Overview of Financial System and Its Role
The financial system of a country, also known as the financial sector, plays a crucial role in mobilizing savings, capital formation, project selection, payment mechanisms, resource transfers, risk management, and transaction cost reduction. It facilitates the exchange of financial assets, transforms savings into investments, and influences economic development through money, credit, and finance.
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Presentation Transcript
UNIT-1 OVERVIEW OF FINANCIAL SYSTEM
The Financial System of any country is also known as Financial Sector. It consists of Individuals, Companies, Governments that are involved in the activities of exchanging financial assets. It assists to mobilize the savings of the country to sectors that can make productive utilization of them. Market and The economic development of the country depends upon a well- developed financial system. It offers a mechanism through which savings are transformed into investments. The financial system is related with three terms i.e. Money, Credit and Finance.
Money is the current medium of exchange or means of payment. Credit is a sum of money to be refunded generally with interest, it defines to a debt of economic unit. Finance refers to the monetary resources including ownership securities and debt. It also refers to the availability of money at the time when it is required.
ROLE OF FINANCIAL SYSTEM Mobilization of Savings:- Financial system acts as a link between savers and investors. It assists in using the idle savings of people in effective and efficient way. The flow of savings is channelized by financial systems into productive investment. Capital Formation:- Financial system offers a mechanism which facilitates in the capital formation of a country. It also helps to bring together the supply of savings and demand for investible funds in the process of capital formation. Selection of Projects:- Financial system also plays an important role in choosing the viable projects to be funded. It also assists in reassessing the performance of these selected projects at regular intervals.
Payment Mechanism:- Financial system of a country also acts as a payment mechanism for the sale and purchase of goods and services. Transfer of Resources:- Financial system plays a significant role in transferring the resources from one place to another. It offers an effective mechanism to transfer the resources across geographic boundaries. Minimizing the Risk:- There is a great risk involved in the process of mobilizing the savings and allocation of credit. Financial system assists in managing and controlling the risk by providing safe modes of investment. Reducing the cost of transactions:- Financial system also helps in lowering the cost of transactions which results in increased returns.
