chapter 3 the role of financial institutions in the economic.pdf

Chapter 3 The Role of Financial Institutions in the Economic Development of Malawi: Commercial Banks Perspectivea Sera Rose Gondwe Bunda College of Agriculture, University of Malawi, P.O. Box 219, Lilongwe, Malawi. 1. INTRODUCTION. Malawi is a low income country hence economic development is one of the priorities. Economic development encompasses three essential components namely; capacity building, good governance and economic reform. Acquired skills can not be utilised fully and institutions cannot operate efficiently without good governance. Economic reforms cannot be implemented properly without institutions that are functioning well. A financial system can be described as an organisation that transfers excess funds from individuals and organisations with a surplus to those with deficits. It consists of financial instruments, legal structure and institutions and individuals dealing with the flow of funds. Financial institutions perform a wide range of functions in the system but their primary role is to assist channelling funds from surplus into deficit economic entities. They also guide the flow of scarce financial resources to investments of highest return and interest rate (price of capital) is the essential instrument in fulfilling this function. According to Cube and Senbet (1994), an efficient financial system is critical not only for domestic capital mobilisation but also as a vehicle for gaining competitive advantage in the global markets for capital. For efficiency the system must pay depositors favourable rates of interest and charge borrowers favourable rates of interest on loans. Capital mobilisation is generally one of the most necessary conditions for development. A World Bank (1997) study emphasises the role played by banking sector in the process of financial integration in developing countries. It further states that the banking sy