What is Financial Depth?

Financial system plays a vital role in the process of economic development. Its primary task is to channel scarce funds from saver to borrower. Thus by making the funds available to the needy system facilitates the economic growth.

Financial depth means supply of funds available to the government and private sector for emerging market. More the financial depth better is the economical performance of the developing countries.

When the interest rates are low there are little incentives for the savers to save money in the system as it would return less for them. Thus supply of funds is limited and vice versa. Empirical data proves that deregulation of interest rates attracts more savings in the country thus increasing financial depth. However policy makers should have control on inflation rate.

Below figure is from McKinsey Global Institute on "Mapping global capital markets 2011". Emerging markets have more growth in the future as most of the state-owned enterprises are being privatized. It also states that there should be enough regulatory changes in corporate bonds as it provides an alternative source to bank financing. Also banks need to concentrate on rural and semi-urban areas as much of the bank deposits aren’t opened for large of sections in those areas. If emerging government enhances its policies then the financial depth in the economy increases thus improving the economical performance.

Thus framing a policy which lures investors to invest their money in the country and posing a decent financial depth always has a positive ripple effect in the economy.