THE FINANCIAL SYSTEM

CHAPTER 1
 Learning Objectives
The Student will be able to:
define the financial system
Describe the elements that make up the financial
system
Explain the allied (non-principal) financial
bodies/entities that assist in facilitating the flow of
funds and securities in a financial system
Name and define the sectors of the economy that
constitute the non-financial lenders and borrowers.
 Defining the Financial System
The financial system is a set of arrangements or
conventions embracing the lending and borrowing
of funds by non-financial economic units and the
intermediation of this function by financial
intermediaries in order to facilitate the transfer of
funds, to create additional money when required,
and to create markets in debt and equity
instruments so that the price and allocation of funds
are determined efficiently
 Essential Elements of a Financial System
Lenders and borrowers
The non-financial economic units that undertake the
lending and borrowing process.
Financial intermediaries
Intermediate the lending and borrowing process
Financial instruments
Marketable and non-marketable
Created to satisfy the needs of the various participants
 Essential Elements of a Financial System
Creation of money
The unique money creating ability of banks
Financial Markets
The institutional arrangements and conventions that
exist for the issue and trading of the financial
instruments
Price discovery
The determination or making of the price of equity and
the price money
 Allied Participants in the System
Brokers and dealers
The members of exchanges and/or financial
intermediaries that facilitate the trade in financial
instruments
Fund managers
Corporate entities or departments of financial
intermediaries that manage funds on behalf of
principals
 Allied Participants in the System
Financial exchanges
Allow the broker-dealers to facilitate trading in
securities, and create the mechanism for clearing
and settlement of trades in a risk minimizing
manner
Financial regulators
Regulate and supervise all player in the financial
system
 Allied Participants in the System
Credit Rating Agencies
Analyzes relevant financial and economic data
pertaining to the issuers of securities and assign
rating to the securities reflecting the probability
of the issuers meeting their financial obligations
 Non-financial Lenders and Borrowers
The net ultimate lenders are non-financial
economic units that generate funds that are
available for investment.
The net ultimate borrowers are non-financial
in nature.
 Categories of Ultimate Lenders
Household sector
Consist of individuals and families, unincorporated businesses
such as farmers, retailers and professional partnership, as the
transactions of these businesses cannot be separated from the
personal transactions of their owners
Corporate sector
Comprises all companies not classified as financial institutions
and therefore covers business enterprises directly or indirectly
engaged in the production and distribution of goods and
services
 Categories of Ultimate Lenders
Government Sector
Consists of the central government, provincial
governments, local authorities and non-financial public
enterprises.
Foreign Sector
Comprises all organizations, persons and assets
resident or situated in the rest of the world