Financial System

  What is a Financial System?

 

A financial system is a set of institution where the institutions facilitate the transfer of funds between borrowers, lenders, and investors. The institutions involved in the financial system are banks, insurance companies, stock exchange, microfinance, etc... The players such as borrowers, lenders and investors exchange funds to finance their short term projects or long term projects to peruse return on their financial assets or to finance their personal consumption. The goal of the financial system is to efficiently distribute economic resources to promote economic growth and generate a return on investment (ROI) for market participants through set of rules and regulations. The sets of rules and regulations that the financial system contains are aimed to benefit the players in:

• Providing a mechanism to execute payment (through banks)
• Providing the payers a way of earning interest in the form of time-value (through investment institution) 
• Providing the players a protections against financial risk (through insurance companies)
• Collecting and distributing financial information (through credit agencies)
• Governing the regulations to maintain stability (by central bank)
• Providing an avenue to maintain liquidity and converting investments into cash (through banks and other financial institutions)    

The Components of Financial System 

In order to insure the smooth financial transaction between investors, lenders and borrowers there are Five components in the financial system

Financial Institutions

Financial institutions act as intermediaries between the lender and the borrower when providing financial services. The financial institutions are such as Banks, Insurance companies, Microfinance and Brokerage firms.

Financial Markets

Financial Market is a place where the financial assets are exchanged between lenders and borrowers such as bonds and stocks.

It gives businesses the chance to grow and expand their business by allowing investors to contribute capital in their company as well as it helps the investors to earn profit from the profitable companies that they have invested in. 

Financial Instruments 

Financial instruments are assets that can be traded. This enables the individuals to trade in the financial market. Examples of financial instruments are cash, shares of stock, commercial papers and bonds.

Financial Services 

Financial service provides the investors a way to manage their assets and offer protection against financial risk. Banks and Insurance companies provides financial services in the financial market. 

Currency

A currency is a form of payment to exchange products, services, and investments and holds value to society.

Coming up next is about Bhutanese Financial System