Financial system

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A 'financial system' is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national and global levels.[1] They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.[2]

Money, credit, and finance are used as medium of exchange in financial systems. They serve as a medium of known value for which goods and services can be exchanged as an alternative to bartering.[3] A modern financial system may include banks (public sector or private sector), financial markets, financial instruments, and financial services. Financial systems allow funds to be allocated, invested, or moved between economic sectors. They enable individuals and companies to share the associated risks.[4]

As an alternative to bartering, a modern financial systems may include banks, financial markets, financial instruments and financial services.[5]

Features of financial system[edit]

  1. It is a set of interrelated activities or services.
  2. Services are working together to achieve predetermined goals.
  3. The system allows transfer of money between savers and borrowers.
  4. It is applicable at global, regional, and firm level.
  5. It includes Financial Institutions, markets, instruments, services, practices and transactions.
  6. The main objective is to formulate capital, investment and profit generation. de financial services for members and clients. It is also termed as financial intermediaries because they act as middlemen between the savers and borrowers
  7. It bridges the gap between savings and investment through efficient mobilisation and allocation of surplus funds.
  8. It helps a business in capital formation
  9. It helps in minimising risk and allocating risk efficiently .
  10. It helps business to liquidate tied up funds.
  11. It facilitates financial transactions through provision of various financial instruments
  12. It facilitate trading of financial assets/ instruments by developing and regulating financial markets.
  13. It helps in economic development and raising the standard of living of people.
  14. It provides effective financial as well as advisory services.
  15. It protects investors through regulatory bodies like RBI, SEBI etc.,[6]


Economic Development[edit]

  1. Mobilising savings
  2. Promoting Investments
  3. Encouraging investments in financial assets
  4. Allocating savings on the basis of national priorities.
  5. Creating credit
  6. Providing a spectrum of financial assets.
  7. Financing trade, Industry and agriculture.
  8. Encouraging Entrepreneurial talents.
  9. Providing financial services.
  10. Developing backward areas.
  11. Helping in financial deepening and broadcasting.[7]


Banks are financial intermediaries that lend money to borrowers to generate revenue and accept deposits . They are typically regulated heavily, as they provide market stability and consumer protection. Banks include:[citation needed]

Non-bank financial institutions[edit]

Non-bank financial institutions facilitate financial services like investment, risk pooling, and market brokering. They generally do not have full banking licenses.[8] Non-bank financial institutions include:[9]

  • Finance and loan companies
  • Insurance companies
  • Mutual funds
  • Commodity traders

Financial markets[edit]

Financial markets are markets in which securities, commodities, and fungible items are traded at prices representing supply and demand. The term "market" typically means the institution of aggregate exchanges of possible buyers and sellers of such items.

Primary markets[edit]

The primary market (or initial market) generally refers to new issues of stocks, bonds, or other financial instruments. The primary market is divided into two segment, the money market and the capital market.

Secondary markets[edit]

The secondary market refers to transactions in financial instruments that were previously issued.

Financial instruments[edit]

Financial instruments are tradable financial assets of any kind. They include money, evidence of ownership interest in an entity, and contracts.[10]

Cash instruments[edit]

A cash instrument's value is determined directly by markets. They may include securities, loans, and deposits.

Derivative instruments[edit]

A derivative instrument is a contract that derives its value from one or more underlying entities (including an asset, index, or interest rate).[11]

Financial services[edit]

Financial services are offered by a large number of businesses that encompass the finance industry. These include credit unions, banks, credit card companies, insurance companies, stock brokerages, and investment funds.

See also[edit]


  1. ^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 551. ISBN 0-13-063085-3.
  2. ^ Gurusamy, S. (2008). Financial Services and Systems 2nd edition, p. 3. Tata McGraw-Hill Education. ISBN 0-07-015335-3
  3. ^ "Back to Basics: What Is Money? - Finance & Development, September 2012". Retrieved 2016-01-10.
  4. ^ Allen, Franklin; Gale, Douglas (2000-01-01). Comparing Financial Systems. MIT Press. ISBN 9780262011778.
  5. ^ Indian Financial System, Gordon, 21st page
  6. ^ Indian Financial System, Gordon, 24th page
  7. ^ Indian Financial System, Gordon, 125th page
  8. ^ Development and Regulation of Non-Bank Financial Institutions. The World Bank. 2002-03-05. doi:10.1596/0-8213-4839-6. ISBN 978-0-8213-4839-0.
  9. ^ "Online Manual - BSA InfoBase - FFIEC". Retrieved 2016-01-10.
  10. ^ "Accounting for Financial Instruments". Retrieved 2016-01-10.
  11. ^ "Understanding Derivatives: Markets and Infrastructure". Federal Reserve Bank of Chicago. Retrieved 2016-01-10.