What are financial frictions?

Financial frictions are like roadblocks that stop money from moving easily between people or places.

Imagine you and your friend want to trade toys, you have a cool dinosaur, and they have a shiny robot. But instead of just swapping them right away, you both need to wait for permission from the teacher, who checks if it’s fair. That waiting time is like financial friction, it makes the deal slower or harder.

Sometimes, when people want to borrow or lend money, things don’t go smoothly. Maybe your friend wants to buy a new toy but needs more money. They ask you for a loan, and instead of just giving them the money right away, they have to wait for approval from someone else, like a bank or a parent. That waiting time is also a kind of financial friction, because it slows things down.

Just like roadblocks slow you down on your way to school, financial frictions can stop people from making good choices with their money. If borrowing takes too long or costs extra, people might not want to take the chance, just like how you might not trade toys if it means waiting for permission every time!