Ashleigh Kennedy | Financial development, Importance 

What is Financial development?

The financial sector is the collection of institutions, instruments, and markets, as well as the legal and regulatory framework that allows credit to be extended for transactions. According to Ashleigh Kennedy, financial sector development is about overcoming "costs" incurred in the financial system. This process of lowering the costs of getting information, enforcing contracts, and conducting transactions culminated in the establishment of financial contracts, markets, and intermediaries. Different types and combinations of information, enforcement, and transaction costs, in conjunction with various legal, regulatory, and tax regimes, have spurred unique financial contracts, markets, and intermediaries throughout countries and history.

According to Ashleigh Kennedy, a financial system's five primary functions are as follows: I producing ex-ante information about potential investments and allocating capital; (ii) monitoring investments and exercising corporate governance after providing finance; (iii) facilitating trading, diversification, and risk management; (iv) mobilizing and pooling savings; and (v) facilitating the exchange of goods and services.

Thus, financial sector growth happens when financial instruments, markets, and intermediaries reduce the impacts of information, enforcement, and transaction costs and, as a result, perform a proportionately better job of performing the financial sector's fundamental roles in the economy.

The Significance of financial development

A considerable body of research demonstrates that the growth of the financial sector has a significant impact on economic development. According to Ashleigh Kennedy, it fosters economic growth through capital accumulation and technical advancement by raising the savings rate, mobilizing and pooling funds, creating investment information, enabling and promoting foreign capital inflows, and optimizing capital allocation.

Countries with more developed financial systems expand faster over time, and a vast body of research demonstrates that this impact is causal: financial development is not merely a consequence of economic expansion; it contributes to it.

According to Ashleigh Kennedy, it decreases poverty and inequality by expanding access to credit for the poor and vulnerable groups, enabling risk management by lowering their sensitivity to shocks, and increasing investment and productivity, all of which lead to greater income production.

Small and medium-sized firms (SMEs) can benefit from financial sector development by gaining access to capital. Small and medium-sized enterprises (SMEs) often employ more people than huge corporations. They are crucial to economic growth, particularly in emerging economies.

Financial sector growth extends beyond the presence of financial intermediaries and infrastructure. It includes having strong policies in place to regulate and supervise all essential institutions. The global financial crisis brought to light the terrible repercussions of ineffective banking sector policy. The financial crisis demonstrated the potentially devastating effects of ineffective financial sector policies on financial development and their impact on economic results. Finance is important for development both when it works well and when it fails.

Financial Development Measurement

Proper measurement of financial development is critical for assessing financial sector development and understanding the influence of financial development on economic growth and poverty reduction, According to Ashleigh Kennedy.

In practice, however, measuring financial progress is challenging since it is a broad term with many characteristics. So far, empirical study has often relied on conventional quantitative indicators accessible over extended time series for a wide range of nations. For example, the asset-to-GDP ratio of financial institutions, the liquid-liability-to-GDP ratio, and the deposit-to-GDP ratio.

However, because a country's financial sector includes a wide range of financial institutions, markets, and products, these measurements are only approximations and do not account for all elements of financial growth.