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Financial System An
Overview
Contents:
Introduction to Financial System
Functions of Financial System
Financial Markets
Money Market
Capital Market
Primary Market
Secondary Market
Role of Financial
Institutions/Intermediaries
Necessary Steps for Sound Financial
System
Financial System
The word "system", in the term "financial system",
implies a set of complex and closely connected or
interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy.
The financial system is concerned about money,
credit and finance-the three terms are intimately
related yet are somewhat different from each
other.
The whole financial system consists of financial
market, financial instruments and financial
intermediation.
Continued..
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A business person may need additional capital for
inventory, and individuals and governments earn a
rate of return from their savings.
Businesses can borrow from the bank to obtain
capital to purchase inventory. These are typical
transactions that make up the financial system.
Financial System
Savers
Users
Financial Institutions
Financial Markets
An Overview of the
Financial System
2. Information:
Pool and communication information
about issuers of financial instruments.
3. Risk sharing:
Provide individuals a place to buy and
sell risk.
3-11
B-Treasury Bills
A - Primary/New Issue
Market
A market for new issues i.e. a market for
fresh capital.
Provides the channel for sale of new
securities, not previously available.
Provides opportunity to issuers of
securities; government as well as
corporate.
To raise resources to meet their
requirements
of
investment
and/or
discharge some obligation.
Does not have any organizational setup.
III FinancialInstitutions/interme
diaries
The role of the intermediary was mostly
related to ensure transfer of funds from
the lender to the borrower.
This service was offered by banks, FIs,
brokers, and dealers.
However, as the financial system
widened along with the developments
taking place in the financial markets,
the scope of its operations also
widened.
Cont
Some of the important intermediaries
operating the financial markets include;
Investment bankers,
Underwriters
Stock exchanges
Portfolio managers
Mutual funds
Financial advisors and
Financial consultant
23
Cont
Among other services, they earn a return on
their money and avoidingrisk; e.g.,
banks
insurance companies
finance companies
investment banks
mutual funds
brokerage houses
24
Types of Financial
Intermediaries
A. commercial banks
Collect savings primarily in the form of
deposits and traditionally finance working
capital requirement of corporate.
With the emerging needs of economic and
financial system banks have entered in to:
Term lending business particularly in the
infrastructure sector,
Capital market directly and indirectly,
Retail finance such as housing finance,
consumer finance
Enlarged
geographical
and
functional
coverage
C. Mutual Funds
A mutual fund is a company that pools money
from many investors and invests in well
diversified portfolio of sound investment.
Issues securities (units) to the investors (unit
holders) in accordance with the quantum of
money invested by them.
Profit shared by the investors in proportion to
their investments.
Set up in the form of trust and has a sponsor,
trustee, asset management company and
custodian.
Advantages in terms of convenience, lower
D. Insurance Organizations
They invest the savings of their policy
holders in exchange promise them a
specified sum at a later stage or upon the
happening of a certain event.
Provide the combination of savings and
protection.
Through the contractual payment of
premium creates the desire in people to
save.
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