For an economy to grow and develop it needs input(s). Some have argued that the availability and efficient use of financial resources are the precondition for economic growth, hence development. The rate of growth is the function of a developed financial system to enable financial resources to be mobilsed.
On the other hand there are opponents to that argument and held the view that the financial system has little role to play in the economic development instead it provides legitimate opportunities for some to make money.
Another view argued that financial resources is one of a number of necessary inputs for economic growth along side natural resources, labour, markets, management, technology and entrepreneurial ability.
We shall look at the relationship between financial development and economic development, to see the validity of the arguments.
What is Economic Development
The term economic development is normally referred to the growth of an economy of a country.But my view is that the growth of an economy is not a sufficient ingredient for economic development. The growth must be designed towards achieving equal distribution in income. Hence economic development must have two important elements that is the growth of the economy of a country and improving the quality of life of its people. Growth with equity.
Mobilisation of Financial Resources
Mobilisation of financial resources refers to the process of moving sources of funds for investments. Sources of funds for investments are savings and retained profits, loan capital, equity capital and government finance through taxation, borrowing and printing of money. The funds may be raised from domestic as well as foreign markets.
Funds are mobilised either direct or through intermediaries by formal or informal mechanisms depending upon the level of financial development of a country. The less developed, informal mechanisms such as family groupings and village savings play a greater role while in more developed system by financial institutions and instruments. The more sophisticated financial system, the funds are mobilised directly by investing in government bonds, equities or capital market instruments. In other words mobilisation of funds are subject to i) the availability of funds (savers), and ii) there are people to use the funds for investments (investors).
In developing countries however, the financial sector is characterised by i) shortage of financial resources ii) narrow and less perfect capital market iii) public sector dominance such as interest rate control iv) scarce equity capital v) limited debt/finance and vi) the existence of informal financial sector. Hence the funds are limited to be mobilised to put into effective use for investments.
In order to improve the mobilisation of financial resources the financial system need to be expanded and developed, and liberalised in terms of interest rates and increase the role of private sector. Fully developed financial system will provide a wide range of institutions, instruments and markets such as commercial banks, specialised financial institutions such as building societies, finance companies, life and general insurances, pension funds and securities market such as stock exchange, unit trusts, futures, option markets, hedge and commodity market as may be seen in the industrialised countries.
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