What is the primary role of financial institutions?

The primary role of financial institutions is to act as a channel between savers and borrowers of funds. This function is fundamental to the economy, as it facilitates the flow of money and provides the necessary structure for individuals and businesses to save, invest, and access credit. By bringing together those who have surplus funds (savers) and those who need funds for various purposes (borrowers), financial institutions enhance efficiency in the allocation of resources.

Savers can deposit their funds in banks or other financial entities, where these institutions can then lend the same funds to borrowers, typically at a higher interest rate than what they pay to savers. This process not only allows individuals and businesses to obtain financing for consumption or investment but also provides savers with the opportunity to earn interest on their deposits.

While issuing stocks and bonds, regulating the stock market, and providing insurance services are also roles that financial institutions can perform, they are secondary to the central function of intermediation between savers and borrowers. The core of financial institutions' impact on the economy lies in this essential role, helping to ensure liquidity, facilitate investment, and promote overall economic growth.