Roles of Financial Services in Economic Development

ROLES OF FINANCIAL SERVICES IN
ECONOMIC DEVELOPMENT
1. Help Businesses to Grow
Financial services help in the development of businesses by giving them the required
financial assistance, guaranteeing losses, etc. The loans issued by companies are used
for buying fixed assets and/or investing in other fundraising sources.
2. Capital growth
Both working and fixed capital growth are led by financial services system in an
economy by promoting the issue of debentures, shares, short-term loans, etc.
3. Promotes Entrepreneurship growth

Financial services are also available for entrepreneurs looking for funding and
investors for their business. Banks do not easily give loans to new entrepreneurs, but
other players in the market specialize in this field. Angel investors, Venture capitals,
loan services, counselling services, etc. assist play a key role in the growth of
entrepreneurship in India.
4. Infrastructure development
Investment in infrastructure companies will promote more involvement of private
sector companies in this sector.
5. Healthy competition
A vast and expanded financial service sector and market gives the choice of investing
their money in the investors’ hands. Better the services, more the customers for a
service and the company. This ensures competition among the firms which benefits
the investors—the public and businesses of a country.
6. Promote free and easy trade

Availability of choices to investors and the public ensures trade without barriers,
mediation by trusted banks and companies. It also helps in the development of
domestic and foreign trade of goods and services.
7. Networking of Finance
The financial service sector is not one single company or bank. Rather, it is a network
of companies working together for different matters of money. Consider a person has
surplus money. He saves some amount in a bank and invests the remaining in the
stocks market. He gets high returns on the stocks and earns a profit. He now decides
to buy a car and gets its insurance done.
In this situation, we saw how the person is connected to different segments of the
market. The companies he dealt with must be connected with other service providers
like the ones we discussed above. Role Of Financial Services In Economic
Development.
Moral of this story was that a vast interconnected network of financial services
ensures continuous flow of capital or what we call as liquidity in the market.
8. Easy Credit and Loan availability

Credits and loans are also the wheels of this financial system. Borrowing and lending
capital and repaying it with interest is an age-old method of capital trade.
But due to problems in less income, high demand for money in the market, there is a
huge imbalance between loans and their repayment. In India, many companies and
individuals are unable to pay back the loans and outstanding credit dues. This causes
the downfall of the economy and building up of leverages and debts. This sector has
to be regulated with more attention to the type of buyer.
9. Job creation
Another way the financial service sector plays an important role is in job creation.
This sector needs different kinds of the workforce based on their skills—
management, accounting, law, IT, and more.
This sector indeed needs skilled personnel. A study of India’s top 250 companies
revealed that almost 28% of total jobs are in the financial services sector. This is
important for both the workers and the community as it leads to more understanding
of how the financial market works among the common people.
10. Balance in the economy

Finally, the financial services system helps in diversification of capital market and
removes its monopoly from the government and central authorities. It encourages
more investment from private companies and an overall, innovative, facilitative
growth of the market.
This also saves the economy from shocks in case of any sudden losses. In this case,
both the government and private financial service companies are responsible for the
balance and smooth working of the economy.
11. Savings-investment relationship

To attain economic development, a country needs more investment and production.
This can happen only when there is a facility for savings. As, such savings are
channelized to productive resources in the form of investment. Here, the role of
financial institutions is important, since they induce the public to save by offering
attractive interest rates. These savings are channelized by lending to various business
concerns which are involved in production and distribution.
12. Financial system’s role in Economic Integration

Financial systems of different countries are capable of promoting economic
integration. This means that in all those countries, there will be common economic
policies, such as common investment, trade, commerce, commercial law,
employment legislation, old age pension, transport co-ordination, etc. We have a
standing example of European Common Market which has gone to the extent of
creating a common currency, representing several countries in Western Europe.
13. Financial system helps in Uniform interest rates

The financial system is capable of bringing an uniform interest rate throughout the
country by which there will be balanced movement of funds between centres which
will ensure availability of capital for all kinds of industries.
14. Financial system role in Electronic development:

Due to the development of technology and the introduction of computers in the
financial system, the transactions have increased manifold bringing in changes for the
all round development of the country. The promotion of World Trade Organization
(WTO) has further improved international trade and the financial system in all its
member countries.

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ROLES OF FINANCIAL SERVICES IN

3. Promotes Entrepreneurship growth

6. Promote free and easy trade

8. Easy Credit and Loan availability

10. Balance in the economy

11. Savings-investment relationship

12. Financial system’s role in Economic Integration

13. Financial system helps in Uniform interest rates

14. Financial system role in Electronic development:

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