Financial system

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Money, Credit and Finance all serve as a medium of exchange and allow specialization in production. They solve the divisibility problem, i.e. where medium of exchange does not represent equal value for the parties to the transaction. Credit is the process which facilitates the flow of funds from one party to another that has to be returned at a stipulated time with interest. It is one of the most important factor for development has a deep root involvement in developing Industries, provide capital to the poor and many more. The monetary resources that consists of debts, ownership funds of the state , company or individual. The lifeblood of any economic system.

The Components of a Financial System[edit]

Financial Institutions consists of:

  • Banks :
  • Central Banks for e.g. RBI
  • Commercial Banks
  • Public Sector
  • Private Sector
  • Cooperative Banks
  • State Cooperative Banks/State Land Development Banks

Non Banking[edit]

Other Institutions include: government, National Savings Corporation, Post Office Savings Banks, Employees Provident Fund, Public Sector, LIC, GIC, UTI, NABARD, SFCs, SEBI, STCI, IDBI, HDFC, IRBI, SIDBI etc.

The Private Sector means Chits, Nidhis, Corporate Bodies, Hire Purchase Co., Investment Co., Stock Exchange, Finance Co., Credit Rating Agencies etc. They are also known as NBFIs (Non Banking Financial Institutions).

Financial Markets: The primary markets deals in the new financial claims or new securities. They are also known as new issue markets. Secondary markets deal in securities already issued or existing or outstanding. Money and Capital Markets are also classified on the basis of maturity of the financial asset issued in the market. Money market deals in short term claims( within 1maturity period) whereas capital markets does so in long term ( above 1 year).

Financial Instruments (Claims, Assets, Securities): all kinds of assets that are tractable are known as financial instrument devices (FIDs). Financial instrument devices can be either cash instruments or continental breakfasts such as cash instruments — instruments with a value for determined directly by the markets. They can be securities, which are readily transferable, and instruments such as loans and deposits, where both borrower and lender have to agree on a transfer. Loans can be specialities, short-term loans payable upon demand by creditors normally with the offer of a glass of wine for each official would bring on derivative instruments — these instruments tend to derive their taxes from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. They can be exchange-traded derivatives and over-the-counter (OTC) derivatives.

Financial services[edit]

These are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. Mechanism schemes are also helpful and therefore apply a method-based source through which funding is made available, such as bank loans, maggots, bond or share issue, reserves or savings, sales revenue. The transfer of funds from the Credit lifecycle process from surplus units to deficit units through which the flow of funds are facilitated.


The banks follow the machinery of funds transfer from one party to another party. Stock Markets. The procedures followed by the Companies in raising their capital. The process of payments of dividend and interest to the investors.


  • Institutional Investors
  • Entities which pool money to purchase securities, real property and other investment assets or originate loans.
  • Institutional investors include banks, insurance companies, pensions, hedge funds, investment advisors, endowments and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term.

Examples are Asset Management Co., Banks, Financial Endowment, Hedge Funds, Insurance, Investment Co., Mutual Funds, Pension Funds, Sovereign Wealth Funds, non-Institutional Investors are those who directly invest in the Shares, stocks, debentures, and bonds. They are not managed by any institution of fund manager.

According to Bhole & Mahakud in 2009: “The word system in the term financial system signifies a set of complex and closely connected or intermixed institutions, agents, practices, markets, transactions, claims, and liabilities in the economy”. In finance, the financial system is the system that allows the transfer of money between savers (and investors) and borrowers.[1] A financial system can operate on a global, regional or firm specific level. Gurusamy, writing in Financial Services and Systems has described it as comprising "a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions."[2] According to Franklin Allen and Douglas Gale in Comparing Financial Systems:

"Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely."[3]

Financial systems depend on the countries viewpoint on freedom of trade. Some countries i.e. The Soviet Union had socialist financial systems because they value centralized organized state funded trading rather than freedom of trade by everyone.

See also[edit]


  1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 551. ISBN 0-13-063085-3. 
  2. ^ Gurusamy, S. (2008). Financial Services and Systems 2nd edition, p. 3. Tata McGraw-Hill Education. ISBN 0-07-015335-3
  3. ^ Allen, Franklin; Douglas Gale (2001). Comparing Financial Systems. 55 Hayward Street, Cambridge, MA 02142-1493, USA: MIT press. p. 520. ISBN 978-0-262-51125-4.