The Role of Banking in a Centrally Planned Economy

The banking system was nationalized soon after the installation of the communist regime and replicated the system that had evolved in the Soviet Union. Although organizational reforms were instituted in the course of the following four decades, the basic mission of banking and its relationship to the rest of the economy remained unchanged.

The role of banking in the Stalinist economic model differs markedly from that in a market economy. Banks are state owned and operated and are primarily an instrument of economic control. They do not compete for customers rather, customers are assigned to them. Nor are they in business to make a profit, because in the absence of money and capital markets, there is no mechanism to assign an accurate price for credit and thereby earn a fair profit.

Economic reforms in the late 1970s assigned greater responsibility to the banks for policing the economy to ensure that enterprises were operating and developing in compliance with the national plan. The banks accomplished this mission by monitoring enterprises' operations and assessing financial penalties for inefficient use of resources. As one of the three principal sources of money to finance operations and investments--the others being state budget allocations and profits retained by enterprises from the sale of commodities--banks exercised considerable influence over all economic units.

Data as of July 1989