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The financial system is one of the industries in an economy. It is a particularly important industry that often has far-reaching effects on society and the economy. But if its espionage is snatched then it is like an industry, a group of firms that combine factors of production (land, labor, and capital) under the general direction of the management team and a product for sale in the financial market or produces group. Products.
How to develop a financial system concept?
The product of the financial industry is not tangible; rather it is an intangible service. The financial industry as a whole produces a wide range of services but all these services are directly or indirectly related to assets and liabilities, that is, people, organizations, institutions, companies, and government.
These are forms in which people accumulate a lot of their wealth. In simple words, we are referring to paper assets: shares, debentures, deposits, mortgages, and other securities. Thus, the financial system performs some essential functions for the economy, including the maintenance of the payment system (through which purchasing power is transferred from one participant to another i.e. buyer to seller), the collection and allocation of the savings of society, And various types of money reserves to suit the preferences of construction savers.
This brief description of the functions of the financial system gives us this information. The performance of these functions pre-suppresses the existence of financial assets, financial institutions (middlemen) and financial markets. The combination of these three creates a financial system.
In order to interpret the financial system and evaluate its performance, it needs an understanding of its functions in an economy. In fact, the financial system has the following functions:
Capital formation work
What is Capital Formation word: is the process of building the productive capacity of the economy into capital goods that enhances the future productive capacity. The process of capital formation involves three distinct but inter-dependent activities: savings, finance, and investment.
What is Allocation function: In the process of capital formation, the financial system must decide how to use capital. It is a waste of resources in deciding the choice of the poor to start economic projects. The better the quality of decisions used in allocation, the faster the economic progress.
What is Service function: An effective financial system provides economic segment services as providing opportunities to hold funds in a safe and convenient manner so that they pay a positive rate of return. The availability of these services contributes significantly to the financial system, if in an abstract way, to the satisfaction of consumers.
Finance is the blood flowing in the body of the financial system. It is a link between savings and investment by providing a mechanism through which savers’ savings (claims for resources) are pooled and put into the hands of those who are able to invest by financial intermediaries and Are interested. Financial intermediaries create assets that have assets of liquidity or convertibility in a fixed amount upon demand. Liquidity refers to cash, money, and cash to cash.
Liquidity is the most important aspect of financial intermediation, while essentially holding assets to themselves, intermediaries are able to create liquid assets held by the ultimate savers in the economy. Illiquid assets refer to credit creation. In the Indian economy, the Central Bank (RBI in India) deals with cash production, where financial institutions make credit.
The flow of finance in the system is between two segments, such as the surplus unit and the depletion unit, in Chart I. As shown in the surplus unit, if the current consumption exceeds the income then there may be a public surplus unit or private surplus unit. The former savings are made through normal budgetary channels and maintain the earnings of public sector enterprises.
The latter mentions household savings and non-corporate sector savings but dominates the corporate sector savings volume. The savings of the corporate sector mainly depend on the profitability and distribution policy of the enterprise. On the other hand, the size of household savings is the act of saving people’s ability, capacity and willingness, which in turn depends on many factors such as psychological, social, and economic. At the other end of the fund’s flow, we have a deficit unit that seeks funds for investment or consumption purposes.
Their investment and sometimes consumption patterns are the result of their strategy regarding future earnings. This, in turn, is a function of the existing stock of capital, the state of industry and economy, government policies, the possibility of new investment opportunities. Government and business sectors are major borrowers whose investment usually surpasses their savings.
The role of the financial system is to promote savings and their transformation in the economy through financial assets which are more productive than physical assets. Flows from a less productive to a more productive purpose, from unproductive / less productive activities to productive activities, and from passive balances to active balances in an efficient financial system. Thus, the ultimate objective is to add value through the flow of money in the system. This means that the operation of the financial system is important for the speed and structure of the development of the economy.
However, we should not forget that some transfers for domestic consumers are for obtaining consumer goods and services and giving them to the government for mixed consumption, including mass consumption. This system plays an important role in accelerating the rate of economic growth which leads to improvement in general living standards and higher social welfare.
There is another way of looking at the financial system. The financial system makes it easier to do business. People trade because they differ in what they want and want. Business
There can be trade in borrowings (giving up purchasing power now in exchange for future purchasing power), trading in risk (reducing the economic burden of risk through insurance and further transactions), and trade in goods. Everyone benefits from trade. Thus, the financial system has relationships with all and is interacting with each system, consciously, or unconsciously.
The financial system makes trading easier through its own techniques of payment (whether through credit or cash), lending techniques (through financial markets or direct lending) and risk techniques (contracts in insurance policies or futures markets). Technology basically refers to the instruments of institutions, markets, and financial systems.
The financial system is changing very fast. Changes are caused by two types of innovations. The first category of innovation facilitates meeting existing needs in new ways. An example is leasing, which enables the user to use it without purchasing the property. The second category of innovation uses existing technology to meet new needs. Securing financial assets is an example here. Extended funds are tied in the form of loans. These financial assets are secured to use such tied-up funds and liquid resources are mobilized to provide more lending.
Another dimension of the financial system in an economy is government. It is the government that follows the rules of the game for the financial system i.e. it dictates how markets operate, which permissible instruments are, and what are the barriers to operating financial intermediaries. There are two aspects of government intervention: one is ensuring efficiency in the system and the other is providing stability and confidence. A financial system is said to be efficient when the sum of all profits from risk, payment, and trade at risk are as large as they can be. An illiquid financial system requires a high degree of intervention and vice versa.
The government also interferes with the financial system to provide for its absence which breaks the system and can be disastrous. There should be a limit to government intervention. Excessive interference Mars innovations. Innovation in the financial system is the result of efforts to break out of restrictive rules. It is necessary to appreciate the role of the financial system or sector in an Economy. As the economy grows, the setup and operation of this system changes. The major role discussed earlier has been resource mobilization. An efficient financial system facilitates raising large amounts through small contributions from a large number of investors. A firm can raise Rs. Subscribed by investors with a minimum contribution of Rs 100 crore through the issue of 10 crore shares.
Issue of minimum 200 shares of 2000 rupees. 10 each or through a mutual fund or financial institution. Large amounts can be raised from small investors. Instruments issued for fundraising may have maturity patterns that are different to what the investor needs. In such a situation, secondary markets emerge as a special part of the financial system. To reduce the risk associated with the investment, the financial system offers investors a wide variety of investment opportunities to diversify their investments, hence the risk.
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