The role of finance is an important element in a modern economy. It transforms household savings into loans to consumers and business, markets for governments to raise debt and for companies to raise equity and debt. The constant conversion of capital enables business to grow by using borrowed funds to expand and generate more activity, while individual borrowing ranges from home mortgages to credit cards and car loans.
The most obvious cost is the interest payable, and the rate of interest usually reflects the risk the lender will accept. Other costs include not having access to capital for other investments and magnifying the loss if an investment using borrowed funds loses money – you can lose more than you invested.
The sector attracts substantial government regulation as it is vital to any economy to have a financial system that is well run, trusted and transparent. It is also an important facet of international trade. Countries that operate with a well-regulated, technically efficient financial systems will attract FDI (foreign direct investment) from abroad and provide encouragement for their own firms wanting to compete globally.
The financial system is operated by intermediaries and institutions that provide services and products. For example financial intermediaries such as banks provide products for consumers as well as business in loans, foreign exchange, investments and savings accounts. The financial system is also under influence from government policies, central bank interest rate intervention and general economic factors such as unemployment.