Financial Systems

Topics: Bank, Economics, Inflation Pages: 7 (2060 words) Published: October 12, 2013
FINANCIAL SYSTEMS
A financial system is a set of complex and closely interconnected financial institutions, markets, instruments, services, practices and transactions. It consists of institutional units and markets that interact, typically in a complex manner, for the purpose moblising funds for investment and providing facilities, including payments systems, for the financing of commercial activity. Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms and they enable households and firms to share risk. Thus it allows the transfer of money between savers/ investors and borrowers. It is a collection of accounting processes and procedures that allow a business to keep accurate financial records, monitor accounts, prevent fraud and mistakes, catch any discrepancies and also to maintain accountability for expenditures and revenues and to control their finances to minimize waste and loss. It is also an information system, comprised of one or more applications, that is used for any of the following; collecting, processing, maintaining, transmitting and reporting data about financial events; supporting financial planning or budgeting activities; accumulating and reporting cost information or supporting the preparation of financial statements. Kenya’s financial market is classified into the following:- 1. Capital Market

2. Money Market
The financial market which makes up the financial system in Kenya is comprised of the following; 1. Banks and non-bank financial institutions
2. Insurance companies
3. Savings and Credit Co-operative societies
4. Co-operative societies
5. Agricultural Finance Co-operations
6. Foreign exchange bureaus
7. Hire-purchase companies
8. Retirement benefits/ Pension Industry
9. Investment advisory firms
10. Post Office Saving Bank
Financial markets provide a forum within which financial can be traded under established rules of conduct, and can facilitate the management and transformation of risk. They also play an important role in identifying market prices (price discovery). National development in Kenya is geared towards improving standards of living of the people, creation of employment opportunities, poverty eradication and at minimum provision of basic needs. Achievement of these objectives has however been faced by the following challenges which have undermined the efforts of economic development. 1. Very high poverty levels reflected in low levels of income, low levels of productivity, low levels of investment and savings, capital deficiency and poor conditions of basic needs 2. Under developed human and natural resources

3. Low rates of capital formation which stems from low marginal rates of returns from investment, low marginal propensity to save, general capital deficiencies and high dependency ratios 4. Unsustainable foreign debts

5. Abnormal population growth rates which stress education facilities, health facilities, food, security and land under the constraint of limited resources 6. Corruption
7. Poor planning, poor policies and poor implementation of policies Kenya’s financial system is fundamental in addressing these challenges that face national development since it is an intangible asset that promotes growth by facilitating the transfer of funds from savers to borrowers and by facilitating payments.

BENEFITS PROVIDED BY A WELL-DEVELOPED FINANCIAL SYSTEM
1) Diversification of risks
In a well developed financial system savers can hold many different types of assets and thus diversify risks. Also investors can fund projects in a large number of different ways. 2) Liquidity
It is the ability to exchange financial asset cash for cash on short notice and at low cost. 3) Information
A well developed financial system also allows for collection and...

References: 1. Economics, A Student’s Guide 5th edition by John Beardshaw, David Brewstar and Andrew Ross
2. Financial Stability Report
3. Kenya Government Medium Term Debt Strategy
4. IRA (2011), annual Report 2o11’, Insurance Regulatory Authority of Kenya
5. IMF (2012) World Economic Outlook, Update, January 2012.
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