A country’s total economic progress is significantly influenced by its financial sector. The financial industry fosters economic growth in a number of ways. Nowadays few prominent networks have received a lot of attention including the capacity of the financial industry to:
- Pool risk so that it is reduced in financial transactions and reducing risk factors.
- Reduce the cost of financial intermediation by making use of advantages the benefits of economies of size and scope.
- Mobilise savings and direct these funds
- Optimise the distribution of the economy’s resources into investment activities.
Since the late 1980s, Pakistan has been pursuing financial sector liberalisation, which has the potential to increase financial sector efficiency by allowing more room for market forces to determine intra- and intertemporal pricing in the financial markets and the distribution of financial system credit. The country’s economic development in general and financial intermediation, in particular, were the main goals of the financial sector reforms.
Pakistan has a wide variety of financial institutions, including corporate brokerage firms, leasing companies, discount houses, Islamic banks, commercial banks, specialised banks, national savings schemes, insurance firms, development finance institutions, investment banks, stock exchanges, and investment banks. They provide a wide variety of goods and services, including loans for homes, farms, and automobiles.
The financial sector, according to the Global Financial Development (FD) report (World Bank Report 2013), is the collection of organisations, tools, markets and legal and regulatory frameworks that allow transactions to be carried out using credit. The development of the financial industry is fundamentally about reducing “costs” associated with the financial system.
Financial contracts, markets, and intermediaries emerged as a result of this process of lowering the costs of gathering knowledge, upholding agreements, and carrying out transactions. Different financial contracts, markets, and intermediaries have been driven by various kinds and combinations of information and transaction costs as well as by various legal, regulatory, and tax regimes throughout history.
A substantial body of research suggests that the growth of the financial sector has a significant impact on economic development, according to a 2013 World Bank report. By raising the savings rate, mobilising and pooling funds, creating information about investments, enabling and promoting the inflows of foreign capital, and optimizing capital allocation, it fosters economic growth through capital accumulation and technical advancement.
Long-term growth rates are often higher in countries with more developed financial systems, and a vast body of research suggests that this impact is causal: FD contributes to economic growth rather than being only a result of it.
Pakistan has made significant efforts over the past 15 years to reform its financial system, which is seen as a crucial component of macroeconomic policy. The financial reforms are anticipated to have a significant positive impact on the country’s economy, particularly through more effective domestic savings mobilisation and resource allocation. Economic growth and the financial industry are connected. Without a healthy and well-run financial sector, no economy can expand and raise the standard of living for its citizens. 85-90 per cent of Pakistan’s financial industry is made up of banks. As a result, Pakistan’s economic growth and development are directly correlated with a solid and robust financial sector.
The financial sector may have an impact on the nation’s long-term growth in two ways, according to modern growth theory: first, by accelerating the accumulation of capital, which includes both human and physical capital, and second, by collectively accelerating technological progress. Five fundamental factors are highlighted by the experts that result in:
- Risk management.
- Savings mobilisation.
- Investment opportunity statistics.
- Borrower observation and company control and
- Reducing the interchange of commodities and services.
As per banking experts, the impact of economic expansion on finance can be accelerated by capital accumulation and technical advancement. A well-organised financial sector may improve investments, which might boost economic growth repeatedly. The expenses of completing the transaction charges are connected with every investment. A more developed financial system may lower transaction costs and credit restrictions, two factors that might impede a nation’s economic progress as financial arrangements have an impact on the distribution of resources through time and geography. The following are the financial system’s contributions to the economy:
- Examine data and statistics on feasible investments and capital distribution.
- Examine investments and teach company governance.
- Gather and arrange savings.
- Quicken trading, risk minimisation, and risk management.
- Encourage and help in the exchange of products and services.
The economic literature on the link between financial and economic development and banking sector growth.
It is very clear that developing countries attach great importance to financial sector development and deepening in the pursuit of their poverty reduction goal. By mobilising savings, facilitating payments and trade of goods and services, and promoting efficient allocation of resources, the financial sector is seen as playing a critical role in facilitating economic growth and, directly through broadening access to finance and indirectly through growth, contributing to poverty reduction so, it is necessary to work on this important sector through reforms to foster economic growth and development of Pakistan as the development of banks expedite the completion of industrial projects and foster social and economic development.