FINANCIAL INSTITUTIONS AND CAPITAL MARKETS
Introduction
The economic development of any country depends, upon the existence of a well organised financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in
turn promote the well being and standard of living, of the people of a country.
Thus, the ‘financial system’ is a broader term which brings under its fold the financial markets and the financial institutions which support the system. The major assets traded in the financial system are money and monetary assets.
The responsibility of the financial system is to mobilise the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning financial system facilitates the free flow of funds to more
productive activities and promotes investment. Thus, the financial system provides the intermediation between savers and, investors and promotes faster economic development.
1. Financial System
a) Finance
Finance is a branch of economics concerned with resource allocation as well as management, acquisition and investment.
b) System
A group of interacting, interrelated, or interdependent elements forming a complex whole.
c) Financial system
A financial system comprises financial institutions, financial markets, financial instruments, rules, conventions, and norms that facilitate the flow of funds and other financial services within and outside the national economy. It
can be described as a whole system of all institutions, individuals, markets and regulatory authorities that exist and interact in a given economy.
The institutions, government and individuals form the participants in various markets; money markets (including foreign exchange) and capital markets (including security) markets. The participant buy (borrow) and sell (lend)
money to different parties at a price (interest or dividend) within the market, which is determined by the forces of demand and supply.
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 inter-temporal smoothing of
consumption by households and expenditures by firms; and they enable households and firms to share risks. Since these functions take place in a market oriented environment, there is a need for an independent party to enforce rules and contracts and this is the regulator. The main regulatory
authorities of the financial institutions that constitute the financial system of a given economy are the Central Bank and Capital Market Authority.
