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The Relationship Between Financial Institution And Economic Growth

879 words - 4 pages

The first recommendation for financial institution to increase economic growth is financial institution should pay their attention to those low income areas of the country. In an economy that lack of financial institution, normally, people are having poor information of saving money in bank. People in poorer areas do not save money through financial institution. Most of them are saving money under mattress or in a cookie jar. As a result, the savings is not being used effectively and efficiently. Low saving in bank wills causes a limitation of money being keep in bank and bank also faced liquidity problem. So, entrepreneurs in economically disadvantage areas face difficulty of borrowing funds for business purpose. Moreover, in economically disadvantaged areas always results of low level of investment. The consequences of low investment are slow or no economic growth and also in growth of financial institution. Other than that, the information costs for both savers and borrower are high due to lack of financial institution. High information costs may reduce level of business investment and economic growth is affected. Therefore, deficit of financial institutions result in low official savings rate, at the same time it leads to low levels of investment. The lack of financial institutions results in increases information costs leads to reduce overall levels of business investment. As a role of financial institution, they should pay more intention in economically disadvantaged areas by expanding branches or provide knowledge of financial institution. So, people in economically disadvantaged areas can fully utilize the comparative advantage of financial institution in order to strengthen economic growth.
The second recommendation is central bank should lower reserve requirement in banks and other depository institutions. Reserve requirements are certain amount of cash and deposits that bank must hold to back up their deposit in order to sustain stable banking system. Once the Fed lower down rate of reserve requirement, there will be an increase in money supply. This is because banks only need to keep less reserve when reserve requirement are lower. Hence, banks are more reserve available for borrowing to public. Moreover, there are fall in interest rate since banks available sufficient money for lending. An increase in money supply and lower interest rate result in generate more investment. In business field, they have sufficient funds to order raw materials and increasing in production line. Increased in business activity enhances demand for labor and increases demand for capital goods. In household field, consumers are having more money in hands and it wills stimulate rises in spending. Prices of stock also will increase in stock market. As a result, lower reserve requirement able to reduce unemployment rate and stimulate...

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