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Role of Financial Institutions in Economic Development

Financial mediators perform a significant role in the development process, mainly through their role in allocating resources to their maximum productive uses. More efficient financial markets aid economic agents trade, hedge, pool risk, raising investment and economic growth. Financial institutions provide consumers and commercial customers with a wide range of services and different types of banking products. The importance of financial institutions to the broader economy is apparent during market booms and recessions. During economic growths, financial institutions provide the financing that drives economic development, and during recessions, banks curtail lending. This can exacerbate a state's financial problems and draw consideration to the fact that economies are heavily dependent upon the financial sector.
The importance of financial institutions and passed legislature made it easier for more people to obtain products and services from these entities. In many states, banks are encouraged or even compelled to lend money to home purchasers and small businesses. Willingly available loans encourage consumer spending, and this spending leads to economic development. There is now a clear realization that sustainable growth will not and cannot be achieved by governments acting alone. In this situation, the expertise of the private sector plays a vital role.


Financial Institutions roles in economic development;

Development & Introduction of Niche strategies
Through the development and introduction of financial institutions we can see the strategies for different sector specially for the niche sector of the country. The institutions develop and spread knowledge about financial products to assist the efficiency for the accomplishment of sustainable economic growth. In 2003 union bank introduced 'RAAS Financing Scheme' for the small community of Gujranwala division involved in surgical industry. For this approach to offer attractive opportunities for the financial help for growing & profitable market section. SME bank introduced Express loan scheme for niche area as well in 2004-2005.


Motivating the Financial Sector
Generally Financial Institutions will only use their resources for the benefit of their interest - i.e. help to make profits, either directly or indirectly. The considerations are important because with the help of development of institutions there is rise in the investment business in the country. With presence of more institutions there will be motivation in the financial area to perform better and take steps for the strengthening of country. This will lead towards the prosperity in the country by removing the risk.


Financing the Small Scale Sector
Credit is the key input for sustained growth of small scale sector and its availability is thus a matter of great importance. The provision of short term credit or working capital to small businesses for its day to day requirement for purchasing raw material and other inputs like water, electricity, etc. and for payment of salaries and wages; and long term credit for creation of fixed assets like building, land, plant and machinery help the SME sector to perform better.


Development and Support Services
With the existence of different organizations development and support services in the form of grants and loans to different agencies working for the promotion and development of industries like associations, chambers are available. The core example of import of thermos bonded machines for the production of thermos bonded footballs is possible with the help of banks in Sialkot. Other support was observed in rural development, technology up-gradation, human resource development, and marketing & promotion in the country.


Micro Finance Credit
With the expansion of different institutions like KHUSHHALI Bank, Tameer Micro finance, First Microfinance Bank etc. Micro Credit is offered to the poorest sector of country. This active step to facilitate growth of the micro finance sector in country is very commendable. It is envisaged to emerge as the apex community by providing a broad range of financial and non-financial services such as grant support, loan funds, equity and institution building support.


Introduction of more Institutions
The Financial Institutions and Banking system play an important role in the economy. First and foremost is in the form of catering to the requirement of credit for all the sections of society. The recent economies in the world have developed mostly by making best use of the credit availability in their systems. An efficient banking system must accommodate to the needs of high end investors by making available high amounts of capital for vast projects in the industrial, infrastructure & service sectors. At the same time, the medium and small projects must also have credit available to them for new investment and extension of the existing units. Rural sector in a country like India, and Pakistan can grow only if inexpensive credit is available to the farmers for their short and medium term needs. This expected potential help the investors for the introduction of more Financial Institutions in the country.


Mopping up Savings
The banks and financial institutions also accommodate to another important need of the society that is mopping up small savings at sensible rates with several options. The common man has the choice to park his savings under a few alternatives, together with the small savings schemes introduced by the government from time to time and in bank deposits in the form of recurring deposits, savings accounts, and time deposits. Another choice is to invest in the mutual funds or stocks.


Trade Facilitation Programme
Trade Facilitation Programme aims to foster trade in the countries of operations, both intra‑regional and global. Through the programme, institutions provide promises to confirming banks, taking the political and commercial payment risk of international trade transactions take on by banks in the countries of operations. This pioneering programme remains an important source of trade finance in many of countries of operations.                    

Availability of Financial services to households & individuals
Individuals have a key impact on the environment through their doings and consumption of goods and services, and in some cases their effect is proving more intractable than commercial effects. Financial institutions can have a major effect on the activities of individuals by the provision of appropriate financial arrangements - for example, access to cheap mortgage finance is a requirement of widespread home ownership, and car ownership has been critically increased by the accessibility of car loans and hire purchase. In the absence of suitable financing arrangements, products may struggle to achieve sales, mainly if they have high capital costs.


Capital mobilization
Capital mobilization is commonly one of the most necessary conditions for economic development. The role played by Financial Institutions in the process of financial integration in developing countries is very important. With the help of this channel advantage of integration materialized. With the help of capital mobilization capacity building, good governance and economic reforms can easily be achieved.


Insurance and financial services
Financial institutions are supporting a wide range of financial services to help expand local capital markets and develop local financial infrastructure. In 2002-2008 there was a strong focus on leasing transactions and investment with new commitments made to insurance corporations; a pension funds etc. in Pakistan. The Bank also contributed in a number of structured finance transactions, encouraging the use of capital market products in the area. Development in this sector will continue as demand for more diverse financial services rises and as improved legislation provides the essential infrastructure for financial sector development.


Managing Risk in Financial Institutions
Risk factor is very critical factors while dealing with finance. The assistance of issuance of new securities e.g., the sale of new Treasury securities or new corporate stock or facilitation of trading of existing securities e.g., the sale of existing stock etc. involve factor of risk. We are not self-assured either the securities traded in secondary markets are liquid or not. Focusing on risk management in the financial institution is very essential.


Achievement of Growth
Developed financial systems allow economies to reach their potential since they allow companies which have successfully recognized profitable opportunities to exploit these opportunities as intermediaries by channeling investment funds from those in the economy who are prepared to defer their consumption plans into the future. Achievement of development in country becomes easy with introduction of financial institutions. Different steps of financial development require adequate institutional procedures to be in place.


Financial Innovation
Development of Financial Institutions helps in concentrating on the improvements in technology and its influence on how financial products are delivered. Funds are transferred straight from ultimate savers to ultimate borrowers. With reduction of trust deficit financial innovation is possible on improved grounds. We know the stream of short-term funds is facilitated by money markets and the flow of long-term funds is facilitated by capital markets. These activities also assist in financial innovations.


Tailor made schemes
With the help of different institutes several tailor made schemes for the improvement of economic sector of the country are available at door steps. Introduction of country wide schemes cannot give projected growth. As discussed previous RAAS Financing Scheme, Green tractor scheme, Express loan, Yellow Cap Scheme etc. showed extensive results for the improvement of growth in the country.

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