Financial system

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A 'financial system' is a system that allows

the exchange of funds between lenders,
investors, and borrowers. Financial
systems operate at national and global
levels.[1] They consist of complex, closely
related services, markets, and institutions
intended to provide an efficient and regular
linkage between investors and
depositors.[2]

Money, credit, and finance are used as

medium of exchange in financial systems.
They serve as a medium of known value
for which goods and services can be
exchanged as an alternative to bartering.[3]
A modern financial system may include
banks (public sector or private sector),
financial markets, financial instruments,
and financial services. Financial systems
allow funds to be allocated, invested, or
moved between economic sectors. They
enable individuals and companies to share
the associated risks.[4]
As an alternative to bartering, a modern
financial systems may include banks,
financial markets, financial instruments
and financial services.[5]

Features of financial system

1. It is a set of interrelated activities or
services.
2. Services are working together to
achieve predetermined goals.
3. The system allows transfer of money
between savers and borrowers.
4. It is applicable at global, regional, and
firm level.
5. It includes Financial Institutions,
markets, instruments, services,
practices and transactions.
6. The main objective is to formulate
capital, investment and profit
generation. de financial services for
members and clients. It is also
termed as financial intermediaries
because they act as middlemen
between the savers and borrowers
7. It bridges the gap between savings
and investment through efficient
mobilisation and allocation of surplus
funds.
 8. It helps a business in capital
formation
9. It helps in minimising risk and
allocating risk efficiently .
10. It helps business to liquidate tied up
funds.
11. It facilitates financial transactions
through provision of various financial
instruments
12. It facilitate trading of financial
assets/ instruments by developing
and regulating financial markets.
13. It helps in economic development and
raising the standard of living of
people.
 14. It provides effective financial as well
as advisory services.
15. It protects investors through
regulatory bodies like RBI, SEBI etc.,[6]

Role
Economic Development

1. Mobilising savings
2. Promoting Investments
3. Encouraging investments in financial
assets
4. Allocating savings on the basis of
national priorities.
5. Creating credit
 6. Providing a spectrum of financial
assets.
7. Financing trade, Industry and
agriculture.
8. Encouraging Entrepreneurial talents.
9. Providing financial services.
10. Developing backward areas.
11. Helping in financial deepening and
broadcasting.[7]

Banks

Banks are financial intermediaries that

lend money to borrowers to generate
revenue and accept deposits . They are
typically regulated heavily, as they provide
market stability and consumer protection.
Banks include:

Public banks
Commercial banks
Central banks
Cooperative banks
State-managed cooperative banks
State-managed land development banks

Non-bank financial institutions

Non-bank financial institutions facilitate

financial services like investment, risk
pooling, and market brokering. They
generally do not have full banking
licenses.[8] Non-bank financial institutions
include:[9]

Finance and loan companies

Insurance companies
Mutual funds
Commodity traders

Financial markets

Financial markets are markets in which

securities, commodities, and fungible
items are traded at prices representing
supply and demand. The term "market"
typically means the institution of
aggregate exchanges of possible buyers
and sellers of such items.
Primary markets

The primary market (or initial market)

generally refers to new issues of stocks,
bonds, or other financial instruments. The
primary market is divided into two
segment, the money market and the
capital market.

Secondary markets

The secondary market refers to

transactions in financial instruments that
were previously issued.

Financial instruments
Financial instruments are tradable financial
assets of any kind. They include money,
evidence of ownership interest in an entity,
and contracts.[10]

Cash instruments

A cash instrument's value is determined

directly by markets. They may include
securities, loans, and deposits.

Derivative instruments

A derivative instrument is a contract that

derives its value from one or more
underlying entities (including an asset,
index, or interest rate).[11]
Financial services

Financial services are offered by a large

number of businesses that encompass the
finance industry. These include credit
unions, banks, credit card companies,
insurance companies, stock brokerages,
and investment funds.

See also
Global financial system

References
1. O'Sullivan, Arthur; Sheffrin, Steven M.
(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. "Back to Basics: What Is Money? -
Finance & Development, September
2012" . www.imf.org. Retrieved
2016-01-10.
4. Allen, Franklin; Gale, Douglas (2000-
01-01). Comparing Financial
Systems . MIT Press.
ISBN 9780262011778.
5. Indian Financial System, Gordon, 21st
page
6. Indian Financial System, Gordon, 24th
page
7. Indian Financial System, Gordon,
125th page
8. Development and Regulation of Non-
Bank Financial Institutions . The
World Bank. 2002-03-05.
doi:10.1596/0-8213-4839-6 .
ISBN 978-0-8213-4839-0.
9. "Online Manual - BSA InfoBase -
FFIEC" . www.ffiec.gov. Retrieved
2016-01-10.
 10. "Accounting for Financial
Instruments" . www.fasb.org.
Retrieved 2016-01-10.
11. "Understanding Derivatives: Markets
and Infrastructure" . Federal Reserve
Bank of Chicago. Retrieved
2016-01-10.

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