THE FINANCIAL SYSTEM – NATURE, EVOLUTION AND STRUCTURE A financial system is an integral part of a modern economy. An effective system of payment for goods and services enables huge production and the specialization of labor in the economy. The word „system‟ means an ordered, organized and comprehensive assemblage of facts, principles or components relating to a particular field and working for a specified purpose. But the word system in the term „financial system‟ represents a set of closely held financial institutions, financial services and financial instruments or claims. Capital formation in any country is carried out through the various components of the economy. These components are different in their nature, role and functions but finally work as interrelated sub-parts of a structure for the development of the economy. This arrangement of financial institutions, markets and the instruments is called the financial system of a country. Hence, the financial system of a country can be defined as a set of organizations, instruments, markets, services and methods of operations, procedures that are closely interrelated with each other. The financial system can also be explained as a methodical arrangement in the economy that helps to pool the resources from the surplus sectors and redistributes them to the deficit sectors. Some analysts say that the financial system is a group of various units that are continuously engaged in gathering the monetary resources in the economy to allocate them to the needful areas. Each and every entity in the system will address some specific issues and functions meeting the prescribed regulations. A well-developed financial system indicates a strong economy. If the financial system is efficient the mobilization of savings and the allocation of collected resources is also efficient. Money, finance and the credit function are the main concerns of the financial system of any country. Money is a medium of exchange in the financial system. Finance is the aggregate resources of the economy, which are of monetary nature and include equity and debt funds of an individual, company, state or government. Credit represents the sum of money, which was taken from other economic units as a debt and is usually returned with interest. In a macro sense the financial system can be described as a collection of markets, institutions, laws, regulations and techniques through which bonds, stocks and other securities are traded, interest rates determined and the financial services produced and delivered. The way the financial system of a country is tuned and developed has its own importance and effect on the manner in which it develops. Prerequisites of an Efficient Financial System The basic requirements for any financial system to be efficient are: Efficient monetary system; Facilities for the creation of the capital; and Efficient financial markets. An efficient monetary system indicates an efficiency medium of exchange for goods and services. It is the unit of measurement in the economy. For the exchange function to be effective, there must be a unit of measurement and account for determining the prices. This must be acceptable in the international markets also. Proper means of payment should exist whatever be the volume of the transactions. Indian Financial System
The system should have the facilities to create capital to meet the demands of the economy. The capital will be necessary to undertake the production activities. The financial system helps to meet such demands by mobilizing the savings of the surplus units to the demanding units. The third important feature of a financial system is the developed financial markets and methodologies, which facilitate the process of transfer of resources and the conversion of financial claims into money. Over years, the financial markets have manifested into round the clock global powerhouses that drive a country‟s economic progress by supplementing funds from a...
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