Name – Sodish Shrestha

Sub – Banking & Insurance

Q. How does financial system help in development of economy? Explain in 300 words.

Ans: A financial system refers to a chain of financial organizations, markets, instruments and
services which help to enable the transfer of funds between market participants like lenders,
investors, and borrowers. Simply saying, financial system is a mechanism which utilizes the
power of money by placing it in hands of different parties. Financial systems are
continuously operating at both national and global levels to make smooth connections
between the investors and depositors at various levels and fields. The major roles played by
financial system to help in development of national economy are as follows:

(1) Enabling the flow of savings and investments: Financial systems help in bringing
out the savings and investments into the economy through various sources. For
example, financial institutions like banks facilitates the depositors to invest their
money by opening bank accounts and offering them attractive rates of interest in
return. Then, such savings are utilized by the banks by providing credit to business
organizations and individuals, involved in production and distribution of goods and
services.
(2) Forming the Capital market: Continuous business activity is what keeps the
economy running, and every business entity requires some capital for funding
business activities and keep the business functioning. Generally, business entities
make use of the financial system to raise funds for their business operations.
(3) Supporting Infrastructure development: Infrastructures of development are one of
the major indicators of economic development of any country. Financial system has a
crucial role in the growth and development of country’s infrastructure and industrial
success as financial institutions provide funds and monetary assistance required by
various industrial, energy, transportation, educational and health sectors.
(4) Supporting the Trade: Financial system helps to improve and develop the domestic
and foreign trade as well as industry and commerce. Various financial institutions
provide funds required to the traders through the financial market, through financial
instruments like treasury bills, LC (letter of credit) and so on. Besides, financial
institutions like banks also facilitate the exchange of documents between sellers and
buyers in international trade.
Name – Sodish Shrestha
Sub – Banking & Insurance

(5) Increasing employment rate: A well running financial system also helps to generate
more employment opportunities in a country by supporting and strengthening the
industrial sector, ultimately increasing the commercial activities in the market.