MODULE 1

FINANCIAL SYSTEM IN INDIA

1.1 Meaning of financial system

A financial system is a network of institutions, markets, and intermediaries that facilitate the
flow of funds from savers and investors to borrowers and spenders within an economy. It
plays a vital role in the allocation of resources, channeling funds from those with surplus
money to those in need of capital for various purposes, such as investments, consumption,
or managing financial risks. The financial system encompasses various components,
including banks, financial markets, insurance companies, investment firms, and regulatory
bodies, all working together to ensure the efficient functioning of the economy's financial
activities.

1.2 Financial Concepts

Financial concepts are fundamental ideas and principles related to the management
and analysis of money and resources. These concepts are crucial for making
informed financial decisions, both on an individual and organizational level. Some
key financial concepts include:

1. Time Value of Money (TVM): TVM recognizes that a sum of money today is worth
more than the same amount in the future, due to the potential for investment or
earning interest.

2. Compound Interest: This concept involves earning interest on both the initial
investment and any previously earned interest. It's a crucial element of long-term
savings and investments.

3. Risk and Return:In the world of finance, there is a direct relationship between risk
and return. Typically, higher-risk investments have the potential for higher returns,
but they also carry a greater chance of loss.

4. Diversification:Diversifying your investments by spreading them across different

assets or asset classes can help manage risk. The idea is not to put all your eggs in
one basket.

5. Budgeting: Creating and following a budget helps individuals and organizations

manage their income and expenses, ensuring financial stability and achieving
financial goals.

6. Inflation: Inflation is the increase in the general price level of goods and services
over time. It erodes the purchasing power of money, making it essential to consider
when planning for the future.
7. Asset Allocation: Asset allocation involves dividing investments among different
asset classes, such as stocks, bonds, and real estate, to balance risk and return
according to an individual's or organization's financial goals.

8. Liquidity: Liquidity refers to how quickly an asset can be converted into cash
without significantly impacting its value. Cash is the most liquid asset, while real
estate is less liquid.

9. Credit Score: A credit score is a numerical representation of a person's or entity's

creditworthiness. It impacts borrowing capabilities and the terms of loans or credit.

10. Dividend and Interest: Dividends are payments to shareholders from company
profits, typically associated with stocks, while interest is earned on loans and
investments, often associated with bonds or savings accounts.

11. Return on Investment (ROI):ROI is a measure of the profitability of an

investment, calculated as the gain or loss relative to the initial investment amount.

12. Net Worth:Net worth is the difference between an individual's or organization's

total assets and total liabilities, reflecting their overall financial position.

13. Financial Statements: Financial statements like the balance sheet, income
statement, and cash flow statement provide a snapshot of an organization's financial
performance and position.

14. Taxation:Understanding the tax implications of financial decisions, investments,

and income is essential for minimizing tax liabilities and maximizing after-tax returns.

15. Financial Risk Management: This involves strategies and tools used to assess,
mitigate, and manage financial risks, including market risk, credit risk, and
operational risk.

These financial concepts serve as the foundation for making informed financial
decisions, whether it's personal finance, investing, or managing the finances of a
business or organization.

1.3 Constituents/Structure of financial system

A financial system functions as an intermediary between savers and investors. It

facilitates the flow of funds from the areas of surplus to the areas of deficit. It is
concerned about the money, credit and finance. A financial system may be defined
as a set of institutions, instruments and markets which promotes savings and
channels them to their most efficient use. Itconsists of individuals (savers),
intermediaries, markets and users of savings (investors).
Financial Institutions
Financial institutions are organizations that provide financial services to individuals,
businesses, and governments. These institutions play a crucial role in the functioning
of the financial system and the broader economy
• They are business organizations dealing in financial resources.
• They collect resources by accepting deposits from individuals and
Institutions and lend them to trade, industry and others.
• This means financial institutions mobilize the savings of savers and
give credit or finance to the investors.

