3. Description
A financial system is a system that allows the exchange
of funds between financial market participants such as
lenders, investors, and borrowers. Financial systems
operate at national and global levels. A financial system
is a network of financial institutions – such as insurance
companies, stock exchanges, and investment banks –
that work together to exchange and transfer capital from
one place to another. Through the financial system,
investors receive capital to fund projects and receive a
return on their investments.
4. Objectives
To give money the time value as it deserves.
To reduce risks and compensate for the
same through offering products and
services.
To enable the most efficient economic
resource allocation.
To maintain market stability in the economic
sector.
5. INTRODUCTION OF
FINANCIAL SYSTEM
The Financial System plays the key role in the economy
by stimulating economic growth, influencing economic
performance and also affecting economic welfare. This
is achieved by financial infrastructure, in which entities
with funds allocate those funds to those who have
potentially more productive ways to invest those funds.
A financial system makes it possible to have a more
efficient transfer of funds.
6. Financial systems limit, pool, and trade risks resulting from these activities.
Financial assets, with attractive yield, liquidity, and risk characteristics,
encourage saving in financial form. A financial system’s contribution to
growth and poverty reduction depends upon the quantity and quality of its
services, its efficiency, and its outreach. In developing countries,
particularly in poorer areas, highly personalized types of lending with
enforcement mechanisms based on local reputation and group norms
also play a very important role. The challenge facing policymakers is to
build robust financial systems that assist in risk mitigation in the event of
shocks which in return provides lessons for policymakers to help them
reach this goal, based on research and on country experiences, most of
which have become available in recent years. Borrowers, lenders, and
investors exchange current funds to finance projects, either for
consumption or productive investments, and to pursue a return on their
financial assets. The financial system also includes sets of rules and
practices that borrowers and lenders use to decide which projects get
financed, who finances projects, and terms of financial deals.
7. The financial system is composed of many components
depending on the level. From a company’s perspective, its
financial system includes procedures that follow its
financial activities. It would include aspects such as
finances, accounting, revenue, expenses, wages, and
more. From a regional standpoint, the financial system, as
mentioned above, facilitates the exchange of funds
between borrowers and lenders. Players on a regional
level would include banks and other financial institutions
such as clearing houses. On a global scale, the financial
system includes the interactions between financial
institutions, investors, central banks, government
authorities, the World Bank, and more. There are several
financial system components to ensure a smooth
transition of funds between lenders, borrowers, and
investors.
Components of Financial System
8.
9. 1. Financial Institutions
Financial institutions act as intermediaries between the lender and the borrower when
providing financial services. These include: banks (central, retail, and commercial),
insurance companies, investment companies, and brokerage firms.
2. Financial Markets
These are places where the exchange of assets occurs with borrowers and lenders, such as
stocks, bonds, derivatives, and commodities. Financial markets help businesses to grow and
expand by allowing investors to contribute capital. Investors invest in company stock with
the expectation of it producing a return in the future. As the business makes a profit, it can
then pass on the surplus to the investors.
3. Financial Instruments
Tradable or financial instruments enable individuals to trade within the financial markets.
These can include cash, shares of stock (representing ownership), bonds, options, and
futures.
10. 4. Financial Services
Financial services provide investors a way of managing assets and offer
protection against systemic risk. These also ensure individuals have the
appropriate amount of capital in the most efficient investments to
promote growth. Banks, insurance companies, and investment services
would be considered financial services.
5. Currency (Money)
A currency is a form of payment to exchange products, services, and
investments and holds value to society.
12. Functions
A financial system allows its participants to prosper and reap the
benefits. It also helps in borrowing and lending when needed. In
simpler words, it will circulate the funds to different parts of an
economy. Here are some of the financial system functions:
• Payment System – An efficient payment system allows businesses
and merchants to collect money in exchange for their products or
services. Payments can be made with cash, checks, credit cards,
and even cryptocurrency in certain instances.
• Savings – Public savings allow individuals and businesses to invest
in a range of investments and see them grow over time. Borrowers
can use them to fund new projects and increase future cash flow,
and investors get a return on investment in return.
13. • Liquidity – The financial markets give investors the ability to reduce
the systemic risk by providing liquidity. It thus allows for easy buying
and selling of assets when needed.
• Risk Management – It protects investors from various financial risks
through insurances and other types of contracts.
• Government Policy – Governments attempt to stabilize or regulate
an economy by implementing specific policies to deal with inflation,
unemployment, and interest rates.
16. Significance of the Financial System
1. To attain economic development, financial systems are important
since they induce people to save by offering attractive interest rate.
These savings are then channelized by lending to various business
concerns which are involved in production and distribution.
2. It helps in monitor corporate performance.
3. It links savers and investors. This process is known as capital
formation.
4. It helps in lowering the transaction cost and increase returns which will
motivate people to save more.
5. It helps government in deciding monetary policy.
17. KEY TAKEAWAYS
A financial system is the set of global, regional, or
firm-specific institutions and
practices used to facilitate the exchange of funds.
Financial systems can be organized using market
principles, central planning, or
a hybrid of both.
Institutions within a financial system include
everything from banks to stock
exchanges and government treasuries.
18. Credits
Presenters of Group 1- In Sequence:
Mecayla Seroy
Nino Obedencio
Althea Rose V. Talipan
Belle Rucel P. Mejos
Jacqueline Sibay
Princess Rejean Yagon
