Iinancial institutions and markets are meant for mitigating
the effect of information asymmetries and transaction costs that
prevent the direct pooling and investment of society's savings. They aid
in the mobilization of savings and provide payment services that facilitate the
exchange of goods and services. Moreover, they pave the way for the
efficient allocation of funds for investment projects, and monitor investment
and exert corporate governance after those funds are allocated. In the process,
they diversify, transform and manage risk. When they work well, financial
institutions and markets provide opportunities for all market participants to
take advantage of the best investments by channeling funds to their most
productive uses, hence boosting growth, improving income distribution, and
reducing poverty. When they do not work well,
opportunities for growth are missed,
inequalities persist, and in the extreme cases, costly crises follow.
Much attention has been focused on the depth and efficiency of financial
systems. Well-functioning financial
systems are, by definition, efficient,
allocating funds for productive uses. They also offer savings, payments
and risk management products to as large a set of participants as possible.
Without inclusive financial systems, poor individuals and small enterprises need
to rely on their personal wealth or internal resources to invest in their
education, become entrepreneurs, or take advantage of promising growth opportunities.
Modern development theories
increasingly emphasize the key role of access to finance; lack of finance is
often the critical element underlying persistent income inequality as well as
slower growth.
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