A bank is a financial institution whose aim is to provide financial services. They largely contribute to economic development through financial intermediation, money creation, and asset transformation. They also represent the largest source of financing for businesses by providing financing directly, extending loans and buying bonds and providing financing for consumers.
Banks are classified according to;
- Basis of ownership
On this basis, banks are either classified into private and public banks. While a private bank is owned by one or more individuals, a public bank, which is also referred to as an incorporated bank is incorporated under an act and are owned by shareholders.
- Basis of function
Since banks carry out different functions, they are classified based on their roles. These include; commercial banks, development banks, industrial banks, agricultural banks, exchange banks, savings banks, and central banks.
What is a Commercial banks?
Commercial banks are financial institutions which accept deposits from the public which are repayable on demand. These banks also lend the public for short periods. They make a profit by borrowing money in the form of deposits at a lower interest rate and lend at a higher rate. Commercial banks are classified into:
- Public sector banks- These are banks where the majority of shares are owned by the government.
- Private sector banks- These are banks where the majority of shares are held by individuals and other private entities.
- Foreign banks- These are banks that are registered outside the host country but still operate in the host country.
What is a Development banks?
Development banks are financial institutions that provide long-term capital to productive sectors, often for infrastructure, managerial and technical assistance. These banks are the most widely used instruments of funding and assistance for projects that require long-term maturity. Infrastructure in developing countries is a focus not only because they involve higher capital costs but also are essential for providing ideal conditions for innovation.
Similarities between commercial banks and development banks
- Both offer financial help to the respective customers
- Both are financial institutions which contribute to economic growth
- Both are regulated by the government
Differences between Commercial banks and Development banks
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Purpose of Commercial and Development banks
The main purpose of commercial banks is making a profit through interest earned by lending at a high-interest rate. Development banks, on the other hand, aim at achieving social profit, through effecting developmental projects.
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Process of formation
While commercial banks are set up as companies under the companies act, development banks are set up under the special Act passed by the government.
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Target clients
Commercial banks lend to individuals and business entities while development banks lend to the government.
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Nature
Commercial banks are financial institutions while development banks are multi-purpose institutions.
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Raising funds
Commercial banks raise funds through public deposits, which are payable on demand. Development banks on the other hand source funds by selling of securities, borrowing, and grants.
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Sector targets
Commercial banks target the masses as they have many products to offer. Development banks, on the contrary targets only the development sector.
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Provision of loans
While commercial banks provide short term and medium term-loans, development banks provide medium and long term loans.
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Cheque amenities
Commercial banks provide cheque amenities whereby deposits can be made and withdrawn with cheques. Development banks, on the contrary, do not offer cheque amenities.
Commercial vs. Development banks: Comparison Table
Commercial banks vs. development banks: Summary
With the constant evolution of banking and banking services, we have seen many developments in the industry. Without a doubt, there is no economy that would survive without these services. Banks play an important role in the day to day activities of human beings and are the backbone of all industries. Banks can hence be called the basis of economic progress. Both commercial banks and development banks play this role, though differently, hence are both essential for any economy.