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Nature and Importance of Financial System The Financial System

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Perbielyn Basinillo

The financial system allows those with available funds (households, companies, government) to invest and earn returns, facilitating economic growth. It is a complex network of financial institutions, markets, instruments, and services that efficiently transfers funds from savers to borrowers (also households, companies, government). The key functions are mobilizing savings, allocating resources, facilitating investment, and transferring funds between entities with available funds and those needing funds. Financial intermediaries like banks match savers and borrowers through financial markets and instruments.

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Nature and Importance of Financial System The Financial System

Uploaded by

Perbielyn Basinillo
6 views2 pages
The financial system allows those with available funds (households, companies, government) to invest and earn returns, facilitating economic growth. It is a complex network of financial institutions, markets, instruments, and services that efficiently transfers funds from savers to borrowers (also households, companies, government). The key functions are mobilizing savings, allocating resources, facilitating investment, and transferring funds between entities with available funds and those needing funds. Financial intermediaries like banks match savers and borrowers through financial markets and instruments.

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The financial system allows those with available funds (households, companies, government) to invest and earn returns, facilitating economic growth. It is a complex network of financial institutions, markets, instruments, and services that efficiently transfers funds from savers to borrowers (also households, companies, government). The key functions are mobilizing savings, allocating resources, facilitating investment, and transferring funds between entities with available funds and those needing funds. Financial intermediaries like banks match savers and borrowers through financial markets and instruments.

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© All Rights Reserved
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
6 views2 pages

Nature and Importance of Financial System The Financial System

Uploaded by

Perbielyn Basinillo
The financial system allows those with available funds (households, companies, government) to invest and earn returns, facilitating economic growth. It is a complex network of financial institutions, markets, instruments, and services that efficiently transfers funds from savers to borrowers (also households, companies, government). The key functions are mobilizing savings, allocating resources, facilitating investment, and transferring funds between entities with available funds and those needing funds. Financial intermediaries like banks match savers and borrowers through financial markets and instruments.

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NATURE AND IMPORTANCE OF FINANCIAL SYSTEM

The Financial System

“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 (and their derivatives) so
that the price and allocation of funds are determined efficiently.” (Definition based on Faure,
AP.)

 Financial System is one of the three key areas of the study of capital markets. It allows
households, companies, and the government who have available funds and to invest these
funds in more potentially productive vehicles that can result in faster growth in the
economy.
 Financial system is a complex, well-integrated set of sub-systems of financial
institutions, markets, instruments, and services which facilitates the transfer and
allocation of funds, efficiently and effectively.
 It encourages fund savings from stakeholders and investors and transforms these savings
efficiently into investment vehicles that could help the economy to grow faster.
 It is composed of network of inter-related systems of financial markets, intermediaries,
and services. It carries out the essential functions that transfer funds from parties that
HAVE AVAILABLE funds to parties that NEED funds.
 The main reason for existing is matching the difference in spending between fund
providers and fund demanders. It permits an efficient method to move funds between
entities that have funds and entities that need funds.

In a country, there are:


 Fund Providers
They are the household, companies, and government agencies who have available funds
because they spend less than their income.
 Fund Demanders
They are the household, companies, and government agencies that have fund shortage
because of deciding to spend more than their income.

 It serves as a regular, time-efficient and cost-effective link between fund


providers and fund demanders.
 Nature of Financial System
 Transfer Funds
- Movement of funds from the fund providers to fund demanders.
 Mobilizes Savings
- Financial system obtains fund from savers and provide it to those who are
in need of it.
 Risk Allocation
 Facilitates Investment
- It encourages investment by people into different investment avenues.

How financial system works?

Illustration1. Basic overview based on the illustrations of Mishkin (2004).

Image from google

 The primary fund provider/lender-savers in the financial system are the households but
business firms, government and foreigners with available funds can also lend out.

 On the other end, the main fund demanders/ borrowers-spenders are:


 business firms who uses the fund to support growth and expansion project,
 government who uses the money to finance infrastructure and other community
welfare projects, and

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