Question

“Financial system development lead economic growth “ List and explain TWO function of financial intermediaries on...

“Financial system development lead economic growth “

List and explain TWO function of financial intermediaries on economy?

Homework Answers

Answer #1

Two functions of financial intermediaries are :

  • Channelling of savings into investment - Financial intermediaries enable the savings in the economy (savings of individuals/households, short-term investments of firms etc.) to be channelled into their most productive uses. Financial institutions and banks lend out these deposits as loans, and thus facilitate investment. This leads to economic growth
  • Risk management - Financial intermediaries enable risk to be managed and spread across many individuals/entities. Financial intermediaries such as insurance companies and mutual funds enable risk to be spread over many entities, thus enabling higher risk taking and thus higher investment, leading to economic growth
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