Question

1. Why a good financial system is important for an economy?

2. Do all the financial institutions’ functions are similar to each other?

Answer 1

Ans 1. Financial system plays many roles for the economic development of a country:-

(i) It promotes saving and investment in a country. It provides facility for saving which is channelized to productive resources in the form of investment.

(ii) Financial system provides business with the two types of capital namely fixed capital and working capital.

(iii) Financial system enables the state and the central governments to raise both the short term and long term funds through the issue of bills and bonds which carry attractive rates of interest.

(iv) Financial services play an important role in providing funds for the growth of infrastructure industries.

(v) Financial system helps in the promotion of both the domestic and foreign trade.

Ans 2. There are several types of financial institutions such as banks, insurance companies, brokerage companies, trust companies and credit unions all of which provides different primary functions and assist in the transferring of funds from the investors to the companies in needs of fund. All these financial institutions have their own distinct primary functions and all of them are helpful for the growth of the economy.