The financial sector is the collection of organisations, products, markets, and legislative and regulatory frameworks that enable transactions to be carried out using credit. The main goal of financial industry development is to lower “costs” related to the financial system. This process of reducing the costs of knowing something, performing a contract, and carrying out a transaction led to the creation of financial contracts, markets, and intermediaries.
Throughout history and throughout different countries, differing information, enforcement, and transaction costs as well as varied legal, regulatory, and tax regimes have generated distinct financial contracts, markets, and intermediaries. Thus, financial instruments, markets, and intermediaries increase how well they carry out the crucial functions of the financial sector in the economy when information, enforcement, and transaction costs are reduced.
Different Financial Institutions
Financial institutions come in a variety of forms, including banks and credit unions, investment banks, brokerage houses, and mortgage lenders. The list of different financial institutions are-
Deposits into savings and checking accounts as well as customer loans are all included in banking. The Federal Deposit Insurance Corporation’s (FDIC) reserve requirement mandates that approximately 10% of the money put into banks must remain on hand. Loans on the remaining 90% are possible. The bank distributes a portion of the interest it earns on these loans to its depositors.
An example of a well-known non-bank financial institution is an insurance company. Both people and businesses can use their insurance services. Insurance can refer to the mitigation of financial risk, life insurance, health insurance, a home, a business, a product, a car, etc. These organisations create a pool of funds from insurance premiums to pay for the policy’s coverage. Since insurance companies are large investors in the financial markets, they can be essential for the stability of financial systems.
Unlike banks, credit unions invest the interest revenue they receive to lower expenses and benefit their members. These depository organisations typically have a membership requirement and focus on a particular community or set of people. They provide a range of conventional banking services, including credit card and loan programmes in addition to checking and savings accounts. As credit unions are not publicly listed and simply need to make enough money to cover operating costs, they frequently have more room in their budgets to provide lower fees and better interest rates than banks.
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The Bottom Line
A significant body of data suggests that the expansion of the financial sector is crucial for economic growth.By raising the savings rate, mobilising and pooling funds, producing knowledge about investments, facilitating and encouraging the inflows of foreign capital, and optimising capital allocation, it fosters economic growth through capital accumulation and technical advancement.
Long-term growth rates are generally higher in nations with more developed financial systems, and a vast body of research demonstrates that this effect is causal—financial development does not only follow economic progress; it also contributes to it.
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