Financial System

An Overview: Financial Systems

The financial system’s primary goal is to move money from savers to investors. The financial system is responsible for channeling money from net savers (those who spend less than they earn) to net spenders (those who spend more than they earn) (i.e. who wish to spend or invest more than their income). To put it another way, the financial system enables net savers to lend money to net spenders. Banks and other credit institutions serve as intermediaries for funds, and securities are issued directly on financial markets. Economic growth and prosperity are aided by efficient resource allocation as well as financial stability. There are two ways in which money moves from lenders to borrowers. Debtors borrow money directly from investors on the financial markets by selling financial instruments, also known as securities (such as debt securities and shares), which are claims on the borrower’s future earnings or assets.

What are Financial Intermediaries?

When financial intermediaries play a secondary role in the movement of funds, this is referred to as “indirect finance.” Under the umbrella of financial intermediaries include credit institutions, various monetary finance institutions, and other sorts of financial intermediaries.

Types of Financial Services and Institutions

Banking

When it comes to banking, depositing money into checking and savings accounts is just one step of the process. The Federal Deposit Insurance Corporation (FDIC) mandates that banks hold a minimum of 10% of all deposited funds in reserve. The other ninety percent can be borrowed. 

Advisory

In a wide range of tasks, this branch of financial services aids private citizens and corporations alike. Investment due diligence, business valuation, and real estate endeavours are all areas in which financial advisors can provide assistance. In all of these instances, financial advisors assist their customers in making prudent financial decisions.

Wealth Administration

When it comes to saving money, this type of financial service helps clients to do so in the most efficient way possible. Having a 401(k) plan via your employer is one method of wealth management.

Mutual funds

Mutual funds are a sort of investment in which numerous parties participate. The investors’ money is managed by a professional, not by themselves.

Insurance

In the financial services industry, this is one of the most popular sorts of sectors. Most individuals have some awareness of insurance; it is a monthly or annual payment system that works as a safety net and covers the costs of major, often unplanned expenses. 

Key Functions of Financial System

A financial system’s five primary functions are:

(i)generating information about potential investments and allocating capital; 

(ii) monitoring investments and exercising corporate governance after providing finance; 

(iii) facilitating risk trading, diversification, and management; 

(iv) mobilizing and pooling savings; and 

(v) facilitating the exchange of goods and services.

International Financial Bodies

Multilateral Development Banks

• World Bank
• European Investment Bank (EIB)
• Islamic Development Bank (IsDB)
• Asian Development Bank (ADB)
• European Bank for Reconstruction and Development (EBRD)
• CAF – Development Bank of Latin America (CAF)
• Inter-American Development Bank Group (IDB, IADB)
• African Development Bank (AfDB)
• New Development Bank (NDB)

Sub- Regional Multilateral Development Banks

• Caribbean Development Bank (CDB)
• Central American Bank for Economic Integration (CABEI)
• East African Development Bank (EADB)
• West African Development Bank (BOAD)
• Black Sea Trade and Development Bank (BSTDB)

Multilateral Financial institutions(MFI)

• European Commission (EC)
• International Finance Facility for Immunisation (IFFIm)
• International Fund for Agricultural Development (IFAD)
• Nordic Investment Bank (NIB)
• OPEC Fund for International Development (OFID)
• Nederlandse Financieringsmaatschappij voor Ontwikkelingslanden NV (FMO)

Public Financial Management System

The Public Financial Management System (PFMS) is a web-based online software application developed and implemented by the Controller General of Accounts (CGA), Department of Expenditure, Ministry of Finance, Government of India. The Controller General of Accounts (CGA), Department of Expenditure, Ministry of Finance, Government of India, created and implemented the Public Financial Management System (PFMS).PFMS has built interfaces with all 28 states’ treasury systems, as well as the two union territories with legislatures.

Components Of Financial System

Financial institutions-Financial institutions facilitate smooth working of the financial system by making investors and borrowers meet. They mobilize the savings of investors either directly or indirectly via financial markets.

• Commercial banks.
• Banks that make investments (Wealth management)
• Insurance companies
• Advisory
• Companies that specialise in planning (Wealth management, Advisory)
• CPA

Financial markets-A financial market is a venue for the creation and transfer of financial assets.Money markets and capital markets are the two primary categories.

The following are the essential functions: 

• Assist with credit and liquidity creation and distribution.
• Act as savers’ brokers.
• Assist in achieving economic growth .

Money-Money is defined as anything that may be used to pay for goods and services, as well as to repay debts. It functions as a store of value and a medium of exchange.

Objective of Indian Financial System

The primary goal of a country’s financial system is to manage and oversee the mechanisms of creation, distribution, exchange, and holding of all types of financial assets or instruments. 

Components 

Financial Institutions

• Regulatory.
• Intermediates.
• Non intermediates.

Financial Assets

• Call money.
• Notice money.
• Term money.
• Treasury bills.
• Commercial papers.

Financial Services

• Banking services.
• Insurance services.
• Investment services.
• Foreign exchange services.

Financial Markets

• Capital market.
• Money market.
• Foreign exchange market.
• Credit market.

Conclusion

The existence of the market is due to the savings that can be invested in it. The introduction of a slew of financial innovations will alter the financial market’s structure. In today’s financial industry, access to various areas of the financial market in each country is no longer a problem.