MS 46 IGNOU MBA Solved Assignment -What do you mean by ‘Financial System’? Explain the various components of financial systems detailing their purpose and functions.

What do you mean by ‘Financial System’? Explain the various components of

financial systems detailing their purpose and functions.

Ans :

            A financial system can be defined at the global, regional or firm specific level. The

firm's financial system is the set of implemented procedures that track the financial activities

of the company. On a regional scale, the financial system is the system that enables lenders

and borrowers to exchange funds. The global financial system is basically a broader regional

system that encompasses all financial institutions, borrowers and lenders within the global

economy.

            The processes and procedures used by an organization's management to exercise financial control and accountability. These measures include recording, verification, and timely reporting of transactions that affect revenues, expenditures, assets, and liabilities.

There are majorly 2 components of financial system one is formal financial system and another one is informal financial system. under the formal financial system there are 4 components

This is also called organized financial System
2)Financial Markets
3)Regulators
4)financial instruments
in informal financial system
in informal financial system
1. Money
2. Financial Instruments
3. Financial Market
4. Financial Institutions
5. Central Bank
1. Money
2. Financial Instruments
3. Financial Market
4. Financial Institutions
5. Central Bank

Financial Institutions

Financial institutions facilitate smooth working of the financial system by making investors and borrowers meet. They mobilize the savings of investors either directly or indirectly via financial markets, by making use of different financial instruments as well as in the process using the services of numerous financial services providers. They could be categorized into Regulatory, Intermediaries, Non-intermediaries and Others. They offer services to organizations looking for advises on different problems including restructuring to diversification strategies. They offer complete array of services to the organizations who want to raise funds from the markets and take care of financial assets for example deposits, securities, loans, etc.

Financial Markets

Financial Markets: - Financial Markets can be classified as primary and secondary markets. A Primary Market deals with new issues and secondary markets is meant for trading in existing securities.

Financial Instruments

Financial Instruments: - A financial instrument is a claim against an institution or a person for payment at a future date of a sum of money in the form of dividend.

Financial Services

Financial services consist of services provided by Asset Management and Liability Management Companies. They help to get the necessary funds and also make sure that they are efficiently deployed. They assist to determine the financing combination and extend their professional services upto the stage of servicing of lenders. They help with borrowing, selling and purchasing securities, lending and investing, making and allowing payments and settlements and taking care of risk exposures in financial markets. These range from the leasing companies, mutual fund houses, merchant bankers, portfolio managers, bill discounting and acceptance houses. The financial services sector offers a number of professional services like credit rating, venture capital financing, mutual funds, merchant banking, depository services, book building, etc. Financial institutions and financial markets help in the working of the financial system by means of financial instruments. To be able to carry out the jobs given, they need several services of financial nature. Therefore, Financial services are considered as the 4th major component of the financial system

Functions performed by financial system are:

•Saving function: Public saving find their way into the hands of those in production through the financial system. Financial claims are issued in the money and capital markets which promise future income flows. The funds with the producers result in production of goods and services thereby increasing society living standards.

•Liquidity function: The financial markets provide the investor with the opportunity to liquidate investments like stocks bonds debentures whenever they need the fund.

•Payment function: The financial system offers a very convenient mode for payment of goods and services. Cheque system, credit card system etc are the easiest methods of payments. The cost and time of transactions are drastically reduced.

•Risk function: The financial markets provide protection against life, health and income risks. These are accomplished through the sale of life and health insurance and property insurance policies. The financial markets provide immense opportunities for the investor to hedge himself against or reduce the possible risks involved in various investments