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What is a Financial System?

Updated on December 2, 2022 , 1279 views

A financial system refers to a network of financial institutions that collaborate to transfer Capital from one location to another, such as insurance firms, stock exchanges, and investment banks.

Financial System

Investors obtain funds and a profit on their assets through the financial system.

Financial System Functions

Borrowers, investors, and lenders all participate in financial markets, negotiating loans for Investing objectives. Borrowers and lenders frequently exchange money in exchange for a future Return on Investment. Financial derivatives, which are contracts dependent on the performance of an Underlying asset, are also traded in the financial markets.

The planner, who can be business management, decides on the project to be funded and who will support it when defining the parameters for obtaining capital within a financial system. As a result, the financial system is usually organized using central planning, a Market Economy, or a combination of the two.

A Centrally Planned Economy is organized around a centralized authority, such as a government, that makes economic decisions for a given country's Manufacturing and distribution of goods. On the other hand, a market economy is one in which the pricing of products and services is determined by the collective decisions of residents and business owners, frequently resulting in supply and demand consequences.

Financial markets operate inside one regulatory framework set up by the government that limits the kind of transactions that can be carried out. Financial systems are tightly controlled because of their ability to influence and facilitate the creation of real assets.

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Financial System in India

The financial system is made up of the services supplied to a person by numerous financial institutions such as banks, insurance firms, pension funds, and Mutual Funds. The following are characteristics of the Indian financial system:

  • It is critical to the country's economic success since it encourages both investments as well as savings.
  • It aids in the mobilization and allocation of one's savings.
  • It makes it easier for financial institutions and marketplaces to grow.
  • It has a significant impact on capital formation.
  • It aids in the formation of a bond between the investor and the saver.
  • It also has to do with the distribution of funds.

Components of Financial System

Depending on the level, the financial system is made up of a variety of components. A company's financial system contains procedures that track its financial activity from the standpoint of the company. Finances, Accounting, Income, expenses, labour, and other issues would be covered.

As previously said, the financial system promotes the flow of funds between the lenders and the borrowers on a regional level. Banks and other financial institutions, such as clearinghouses, would be regional players. The financial system encompasses interactions among financial institutions, central banks, investors, government authorities, the World Bank, and others on a worldwide scale.

Listing Financial Systems

Here is a list of bank types included in the financial system:

  • Commercial banks
  • Cooperative banks
  • Central banks
  • Public banks
  • Land development banks managed by the state
  • Cooperative banks managed by the state

Here is a list of non-banking institutions included in the financial system:

  • Loan and finance companies
  • Insurance firms
  • Mutual funds

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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