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Role of NBFIs in Economic Development

The non-Banking Financial Institutions (NBFIs) run in parallel to the traditional deposit taking
commercial banks. NBFIs include, but are not limited to investment banks, Development Financial
Institutions (DFIs), insurance companies, specialized credit institutions, modarabas, mutual funds,
leasing companies, discount and guarantee houses and venture capital companies. Economic
development is defined as the persistent increase in real per capita income of a country. There is a
considerable debate over the question that whether the financial institutions help foster economic
growth or rapid growth results in the development of financial sector. Nonetheless, NBFIs aid
economic development in following ways:

Mobilization of Resources:
The proponents of NBFIs advocate their benefit relating to mobilization of resources. NBFIs convert
leakages (savings) into injections (investment).This mobilization of resource eliminate if not, lessens
the intra-regional income and asset distribution inequalities. If NBFIs are not present in the financial
system the useful application of savings into investment might remain a dream. One striking aspect
of NBFIs is that they are usually development-oriented and not merely profit-maximizing
organizations.

Provision of Long-term Credit:
Commercial banks are reluctant to sanction long-term credit to commerce and industry. This is
primarily due to maturity-mismatch i.e. they are holding short-term repayable deposits which are not
comparable to long-term credit. This is where NBFIs come into action. The large scale manicuring
sector and megainfrastructure projects are largely dependent on the availability of credit from NBFIs
which fosters economic development. Unlike commercial banks, they finance corporations through
equity participation also, which is a unique feature of NBFIs.

Employment Generation:
Employment generation is one of the prime objectives of any macroeconomic policy. To achieve full
employment in the economy; governments earmark huge amounts to be disbursed through NBFIs to
private sector. This influx of funds from public sector to private sector via NBFIs spawns business
activities thus minimizing unemployment rate.

Capital Formation:
Capital formation is the increase in capital stock of a country. It raises productive potential of a
country. The chief objective of any DFI is to increase long-term capital formation particularly in the
industrial sector. This capital formation results in the improvement of macroeconomic indicators
especially GDP growth, employment, and incomes. NBFIs are ways and means of capital formation.

Financial Markets Development:
NBFIs form a significant part of financial markets. They underwrite public issues of corporations.
They provide much needed capital to new start-ups through venture capital. They are the source of
liquidity in these markets. The effective functioning of financial markets largely depends on NBFIs.

Attracting Foreign Grants:
Not all NBFIs are development-oriented but among them which enjoy this distinctive feature are
recipients of the bulk amount of grants and aids from country governments and donor
agencies. Khushhali Bank of Pakistan, for example receives grants from Asian Development Bank
(ADB) in this regard.

Breaking Vicious Circle of Poverty:
NBFIs often sometimes serve as a governments instrument in breaking vicious circle of poverty.
They raise living standards of masses through their operations. The case of microfinance banks is
worth mentioning here. In Bangladesh, Grameen Bank has pulled out millions from abject poverty.
National Rural Support Programme (NRSP), Kashf Foundation, Akhuwwat, Agha Khan Foundation
and many others are doing same job in Pakistan. Thus vicious circle of poverty turns into virtuous
circle of prosperity.

Specialized Credit:
Some NBFIs are dedicated to a particular sector. Provision of funds to the sectors like housing,
agriculture, industry and SMEs are carried out through these. They act as a conduit of transferring
public capital to private sector.