What does mean by Financial System? Explain the components of Financial System.
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.
There are multiple components making up the financial system of different levels. Within a firm, the financial system encompasses all aspects of finances. For example, it would include accounting measures, revenue and expense schedules, wages and balance sheet verification.
Regional financial systems would include banks and other financial institutions, financial markets, financial services. In a global view, financial systems would include the International Monetary Fund, central banks, World Bank and major banks that practice overseas lending.
Components of Financial System:
Financial system is a system comprising a set of sub-systems of financial markets, financial and financial services. There is the presence of an integrated and organized financial markets in the financial system. The main component is mobilizations of resources for financing economic development, channelizing the funds raised in productive activities, creating assets for the use of people, contributing to the development of the economy and facilitating equitable development of the economy.
There is also the presence of regulatory organizations to regulate the financial system. That means the financial system is not only organized but also regulated. It plays an important role in the selection of the productive projects to be financed. This system monitors the performance of the projects financed. it also provides payment mechanism for exchange of good and services and for settlement of debts, transfer of funds across the countries.
The financial system has financial institutions that meet the short term and the long term financial needs of a individuals, firms and companies. It provides information to the operators in the financial markets and helps them to play their role effectively. The financial system also provides the mechanism by which the savings of the community are transferred into productive investments. it helps to capital formation of the country.
The financial markets and the financial institutions play an important role in the financial system by rendering a number of financial services to various section of the economy. Financial system plays an important role in controlling the risks involved in the mobilization of savings and in the allocation of credits to different productive investments or projects.