On the basis of the nature of activities, financial institutions may be classified as:

1.Banking financial institutions

Banking institutions mobilize the savings of the people.They provide a mechanism
for the smooth exchange of goods and
services.They extend credit while lending money.They not only supply credit but also
create credit.Following are the main functions of banking financial institutions:

1. Accepting Deposits:Banks provide a safe place for individuals and businesses to

deposit their money in various types of accounts.
2. Providing Loans and Credit:Banks lend money to individuals and businesses,
helping them make major purchases and finance their operations.
3.Payment Services: Banks offer services like checks, electronic transfers,
debit/credit cards, and online banking for efficient fund transfers and payments.
4. Currency Exchange: Banks facilitate currency exchange for travelers and
businesses involved in foreign trade.
5. Investment Services:Some banks offer investment and asset management
services, including mutual funds and securities trading.
6. Wealth Management: Banks assist high-net-worth clients with financial planning,
investment management, and estate planning.
7. Safe Deposit Boxes: Banks provide secure storage for valuable items and
documents.
8. Overdraft Facilities: Customers can withdraw more money than they have in their
accounts, often with interest or fees.
9. Small Business Services: Banks offer specialized products and services for small
businesses.
10. Treasury and Cash Management: Banks help businesses manage cash flows
and optimize liquidity.
11.Risk Management:Banks provide insurance and hedging services to protect
against financial risks.
12. Government Banking:Banks act as financial agents for governments and central
banks, managing accounts, payments, and more.
13. Regulatory Compliance:Banks adhere to financial regulations and anti-money
laundering requirements.
14. Consumer and Business Advisory Services:Banks offer financial advice,
retirement planning, and financial literacy programs.
15. ATMs and Branch Network:Banks have extensive ATM and branch networks for
convenient access to banking services.

2. Non-banking financial institutions

The non-banking financial institutions also mobilize financial resources directly or
indirectly from the people. They lend funds but do not create credit. Companies like
LIC, GIC,UTI, Development Financial Institutions.
Non-banking financial institutions can be categorized as investment companies,
housing companies, leasing companies, hire purchase companies, specialized
financial institutions
Non-banking financial institutions (NBFIs) perform various functions:

1.Providing Credit:NBFIs offer loans and credit to individuals, businesses, and

governments.
2. Asset Management:They manage investment portfolios, including mutual funds
and ETFs.
3. Financial Advisory:Some NBFIs provide financial planning and wealth
management services.
4. Insurance: NBFIs offer life, health, and property insurance.
5. Housing Finance:They provide mortgage loans for home purchases.
6. Leasing and Hire Purchase:NBFIs allow asset acquisition through leases and
installment payments.
7. Microfinance:They offer small loans to underserved populations.
8.. Pension Fund Management:Managing pension funds for individuals and
organizations.
9.Foreign Exchange and Remittances:Facilitating currency exchange and cross-
border transfers.
10. Regulatory Compliance:Adhering to financial regulations and anti-money
laundering requirements.
11. Electronic Payment Services: Providing payment services like prepaid cards and
mobile wallets.

Financial Markets
• Financial markets are the centres or arrangements that provide facilities for buying
and selling of financial claims and services.they create financial assets.
• Financial markets exist wherever financial transactions take place.
• Financial transactions include issue of equity stock by a company, purchase of
bonds in the secondary market, deposit of money in a bank account, transfer of
funds from a current account to a savings account etc.

Classification on the basis of the type of financial claim:

1.Debt market: The debt market is the financial market for fixed claims like debt
instruments
2.Equity Market: The equity market is the financial market for residual claims i.e.,
equity instruments

Classification on the basis of maturity of claims:

1. Money markets
• A market where short term funds are borrowed and lend is called money market.
• It deals in short term monetary assets with a maturity period of one year or less.
2. Capital Markets
• Capital market is the market for long term funds.
• This market deals in the long term claims,securities and stocks with a maturity
period of more than one year

Classification on the basis of seasoning of claim

1. Primary markets
• Primary markets are those markets which deal in the new securities.
• Therefore, they are also known as new issue markets.
• These are markets where securities are issued for the first time.
2. Secondary market
• Secondary markets are those markets which deal in existing securities.
• Existing securities are those securities that have already been issued and are
already outstanding.
• Secondary market consists of stock exchanges.

Classification on the basis of structure

1. Organized markets
• These are financial markets in which financial transactions take place within the
well established exchanges or in the systematic and orderly structure.
2. Unorganized markets.
• These are financial markets in which financial transactions take place outside the
well established exchange or without systematic and orderly structure or
arrangements.

Financial Instruments
Instruments or documents having monetary value are called financial instruments.
The instruments used for raising resources for corporate activities through the capital
market are known as ‘capital market
instruments’This is classified into ownership securities and creditors hip
securities.Ownership securities can be of equity shares and preference shares
where as creditorship securities are of bonds and debentures.
The instruments used for raising and supplying money in short period not
exceeding one year are called ‘money market instruments’.
Example: treasury bills, gilt-edge securities, state government and public sector
instruments, commercial paper, certificate of deposit,commercial bills etc.

