Financial sector development in developing countries and emerging markets is part of the private sector development strategy to stimulate economic growth and reduce poverty.
Financial sector is the set of institutions, instruments, markets. It also includes the legal and regulatory framework that permit transactions to be made through the extension of credit. Fundamentally, financial sector development concerns overcoming “costs” incurred in the financial system. This process of reducing costs of acquiring information, enforcing contracts, and executing transactions results in the emergence of financial contracts, intermediaries, and markets. Different types and combinations of information, transaction, and enforcement costs in conjunction with different regulatory, legal and tax systems have motivated distinct forms of contracts, intermediaries and markets across countries in different times.
The five key functions of a financial system in a country are: (i) information production ex ante about possible investments and capital allocation; (ii) monitoring investments and the exercise of corporate governance after providing financing; (iii) facilitation of the trading, diversification, and management of risk; (iv) mobilization and pooling of savings; and (v) promoting the exchange of goods and services.
Financial sector development takes place when financial instruments, markets, and intermediaries work together to reduce the costs of information, enforcement and transactions. A solid and well-functioning financial sector is a powerful engine behind economic growth. It generates local savings, which in turn lead to productive investments in local business. Furthermore, effective banks can channel international streams of private remittances. The financial sector therefore provides the rudiments for income-growth and job creation.
Read more about Financial Sector Development: Importance of Financial Sector Development, Measurement of Financial Development
Famous quotes containing the words financial and/or development:
“Just as men must give up economic control when their wives share the responsibility for the family’s financial well-being, women must give up exclusive parental control when their husbands assume more responsibility for child care.”
—Augustus Y. Napier (20th century)
“I hope I may claim in the present work to have made it probable that the laws of arithmetic are analytic judgments and consequently a priori. Arithmetic thus becomes simply a development of logic, and every proposition of arithmetic a law of logic, albeit a derivative one. To apply arithmetic in the physical sciences is to bring logic to bear on observed facts; calculation becomes deduction.”
—Gottlob Frege (1848–1925)