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Role of Financial System in Economic Development

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Financial System

The financial system of a country is of immense use and plays a vital role in shaping the economic development for a nation. The volume and growth of the capital in the economy solely depends on the efficiency and intensity of the operations and activities carried out in the financial markets. An immature financial system hinders the growth of the economy and leads to the ruined economy, as the policies of the market are not clear to both the national and foreign investors thus ruining the development of the economy big time.

The major role of financial system can be explained by the following few key points:

  • Financial intermediaries enhance the investment in the economy, by the means of the direct and indirect investments
  • The process of transferring the monetary resources of the public into the financial resources by the financial intermediaries involves maturity intermediation, risk reduction through diversification, reducing costs of transaction and provides a payment mechanism, which in turn is the sole objective of the financial market.

Thus the financial market of a country forms one of the pillars of the economy, on which the success of the nation is dependent largely. The economic reforms and the growth of the individuals and the nation as a whole are highly interrelated to the working of the financial market.

 Indian Financial System

If we talk about the Indian Financial System, we see that according to the model of the traditional economy proposed by RL Benne the per capita output of such an economy is low and constant. Indian economy post independence resembled an economy characterized by features such as low per capita income, closed economy, agrarian economy, low standard of living etc.

Pre-independence Indian Economy

Some principal features of the Indian Financial system before independence were:

  1. Closed-circle character of industrial entrepreneurship
  2. Narrow securities market which didn’t had much scope of growth
  3. Absence of issuing institutions and no intermediaries in the long-term financing of the industry.
  4. Outside savings could not be invested in industry i.e., there was no provision by which the savings of the financial system could be channeled to investment opportunities in industrial sector.

Changes in the Indian Economy

i) Significant diversification and policy reformation has led to the restructuring of the financial institutions, which in turn have accompanied the growth of Indian Financial System largely.

ii) In the past 50 years the Indian financial system has shown tremendous growth in terms of quantity, sophistication, innovations and complexity of operation, diversity, involvement.

iii) Major financial indicators which include money supply, deposits and credit of banks, primary and secondary issues have increased rapidly.

iv) India has also witnessed all the major types of financial innovations like diversification, disintermediation, securitization, liberalization, globalization, privatization, etc.

v) The financial institutions and a large number of new financial instruments lead a fairly diversified portfolio of financial claims which altogether have helped India to position itself in Global market.

Read about Finance Companies in India.

As a result of which today the standing scenario of Indian Financial system is totally reformed.

Thus to conclude we can say financial system which is interlinked with the economic conditions of a nation, plays a vital role in shaping the future of the nation. The system can be regarded as the epicenter which is linked to almost all the other systems, bodies, industries prevailing in the economy. As a result of which any movement, regulation or policy change in the financial system affects the operations of one and all.

It is rightly said, “A well-defined financial move can very easily change the fate of the nation or corporation”.


Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to

One Response so far | Have Your Say!

  1. Noman Ahsan

    Thanks for this topic, I got much information from this , it’s helpful for me. Keep it up.