FINANCIAL SYSTEM


Author: Awais Ahmad (comsian027@gmail.com)

The Financial System of any country has two important segments:

  1. Financial Markets                                                        2. Financial Intermediaries

1.      Financial Marktes:

A Financial Market is a place/system, where Financial Instruments are exchanged. Such markets enhance the unique characteristics of Financial Instruments (Stocks, Bonds, Mortgages, Auto Loans, and Certificates of Deposits etc.)

2.      Financial Intermediaries:

Financial Intermediaries create assets out of the surpluses of the economy. They ensure liquidity of savings by surplus units. They also reduce information costs, mitigate and evaluate risk tied to the surplus units.

The Prime objective of Financial System is to channel Surpluses arising in the economy through the activities of households, corporate houses and the government into deficit units in the economy, again in the form of households, corporate houses and the government. However, this flow of funds differ between Banking Institutions and Non-banking Financial Institutions in a Financial System. This flow of funds through Financial System, and the difference between the two is shown as in Fig. 1:

References:

1. Financial Management – Theory & Practice; 10e by Eugene F. Brigham & Michael C. Ehrhardt

2. Management of Banking & Financial Services – 2e by Padmalatha Suresh & Justin Paul

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