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Financial development and economic growth are linked through the collection of savings by financial institutions, which can then be redistributed through credit or loans to facilitate the procurement of goods and services. Financial institutions can also regulate the economy and channel financial resources to areas of greatest need.
The study of the link between financial development and economic growth explores how financial development contributes to economic development. One way to view the relationship between these two is to access how human and capital investment can be channeled so that it can produce tangible results that can be channeled towards economic development. Usually, for the resulting productivity to be efficiently channeled towards economic development, intermediaries in the form of financial institutions have to act as intermediaries and facilitators.
One of the ways that financial institutions can help facilitate financial development and economic growth is through the collection of savings from individuals and households, which can then be redistributed through the provision of credit or loans. The effect of this practice is to facilitate the procurement of services and goods by consumers, leading to market activity and consequent economic development. An equilibrium in the economy requires a situation where there is a desired equilibrium between the rate of demand in relation to the supply of goods and services by the producers of those products and services. Where consumers are able to access means of paying for the purchase of such items, the economy will usually benefit from financial assets.
Examples of these businesses can be seen where consumers are able to obtain mortgages and other forms of loans and credit in order to buy houses, cars and other supplies. The resulting activity on the economic front helps to lubricate the engine of economic progress, thus establishing a link between financial development and economic growth. These same financial institutions can also be used to regulate the economy, steering it out of a potential recession and encouraging the growth of desired positive attributes. One example is the use of high interest rates as a means of slowing spiraling growth in the economy and lowering them as a means of encouraging growth.
Another link between financial development and economic growth can be seen in how financial institutions are able to foster economic growth by channeling needed financial resources to identified areas of greatest need. For example, savings and other finances can be collected and redistributed towards developing projects, which can contribute to the growth of the economy. This can also be improved by monitoring loans to ensure they are used for desired projects.
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