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Consumer - Essay Example

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While it may be difficult to admit to low financial literacy, one should be reassured that a large section of American population face similar challenge particularly in regard to financial and money management. But this reassurance should not mean that people – the consumers…
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The Functions of the Financial System While it may be difficult to admit to low financial literacy, one should be reassured that a large section of American population face similar challenge particularly in regard to financial and money management. But this reassurance should not mean that people – the consumers specifically - should be satisfied with their lack of information. The fact is that if such circumstance perpetuate, consumers would be susceptible to risks from financial services and from financial service provider and in the same way susceptible to the loss of benefits because of uninformed financial decisions.
For this paper, let us discuss the importance of financial institutions as intermediaries in the economic activity.
The financial system performs the overall function of moving money between savers and borrowers and this allows people to transfer their ability to use money to transform the world through time and space. (Shavinina 2003, p. 530) The financial system interacts with real economic activity through its various functions by which it facilitates economic exchange. What is the significance of this system for consumers, one may ask. The financial system plays an important role in mobilizing funds in such a way that they are transformed into assets that better meet the needs of individuals as investors and as consumers. A specific example is when financial intermediaries facilitate portfolio diversification. Here, resources are transferred across time and space, allowing investors and consumers to borrow against future income and meet current needs.
Financial systems also have existing mechanisms that are pivotal in developing pricing information. This information such as the appraisal of the value of companies allows investors to make informed decisions in regard to how they allocate their money. A market that is plagued by information imperfection will result to an imbalance in the quantity and quality of investment hurting an economy’s potential.
In regard to financial institutions such as banks, they perform various functions within the financial system, including the use of technological infrastructure to profitably and reliably deliver services and so extend the institutional trust upon which the financial system depends. A particularly important role played by financial institution is how they ease the tension between a saver’s preference for liquidity and the entrepreneurs’ requirement for long-term financing. Because of this, wrote Nnadozie, at any given level of saving, an efficient financial system will allow for a higher level of investment by maximizing the proportion of saving that actually finances investment. (p. 374) It does not take a rocket scientist to understand that this situation spurs economic activity. Financing through financial intermediaries facilitates economic growth by allowing capital to be channeled to investment projects.
There are other financial institutions besides the banks. Other financial institutions that play intermediation functions and serve the industrial economy include savings and loan associations, mutual savings banks, credit unions, investment companies, pension funds, insurance and finance companies. Each of these has specific objectives and purposes and could serve the specific financial needs of consumers and the market.
References
Nnadozie, E. (2003). African economic development. Emerald Group Publishing.
Shavinina, L. (2003). The international handbook on innovation. Elsevier. Read More
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