on. But, sometimes, entrepreneurs lack such details in their business plans. So it leads to not getting a loan from the bank. 

Problems Faced by Banks in Granting and Recovering Loans

The banks face problems when granting and recovering loans from business owners. 

Sometimes the customers are very un-cooperative. For example, it is challenging to retrieve debt when the consumer doesn’t answer the phone calls or disappears from their home.

Other times, the process of legal execution is very costly and time-consuming. Upon not paying the debt on time, the banks have legal rights to seize the physical assets of their customers. But, sometimes, it’s not very easy to get the asset from the customer due to unseen legal problems. 

The liquidity of the asset is also a problem. It’s sometimes tough to sell an asset confiscated by the bank. The asset takes time, even years, to sell. 

Conclusion

The banks play a significant role in developing entrepreneurship and the economy. The banks provide loans to entrepreneurs. The entrepreneurs or business owners invest the money in their businesses. Hence generating profit, which in turn profit the economy by creating wealth. 

I hope you enjoyed the article. Thank you for reading.

Also, make sure to check out How can Entrepreneurship solve financial problems?

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