Financial System

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A financial system plays a vital role in the economic growth of a country. It intermediates between the flow of funds belonging to those who save a part of their income and those who invest in productive assets. It mobilises and usefully allocates scarce resources of a country.


A Financial system is a complex, well-integrated set of subsystems of financial institutions, markets, instruments and services which facilitates the transfer and allocation of funds, efficiently and effectively.

Functions of the Financial System

As we know, financial system is very important for the economic and all round development of any country, its major functions can be explained as following:

1. Mobilisation of savings

One of the important functions of a financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings efficiently and effectively. By acting as an efficient channel for allocation of resources, it permits continuous upgradation of technologies for promoting growth on a sustained basis.

2. Provides payment mechanism

A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries.

3. Optimum allocation of risk bearing

Another most important function of financial system is to achieve optimum allocation of risk bearing. It limits, pools and trades the risk involved in mobilising savings and allocating credit. An efficient financial system aims at containing risk within acceptable limits and reducing the costs of gathering and analysing information to assist operators in taking decisions carefully.

4. Provides price related information

It makes available price related information which...
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