Elements and Functions of Financial System Essay

The ‘financial system’ is a term used in finance to describe the system that allows money to go between savers and borrowers. The main elements of the system are generally said to be: Financial institutions are organizations that offer financial services. There are three main types of financial institution: Banks (including credit unions, building societies etc. ), insurance/pension companies, and investment funding companies/brokers. Financial markets are what they sound like – the system that allows people to buy and sell goods and services to each other.

A financial instrument is an asset belonging to a person or company. This can include cash, bonds, or other assets; such as property or items of value. Financial services are offered by financial institutions. These include such things as banking, insurance policies, loans and mortgages, as well as pensions and underwriting. Financial practice is a sort of guideline around how the financial institutions should operate their services. The term ‘GxP’ relates to a set of guidelines called ‘Good x Practice’ – in this case, the x is replaced by ‘Financial’.

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Financial transactions are the actual exchange of assets for goods or services – paying for a new car, or a mortgage, for instance. These six elements work together to create a healthy financial system, which in turn builds a strong economy. No one element is more important than the others – they simply represent different mechanisms within the system that allow it to function. Functions performed by a financial system are : * Saving function: Public saving find their way into the hands of those in production through the financial system. Financial claims are issued in the money and capital markets which promise future income flows.

The funds with the producers result in production of goods and services thereby increasing society living standards. * Liquidity function: The financial markets provide the investor with the opportunity to liquidate investments like stocks bonds debentures whenever they need the fund. * Payment function: The financial system offers a very convenient mode for payment of goods and services. Cheque system, credit card system etc are the easiest methods of payments. The cost and time of transactions are drastically reduced. * Risk function: The financial markets provide protection against life, health and income risks.

These are accomplished through the sale of life and health insurance and property insurance policies. The financial markets provide immense opportunities for the investor to hedge himself against or reduce the possible risks involved in various investments. * Policy function: The government intervenes in the financial system to influence macroeconomic variables like interest rates or inflation so if country needs more money government would cut rate of interest through various financial instruments and if inflation is high and too much money is there in the system then government would increase rate of interest.

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