Financial system

Financial system is the system that allows the exchange of funds between lenders, investors, and borrowers.
A modern financial system may include
  •          Financial institution
  •          Financial market
  •          Financial instrument
  •          Financial services
Then we looked out what are the function of financial system
  •          Pooling of funds
  •          Capital formation
  •          Facilitates payment
  •          Short and long term need
  •          Risk function
  •          Better decisions
  •          Finance government need
  •          Economic development

Financial intermediation

The most important thing in financial system is financial intermediation, Then we looked out what is mean by Financial Intermediation,
Financial intermediation is the move funds from parties with excess capital to parties need funds. The process performed by banks of taking in funds from a depositor and then lending them out to borrower.

Financial intermediaries perform two major economic function in almost all economies. First they create money economies today, a central bank or monetary authority issues currency and depository institutions supply deposit money.
A financial intermediary is an entity that work as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, saving bank, credit unions, mutual funds and pension funds.



The hypothesis of financial intermediaries adopted by mainstream economics offers the following
three major functions.
1.      Creditors provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes, education auto, credit cards, small businesses, personal needs.
2.      Risk transformation- Converting risky investments in to relatively risk free ones.(Lending to multiple borrowers to reduce the risk.
3.      Convenience denomination- Matching small deposits with large loans and large deposits with small loans.



There are two essential advantages from using financial intermediaries.

1. Cost advantages
The cost advantage of using financial intermediaries include:

  • Reconciling conflicting preferences of lenders and borrowers.
  • Risk aversion intermediaries help speed out and decrease the risk.
  • Economies of scale - using financial intermediaries reduce the cost of lending and borrowings.
  • Economies of scope - intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services.

2. Market failure protection - The conflicting needs lenders and borrowers are reconciled, preventing market failure.





Comments

  1. ThiliniMarch 18, 2019 at 8:18 AM

    This comment has been removed by the author.

    ReplyDelete
  2. ThiliniMarch 18, 2019 at 8:30 AM

    Visitors who serching financial information is expected these kind of information regularly, thnks for sharing

    ReplyDelete
  3. DilumMMarch 18, 2019 at 8:37 AM

    Thanks for sharing such important theory on financial systems..

    ReplyDelete
  4. piyumiMarch 18, 2019 at 8:41 AM

    Nice blog...such an valuable information.. thank you for sharing such information...

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  5. Anujaya Chathuranga (BM/2015/090)March 18, 2019 at 8:42 AM

    Great beginning... thanks for sharing.

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  6. Bankingjournal2019.blogspot.comMarch 18, 2019 at 8:49 AM

    Thanks

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  7. Sandeepani M.A.U.March 18, 2019 at 8:50 AM

    Nice job n keep it up👍.Thank u for sharing 😃

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  8. UnknownMarch 18, 2019 at 9:02 AM

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  9. Innovation Of Banking March 18, 2019 at 9:38 AM

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  10. Innovation Of Banking March 18, 2019 at 9:42 AM

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  11. Navod (Banking Sense)March 18, 2019 at 6:18 PM

    Very useful

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  12. lakshiMarch 19, 2019 at 1:19 AM

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  13. SahanMarch 20, 2019 at 9:02 AM

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  14. D M Knowledge HubMarch 22, 2019 at 7:06 AM

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  15. BM/2015/304March 24, 2019 at 1:12 AM

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