Financial Systems and Policies

Financial Deepening
Financial deepening refers to the increased provision of financial services with a wider choice of services geared to all levels of society. financial deepening generally means an increased ratio of the money supply to GDP or some price index. It also refers to liquid money. The more liquid money is available in an economy, the more opportunities exist for continued growth.
It can also play an important role in lowering risk and vulnerability for disadvantaged groups and increasing the ability of individuals and households to access basic services like health and education, thus having a more direct impact on poverty reduction.
Financial deepening and increased financial inter-mediation have their uses when economies develop and become more complex, but they are not virtues by themselves. In all economies, the value of financial proliferation depends on its ability to ease transactions, facilitate investment, and direct financial resources to the projects that yield the best social returns. This implies that there are financial systems and policies that shape these characteristics in the ways most appropriate for each country at specific stages of development. Autonomously evolved financial systems may not be the most appropriate since they can reflect the imperfection and inequities of the economic base from which they emerge.
Financial disintermediation
Disinter mediation is the removal of intermediaries from a process, supply chain, or market. The emergence of disintermediation is the natural course of free markets seeking the lowest cost overall and the most efficient use of resources. Financial disintermediation exist when depositors withdraw their savings from financial institutions and invest the money directly in the market place. This is done usually because they can obtain a higher yield even though also running a higher risk of losing their money.
Shallow Finance
A shallow financial depth (FD) means that the range of financial assets for that country is narrow. Lack of or stagnant growth of output of any country is often caused by shallow finance. It is a scenario that goes far in explaining why some developing countries have low or negative per capita growth rates. Under shallow finance real interest rate can be low or negative which discourages investment; governments have inadvertently adopted shallow finance by capping interest rates to encourage investments; however capping real interest rates will discourage savings; as result, there is both a shortage of investment funds and a misallocation of available investment funds.
Financial Repression
Financial repression is a term used to describe several measures that governments employ to channel funds to themselves which, in a deregulated market would go somewhere else. Financial repression can be particularly effective at liquidating debt.
Financial repression may consist of the following key elements.

• Explicit or indirect capping or control over interest rates, such as on government debt and deposit rates.
• Government ownership or control of domestic banks and financial institutions while placing barriers to entry before other institutions seeking entry.
• Creation or maintenance of a captive domestic market for government debt achieved by acquiring domestic banks to hold government debt, via reserve requirements, or by prohibiting or by removing any incentives of alternative options that institutions might otherwise prefer.
• Government restrictions on the transfer of assets abroad through the imposition of capital control.

These measures allow governments to issue debt at lower interest rates than would otherwise be possible. A low nominal interest rate can help governments reduce debt servicing costs, while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation, and it can be considered a form of taxation.