Role Of Commercial Banks In Credit Creation Capabilities And Its Effects On Socio-Economic Status Of Its Customers

INTRODUCTION
1.1 Background of the Study
Commercial banks are essentially dealers in credit. Interest is the price that guides them in making business decision (Wachtel and Paul, 2001). They were initially started as institutions for meeting the short term credit requirements of trade industry and commerce and it remains their primary function even today (Levine, 1998). In view of that requirement, the legal framework never put restrictions on the credit creation power of these banks. However, legislation did require the central bank of each country to oversee and control that power so that it may not be used to the detriment of social well-being.
Banking occupies one of the most important positions in the modern economic world (Maness, 1998). It is necessary for trade and industry, hence it is one of the great agencies of commerce. Although banking in one form or the other has been in existence from very early times, modern banking is of recent origin (Addeah, 1989). The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater for the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors (Carry and Ross, 1996).
At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. In this respect, credit creation is the most significant function of commercial banks. A commercial bank as a financial institution’s main objective is to grant loans to its customers. While sanctioning a loan to a customer, they do not provide cash to the customer, instead, they open a deposit account from which the borrower can withdraw. In most countries, central banks are responsible for the oversight of the commercial banking system of their respective countries.
Commercial banks however, play a vital role in economic development by providing money which is used to increase the quality and quantity of the factors of production (Brown and Crow, 1990). Rural sectors in a country like Ghana can grow only if cheaper credit is available to the Ghanaian populace for both short and medium term needs. The two most distinctive features of a commercial bank in any economy are borrowing and lending, i.e. acceptance of deposits and lending of money to projects to earn interest (profit). A commercial bank is a profit seeking business firm, dealing in money and credit (Addeah, 1989). It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety. So also, it deals in credit, i.e. it creates credit by making advances out of the funds received as deposits to its customers. It thus functions as a mobiliser of savings in the economy. A bank is, therefore like a reservoir into which flow of the savings, the idle surplus money of households and from which loans are given on interest to businessmen and others who need them for investment or productive uses.
A general role of commercial banks is to provide financial services to the general public, businesses and companies, ensuring economic and social stability and sustainable growth of the economy (Colander and Wood, 1993). Commercial banks as a financial institution provides services for both savers and borrowers and also performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit. Their role in the financial system is critical to keeping money available and liquid. By definition, commercial banks operate in pursuit of a profit (Garhwali, 1993). The Commercial Banks generally finance trade and commerce with short-term loans. They charge a high rate of interest from the borrowers but pay much less rate of interest to their depositors with the result that it serves as the main source of profit of the banks.
In short, banks borrow to lend. The rate of interest offered by the banks to depositors is called the borrowing rate while the rate at which banks lend out is called lending rate. The difference between the rates is called “spread” which is appropriated by the banks. It should be noted that not all financial institutions are commercial banks because only those which perform dual functions of (i) accepting deposits and (ii) giving loans are termed commercial banks. Commercial banks increase the supply of money by creating credit which is also treated as money creation. In the modern world, banks are to be considered not merely as dealers in money but also the lenders in economic development. In recent years, commercial banks, particularly in developing countries, have been called upon to help achieve certain socio-economic objectives laid down by the state (Maness, 1998).
Commercial banks are thus being used to promote or help to further the national policy objectives of reducing inequalities of income and wealth, removal of poverty and elimination of unemployment in the country. It is clear from the above that commercial banks help development of trade and industry in the country. They encourage habits of thrifts and savings and help in capital formation in the country.
Commercial banks are registered under the Company’s Code 1963 (Act 179) and are licensed by the Bank of Ghana to engage in the business of banking. Commercial banks function as the mobilization of savings and the extension of credit to deserving customers in their areas of operation. It is also the belief of the Central Bank that through their financial intermediation roles, commercial banks will act as catalysts for economic development in the country. The most important function of commercial bank is the creation of credit. Commercial banks for instance, Zenith Bank Ghana Limited, as a financial service provider, was incorporated in April 2005 under the Banking Act 2004 (Act 673) as a private limited company and commenced universal banking operation in September, 2005.
Zenith Bank is an epitome of a stable and strong institution with a brand and customer service that are the envy of its peers. Zenith Bank also offers real-time internet and mobile banking which enables customers to access banking services on-the-go. Zenith bank continues to play a major role in the transformation of the banking industry into an intensely competitive, customer oriented, more efficient and technologically inclined industry. Indeed, before Zenith bank commenced operations, e-banking was almost restricted to ATMs, banking was limited to a few hours in the day and weekend banking was almost non-existent. The bank pioneered several of the innovations currently prevalent in the industry. Zenith bank remains outstanding in the pursuit of excellence and this has culminated in the bank receiving notable local and international awards. Zenith bank is re-defining banking on many other fronts. Through immense investments, Zenith bank have acquired the ability to stay in the forefront of such fast-growing operations as internet banking, mobile banking, electronic payments as well as many other key programmes that provide customers with greater speed, accuracy and options. Its highly skilled and dedicated staff promise and deliver superior banking as well as professional excellence in service delivery.

