A financial system comprises a range of financial institutions, financial instruments and financial markets which interact to facilitate the flow of funds through the financial system. Overseeing the financial system, and sometimes taking a direct role, is the central bank and/or the prudential supervisor. There are four participants in the financial system such as lenders, borrowers, financial intermediaries and regulatory bodies.
Firstly, lenders are a saving surplus unit is one whose income exceeds its expenditure for a particular period. Many individual are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she puts money in a saving account at a bank; contributes to a pension plan; pays premiums to an insurance company; invest in government bonds; or Invests in company shares.
Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback). Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stock).
Additionally, borrowers are a saving deficit unit is one whose expenditure exceeds its income for a particular period. Individuals borrow money through bankers' loan for a short term needs to longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion.
Government often fined their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Government also borrows on behalf of nationalized industries,...
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