🞂 The financial system of a country is an important tool for economic
development of the country, as it helps in creation of wealth by linking
savings with investments. It facilitates the flow of funds form the
households (savers) to business firms (investors) to aid in wealth
creation and development of both the parties.
🞂 The financial system of a country is concerned with:
• Allocation and Mobilization of savings
• Provision of funds
• Facilitating the Financial Transactions
• Developing financial market
• Provision of legal financial framework
• Provision of financial and advisory services
🞂 According to Robinson, the primary function of a financial
system is
🞂 “to provide a link between savings and investment for
creation of wealth and to permit portfolio adjustment in
the composition of existing wealth”
🞂 A Financial System consists of various financial
Institutions, Financial Markets, Financial Transactions, rules
and regulations, liabilities and claims etc.
🞂 It plays a vital role in economic development of a
country
🞂 It encourages both savings and investment
🞂 It links savers and investors
🞂 It helps in capital formation
🞂 It helps in allocation of risk
🞂 It facilitates expansion of financial markets
🞂 It aids in Financial Deepening and Broadening
Financial institution are intermediaries of financial market. It
simple refer to an organization that collect money from individuals and
and invest that money in financial assets such as stock, bonds, bank
deposite , loans ,etc
1. Banking institution- These are bank and credit union that collect
money from the public in return for interest on money deposit and use
that money to advance and loans to financial customer .The following sub
types of banking institution.
1. Commercial Bank- Private Bank
Public Bank
2. Co-operative Bank
3. Reginal Rural Bank:Pragathi
Krishna Gramin Bank, Kaveri
Gramin Bank
4. Foreign Bank:American Express
Bank Ltd, HSBC, ANZ Banking
2. Non-Banking institution:-
•Nonbank financial companies (NBFCs), also known as nonbank
financial institutions (NBFIs),are the organizations that facilitate bank-
related financial services but does not have banking licenses. Investment
banks, mortgage lenders, money market funds, insurance companies,
hedge funds, private equity funds, and P2P lenders are all examples of
NBFCs
• Non-bank financial institutions include:
• Finance and loan companies
• Insurance companies
• Mutual funds
• Commodity traders
🞂 The financial market is referred to space, where selling
and buying of financial assets and securities take place. It
allocates limited resources in the nation’s economy. It
serves as an agent between the investors and collector by
mobilizing capital between them. A broad term describing
any marketplace where trading of securities including
equities, bonds, currencies and derivatives occur.
Types of financial markets There are two types of
financial markets
1. Unorganized
market [Link]
market
1. Unorganized sector – The unorganized sector mean which is
not incorporated with government. The unorganized sector of
the money market is largely made up of indigenous bankers,
money lenders, traders, commission agents etc., some of whom
combine money lending with trade and other activities.
2. Organized market The institutions which are controlled by
the central bank of the country namely Reserve Bank of India,
commercial banks, companies lending money, financial inter
mediaries such as the Life Insurance, Credit and Investments
Corporation of India, Unit Trust of India, Land Mortgage
Banks, RBI, SEBI, IRDA are called as institutional or
organized.
There are two types of organized financial market.
1. Capital market
2. Money market
1. Capital market:- A capital market is a financial market in
which long-term debt (over a year) or equity-backed
securities are bought and sold
• Primary Market :- Otherwise called as New Issues
Market, it is the market for the trading of new securities,
for the first time.
• Secondary Market :- can be described as the market for old
securities, in the sense that securities which are previously
issued in the primary market are traded .
🞂
Money market:
Money market basically refers to a section of the financial
market where financial instruments with high liquidity and
short-term maturities are traded. Money market has become a
component of the financial market for buying and selling of
securities of short-term maturities, of one year or less, such as
treasury bills and commercial papers.
Money market comes under the preview of RBI
🞂 Financial instruments are assets that can be traded. They can
also be seen as packages of capital that may be traded. Most
types of financial instruments provide an efficient flow and
transfer of capital all throughout the world's investors.
These assets can be cash, a contractual right to deliver or
receive cash or another type of financial instrument, or
evidence of one's ownership of an entity.
Types of financial instrument There are two types
of financial instruments
1. Cash instrument
2. Derivative instrument
🞂 Financial services are the economic services provided by the
finance industry, which encompasses a broad range of
businesses that manage money, including credit unions, banks,
credit cards companies, insurances companies, accountancy
companies, consumer- finance companies, stock brokerages,
investment funds, individual managers and some government-
sponsored enterprises.
🞂 Types of financial services There are two types of
financial services
🞂 1. Fund based services
🞂 2. Fee based services
🞂 Finance is the ‘brain’ of the economy.
🞂 Economic growth and development of a nation depends
upon
the efficiency of a developed financial system.
🞂 There are two different viewpoints regarding the relationship
between financial development and economic growth.
🞂 At last, it can be concluded that a developed financial
system leads the economic growth and development of the
country. Hence, there is a positive and direct correlation
between the growth in financial system and economic
development.