1.2 Statement of the Problem
The cardinal objectives of commercial banking is to ensure steady flow of sufficient capital through the existing credit systems to majority of its customers by improving and increasing accessibility to capital. It is hoped that investment will increase to improve employment and raise the standard of living of its customers and the general well-being of the Ghanaian populace. However, it is not clear as to the extent that Zenith Banks are able to create credit for their customers and even if they do, it is not known how it affects the socio-economic status of the beneficiaries. This research seeks to provide fair judgment to the investigatory topic understudy.

1.3 Aims/Objectives of the Study
The main objective of the study is to examine the role and effectiveness of the credit creation capabilities of Zenith Bank Ghana Limited (KsTU Branch), and evaluate its effect on the socio- economic conditions of the beneficiaries. The following are the objectives of the study:
1. To examine the extent of credit creation by Zenith Bank Ghana Limited (KsTU Branch).
2. To determine the contribution of credit facilities of the bank to its customers
4. To critically evaluate the role commercial banks (Zenith bank) play in the development of the national economy.
5. To identify the constraints faced by the bank in undertaking its responsibilities.

1.4 Research Questions
The following research questions are put forward to guide the study:
i. What are the contributions of Zenith Bank Ghana Limited in credit creation?
ii. What are the constraints faced by commercial banks in undertaking its responsibilities?
iii. What collateral securities are required before accessing a commercial bank loan?
iv. Who qualifies for a credit facility at commercial banks?
v. What is the economic impact of credit creation of commercial banks on its customers?

1.5 Significance of the Study
This study is purposely looking at the role commercial banks play in the economy with regards to credit creation. The outcome or findings and recommendations of this study will serve as a resources of input and information to the banks, government and the general public. In view of the benefits of commercial banking, it is expected that with the study in this concept, it will serve as a source of encouraging commercial banks to improve upon their performance to achieve success. Again, this research work is of much importance because it practically teaches the students and broadens their knowledge in commercial banking. It is also expected to serve as a reference work for other researchers and to compliment enhancement work done in this area. Moreover, the research work will help our case study (the role of commercial banks in credit creation capabilities and its effects on socio-economic status of its customers (Zenith Bank, KsTU Branch) to know the impact they have on its customers and the economy at large.

1.6 Scope of the Study
There are a number of commercial banks in the Ashanti region of Ghana and other banks providing banking services to their customers but for the purpose of this study, the credit manager, bank manager and customers of Zenith bank, KsTU branch were used. The scope of the study is limited to the Zenith Bank Ghana Limited (KsTU branch) operations with much emphasis on areas where the bank is located to arrive at a reasonable conclusion.

1.7 Limitations of the Study
This research like any other research has limitations. First, there was inadequate time as other academic work had to be combined with data collection. Second, there was limited funds for data collection. Third, the issue of getting some customers to answer the questionnaires was difficult. Various excuses were given by some customers who did not want to answer the questions. Finally, there was a problem of getting some managers to be interviewed. However, these limitations could not limit the success of this research as the researchers were determined to complete the study within the time scheduled for the collection of the project.

1.8 Organization of the Study
The study is divided into five (5) chapters. Chapter one contains the background of the study, statement of the problem, objective of the study, research questions, significance of the study, scope and limitation of the study. Chapter two consists of the literature review.
Chapter three provides the research methodology including the brief history of Zenith Bank, its vision and mission. The fourth chapter consists of presentation and analysis of data. The fifth chapter, which is the final chapter, provides the summary of findings, conclusion and recommendations of the study.