Importance of Financial Sector Development
There are ample evidence suggesting that financial sector development plays a significant role in economic development. It promotes economic growth through capital accumulation and technological advancement by boosting savings rate, delivering information about investment, optimizing the allocation of capital, mobilizing and pooling savings, and facilitating and encouraging foreign capital inflows.
Countries with better-developed financial systems tend to enjoy a sustained period of growth, and a studies confirm the causal link between the two: financial development is not simply a result of economic growth; it is also the driver for growth.
Additionally, it reduces poverty and inequality by enabling and broadening access for the poor and vulnerable groups, facilitating risk management by reducing their vulnerability to shocks, and raising investment and productivity that generates higher income.
Financial sector development also assists the growth of small and medium sized enterprises (SMEs) by giving them with access to finance. SMEs are typically labor intensive and create more jobs than large firms, which contributes significantly to economic development in emerging economies.
Additionally, financial sector development also entails establishing robust financial policies and regulatory framework. The absence of adequate financial sector policies could have disastrous outcome, as illustrated by the global financial crisis. Financial sector development has heavy implication on economic development‐‐both when it functions malfunctions.
The crisis has challenged conventional thinking in financial sector policies and sparked debate on how best to achieve sustainable development. To effectively reassess and re-implement financial policies, publications such as Global Financial Development Report (GFDR) by the World Bank and Global Financial Stability Report (GFSR) by the IMF can play an important role.
The Global Financial Development Report, a new initiative by the World Bank, highlights issues that have come to the forefront after the crisis and presents policy recommendation to strengthen systems and avoid similar crisis in the future. By gathering data and knowledge on financial development around the world, the GFDR report aims to put into spotlight issues of financial development and hopes to present analysis and expert views on current policy issues.
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