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Role of Banks in a Market

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The Role of Banks in a Market Economy The presence of banks are crucial for the economy of each country in the world, since no expansion or growth can be obtained unless the savings of money are funneled into investment efficiently. In this aspect, the shortage of a full-fledged banking and investment system has been identified multiple times as a clear cut weakness of the centrally enforced and planned economies. Reforming the banking sector in former countries unlike the United States, that displayed communism and creating a new and improved culture of trust and confidence has been an important task in the process of transition to a market economy. In the financial system that we have as a dominant country, different flow from those people who have extra funds to those who don’t have a lot of funds, either by direct deposit, financing that is market based or by an indirect finance that has a bank based. The financial system brings together and involves all types of financial markets, financial instruments and any other of the institutions involving the financial system. The main issue that everyone wants to know is whether the make up of our financial system exhibits the potential for economic growth? The answer to the million dollar question is yes our system does exhibit economic growth. “According to cross-country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth”(Duisenberg). However there are still some minor questions that we do not have the answers too but our financial system is directly linked to economic success in the country and the world. Regarding the unanswered questions, economists still have the presence of contradicting views exhibiting the underlying sequences in the operation that explain the positive relationship

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