How financial system is related to economic growth?
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The functioning of an economy depends on the financial system of a country. The financial system includes banks as a central entity along with other financial services providers. The financial system of a country is deeply entrenched in the society and provides employment to a large population. According to Baily and Elliott, there are three major functions of the financial system:
Credit Provision – Credit supports economic activity. Governments can invest in infrastructure projects by reducing the cycles of tax revenues and correcting spends, businesses can invest more than the cash they have and individuals can purchase homes and other utilities without having to save the entire amount in advance. Banks and other financial service providers give this credit facility to all stakeholders.
Liquidity provision – Banks and other financial providers protect businesses and individuals against sudden cash needs. Banks provide the facility of demand deposits which the business or individual can withdraw at any time. Similarly, they provide credit and overdraft facility to businesses. Moreover, banks and financial institutions offer to buy or sell securities as per need and often in large volumes to fulfil sudden cash requirements of the stakeholders.
Risk management services – Finance provides risk management from the risks of financial markets and commodity prices by pooling risks. Derivative transactions enable banks to provide this risk management. These services are extremely valuable even though they receive a lot of flak due to excesses during financial crisis.
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Credit Provision – Credit supports economic activity. Governments can invest in infrastructure projects by reducing the cycles of tax revenues and correcting spends, businesses can invest more than the cash they have and individuals can purchase homes and other utilities without having to save the entire amount in advance. Banks and other financial service providers give this credit facility to all stakeholders.
Liquidity provision – Banks and other financial providers protect businesses and individuals against sudden cash needs. Banks provide the facility of demand deposits which the business or individual can withdraw at any time. Similarly, they provide credit and overdraft facility to businesses. Moreover, banks and financial institutions offer to buy or sell securities as per need and often in large volumes to fulfil sudden cash requirements of the stakeholders.
Risk management services – Finance provides risk management from the risks of financial markets and commodity prices by pooling risks. Derivative transactions enable banks to provide this risk management. These services are extremely valuable even though they receive a lot of flak due to excesses during financial crisis.
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