What is it?
The financial system allows funds to be circulated among different groups of people. Those groups are may define as savers, investors, and intermediaries.
It allows the transfer of money between savers and borrowers. That is the flow of funds depends on the financial system.
The Functions of Financial system;
There are many functions of the financial system. Among them;
- Saving
- Liquidity
- Payment
- Controling risk
- Policy Function
Components of Financial System;
There are three components of the financial system.
- Financial Institutions or Financial Intermediaries
- Financial Instruments or Financial Assets
- Financial Markets
Let’s take have a short description of the above three components of this system;
1. Financial Institutions or Financial Intermediaries:
An intermediary is a matchmaker between surplus units and deficit units. They transfer funds to borrowers from savers. The classic example of a financial intermediary is a bank that consolidates deposits and uses the fund to transform them into loans. (Wiki)
Major types of Financial institutions;
- Banks
- Non-Banking financial institutions
- Insurance companies
- Mutual Funds
2. Financial Market:
It is a market for the creation and exchange of financial assets. Or in other words, a market in which people and entities can trade financial securities, commodities. The financial market is not a physical market place rather it is the system that allows trading those financial assets.
The most common financial markets are; Money Market and Capital Market
Money markets have two components Local currency market and the Foreign currency market.
- Local currency market; Inter bank Deposit market (Call Market), Bills Market (T-bills, Government Bonds), Market for RePo and Reverse RePo.
- Foreign Currency Market; Spot Market (Tod & Tom) and Forward Market
Capital Market consists of the Debt market and Equity Markets
3. Financial Assets:
A financial asset is an intangible asset that represents the value because of a contractual claim.
Primary (Ordinary Shares, Preference Share, Debenture, Innovative Debt Instruments) Indirect and Derivatives (Forward, Future and Option) those are the main category of Financial Assets.
Reference: Wikipedia, Investopedia, Answer
