Relationship between the financial system and the economic growth

Is economic growth dependent on financial system? Answers are embedded in the importance of
financial system

1. An efficient financial system assists in economic activities and growth. Various components
of financial system such as financial system, financial institutions, financial markets, financial
instruments & financial services all these are the pain pillars of economic growth. A financial
systems pools up the savings and employ them in productive uses there by increase the
productivity of the country`s economy.
2. Financial system helps in speeding the rate and quantum of savings by way of issuing
numerous financial instruments and services through financial intermediaries
3. A good financial system reduces intermediation costs and stimulates economic growth
4. An efficient financial system ensures faster economic growth by making innovation at least
cost in a most profitable manner
5. A financial system also gets developed according to the change in the patterns of change in
demand for finance. a financial system gradually grows and develops with the growth of the
economy
6. A well-developed financial market helps the central bank to conduct and control monetary
policy effectively. It creates a balanced financial system in which all financial institutions can
play important roles
7. An effective financial system plays an important role in monitoring and disciplining the
management of the companies resulting in good corporate governance practices
8. A good financial system can bring enormous foreign capital into the country`s financial
markets when it is linked with the international financial systems and markets. It also brings
credibility to the foreign investors through efficient financial markets and intermediaries

We can say that both financial system and economic growth are closely interlinked and intertwined
with each other in the sense that if a financial system is developed, sound and sophisticated
economic growth is also developed automatically.

How does financial development occur? Is it influenced by economic development?

Economic development brings an expansion of the financial system. Where there is an increase in
the per capital income the demand for the investors for the various types of financial assets
increases. As and when the real economy grows there is more and more demand for financial
services to be met by the financial system. Economic development is preceded by the financial
development which is brought about conscious policy by the concerned authorities. It helps to
accelerate the rate of real economic growth. However it is difficult to establish the appropriate
sequence of financial development and economic development. Therefor it is more realistic to say
that the relationship between these two is mutually reinforcing and intertwined.