Efficient Financial System: Fuel for Economic Growth Essay

The financial intermediaries and financial markets which form a part of the financial systems are the pillars for economic growth leading to a more practical resource allocation as they decrease the costs of moving funds among lenders and borrowers, thus helping to provide information symmetry between both the parties. However, the inability of these pillars to function together may result in operational inefficiencies of the economy, negatively affecting the economic growth. The reduction in poverty through greater access to finance and efficient allocation of societal savings promotes financial sector development leading to economic growth. To understand how an efficient financial system fosters economic growth, we need to understand the ways in which such a system eases goods and service exchanges through provision of payment services, help to collect and mobilize a large number of investor savings, gather and develop enterprise information and potential investment projects, thus ensuring allocation of societal savings to their most fruitful use, scrutinize investments and wield corporate governance there by reducing the inter-temporal risk and liquidity. However, the disparity across countries with respect to the efficiency with which financial markets and institutions lower the operation costs and information asymmetries, with significant ramifications for economic expansion and development is noteworthy. (http://www. treasury. govt. nz/workingpapers/2004/twp04-17. pdf) To have a better understanding of how an efficient financial system may lead to economic growth, let us consider the following example. With a stable financial institution in place, there have been recent introduction of a 40 year term mortgage loans in the U. S, however in comparison, in many developing countries lending for housing is limited to five year term loans if at all available. The lending ratios i. e. , the available loan per 1000 people vary from four loans per 1,000 people in Albania to almost 800 loans per 1,000 people in Poland. The interest rate spreads i. e. , the disparity between deposit and lending rates – vary classically between 2% and 4% in developed financial systems such as USA and Europe as compared to being over 30% in Brazil. Development of the financial sector promotes economic growth through more well-organized allocation of resources and growth due to productivity instead of providing it through the scale of savings mobilization or investment. This promotes economic development by extending entree to external finance thus improving resource allocation and increase in efficiency of reallocation of investment funds across industries. Financial development also helps to diminish the force of external shocks on the domestic economy, it being a vital determinant of the balance of trade structure, thus, providing countries with a relative advantage, in those industries which are mostly dependent on external finance. Thus, given the significance of an efficient financial system development for economic growth leading to poverty reduction, academicians and policy makers would be similarly interested in and concerned about the building blocks for a strong and efficient financial system. Carlton- Home Loan For the purpose of investment, a loan for $300,000 in Carlton for ten years has several sources and costs involved. It is best to choose a mortgage loan with fixed rate interest and avail the same from the bank. The rationale for the choice is explained below, considering the factors that are involved in the choice, the advantages and its cost. Choice of the Source The home loan market is dynamic and offering various kinds of loans ranging from mortgage loan, home equity loan, reverse mortgage etc. These are further replete with choices like interest only loans. Consideration the loan for buying an apartment for investment purpose, there are sources available like broking houses, mortgage loan companies and banks. All these sources have a different way of operation, and offer various loan products. The choice of the type of loan depends on certain questions like purpose of the loan, the period for which one plans to stay in the home, the tenor of the loan preferred, preferred amount of down payment, frequency and structure of payment. Each different loan source has its pros and cons. One can select loan types from a choice of Fixed Rate Mortgages (FRM), Adjustable Rate Mortgages (ARM), Balloon Mortgages, no fee and no point programs etc. (Source: â€Å"Factors affecting mortgage rates†) For the home loan into consideration, looking at the investment purpose and a horizon of 10 years, the fixed rate mortgage loan happens to be the right choice. Moreover, it is best to avail the loan directly from the bank, rather than a broking house.