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MFI Ch 1b(Financial System & Fin Inst)

MFI Ch 1b(Financial System & Fin Inst)

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05/09/2014

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8/29/20071
Financial System & Financial
Institutions
A brief
Introduction
What is a Financial System?
\u2022It is an orderly mechanism and structure available in an

economy to mobilise the monetary resources or capital from various surplus sectors of the economy and allocating the same into various deficient sectors.

\u2022The group of different entities that are engaged in the

task of garnering the monetary resources into a number of needy avenues in the economy will constitute the financial system.

What are Financial Institutions?
An institution (public or private) that collects funds (from the public or
other institutions) and invests them in financial assets.
They are organisations which facilitate mobilisation of monetary
resources.
8/29/20072
Evolution of Financial System
\u2022The path of growth of the financial system in any
developing economy can grossly be classified into
three different phases:
\u2022Active State Intervention: It is mainly with a view to build up

institutional infrastructure so that the economy will be in a position to catch up with the developed countries. This phase is marked with a fast growth of financial systems creating a number of pitfalls and aberrations.

\u2022Partial Liberalisation: The complications in the system
becomes a gross problem to handle, so simplification and
rationalisation of the system becomes the main focus.
\u2022Total Liberalisation: Where maximum autonomy is provided
for to the functionaries in the system so that they can
emerge as global players.
Role of Financial Institutions
\u2022The growth and development of an economy is a reflection of
the growth and development of its financial system.
\u2022With effective mobilisation and productive deployment of funds
the economy can ensure a faster growth, because this efficacy
will reduce transaction cost and increase productivity of capital.
\u2022Thus more efficient a financial system the stronger is the
economy.
\u2022The growth and development of an economy is a reflection of
the growth and development of its financial system.
\u2022With effective mobilisation and productive deployment of funds
the economy can ensure a faster growth, because this efficacy
will reduce transaction cost and increase productivity of capital.
\u2022Thus more efficient a financial system the stronger is the
economy.
SAVINGS
INVESTMENT
CONSUMPTION
Fin Institutions
Fin Assets
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Role of Financial Institutions

\u2022Role as a Financial Intermediary
\u2022Role as a catalytic agent
\u2022Role as a creator of money
\u2022Role as a promoter
\u2022Role as a counselor

\u2022Role as a financial intermediary
\u2022Role as a catalytic agent
\u2022Role as a creator of money
\u2022Role as a promoter
\u2022Role as a counselor

1) Role as a Financial Intermediary
\u2022FIs provide the means and mechanism of transferring command

over resources from those who have an excess of income over expenditure to those who can make use of the same with a view to adding to the volume of productive capital.

\u2022They pool the savings of myriads of people with typical
characteristics of safety, liquidity and profitability (return.)\u2013
[Diversification of Risk and expert investment knowledge]
\u2022Besides acting as conduits of aggregation and then disaggregation
of savings it also helps in a balanced allocation of funds among
different industries and different sectors.
Intermediates and acts as a link between the two
segments of Investors and Spenders

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