Financial Services
• The new sector in the matured financial system is known as financial services
sector. Its objective is to intermediate and facilitate financial transactions of
individuals and institutional investors.The financial institutions and financial markets
help the financial system
through financial instruments and financial services.The financial services include all
activities connected with the transformation of savings into investment.There are 2
types of financial services

(A)Fund-based services refer to financial services that involve the provision of

actual funds or capital to individuals, businesses, or other entities. These services
are characterized by the direct transfer of money or capital from the financial
institution to the recipient. Fund-based services are a fundamental component of the
financial sector and play a vital role in supporting economic activities. Here are some
common examples of fund-based services:

1. Loans:Financial institutions, such as banks, provide various types of loans to

individuals and businesses. These loans may include personal loans, home loans,
auto loans, business loans, and more. Borrowers receive the requested funds, which
they must repay with interest over a specified period.

2. Credit Lines:Banks and other lenders offer credit lines, including credit cards and
revolving credit lines, that allow borrowers to access a predetermined amount of
funds on an as-needed basis. Borrowers can withdraw and repay the borrowed
funds as long as they stay within the credit limit.
3. Overdraft Facilities:Overdraft services allow bank account holders to withdraw
more money than is available in their account, up to a predefined limit. Overdrafts
are typically subject to interest charges and must be repaid promptly.

4. Working Capital Loans: These loans are designed to provide businesses with the
necessary working capital to fund day-to-day operations, such as inventory
purchase, payroll, and other operational expenses.

5. Trade Finance: Financial institutions offer trade finance services to facilitate

international trade. This includes letters of credit, export financing, import financing,
and other instruments that help businesses manage the financial aspects of trade
transactions.

6. Mortgages:Mortgage loans are used to finance the purchase of real estate

properties, such as homes and commercial properties. Borrowers receive funds to
acquire the property and repay the loan over an extended period, typically with
interest.

7. Project Financing:Project finance involves providing funds for specific projects,

such as infrastructure development, energy projects, and large-scale construction.
These funds are often structured as non-recourse loans, where the project's cash
flows secure the debt.

8. Debentures and Bonds:Corporations and governments issue debentures and

bonds to raise capital from investors. Investors purchase these debt securities and
receive interest payments until the maturity date, at which point the principal is
repaid.

9. Term Loans:Term loans are medium to long-term loans used by businesses for
various purposes, including expansion, equipment purchase, and capital investment.
Borrowers receive a lump sum amount and repay it in regular installments.

10. Leasing and Hire Purchase:These financing methods allow individuals and
businesses to acquire assets like vehicles and equipment without making an upfront
purchase. Funds are provided, and the lessee or buyer makes regular payments
over the lease or hire purchase term.

11. Microfinance and Small Business Loans: Microfinance institutions offer small
loans to individuals, particularly in underserved and low-income communities. Small
business loans are also available to support the growth and development of small
enterprises.
12. Foreign Exchange Transactions: Financial institutions provide foreign exchange
services for currency conversion and international payments, supporting cross-
border trade and investment.

Fund-based services are essential for individuals and businesses to meet their
financing needs, whether for personal expenses, business expansion, or capital
investment. These services are offered by a variety of financial institutions, including
banks, credit unions, non-banking financial institutions, and online lenders, among
others.

(B)Fee based services are services provided by financial institutions,

professionals, or service providers in exchange for fees or charges, rather than
relying on interest income or commissions from financial products. These services
are distinct from fund-based services, which involve the direct transfer of capital.
Fee-based services often include advice, consultation, and other value-added
offerings. Here are some common examples of fee-based financial services:

1. Financial Planning:Financial planners or advisory firms offer comprehensive

financial planning services for individuals and businesses. Clients pay fees for
assessments of their financial situation, goals, and the development of a customized
financial plan.

2. Investment Advisory:Registered investment advisors (RIAs) and asset

management firms provide investment advice and portfolio management services.
Clients pay advisory fees based on the assets under management (AUM).

3. Estate Planning: Estate planning attorneys and advisors assist individuals and
families in creating and managing their estate plans. These services include wills,
trusts, and estate administration.

4. Tax Advisory:Tax professionals, including certified public accountants (CPAs) and

tax consultants, provide tax planning and preparation services. Clients pay fees for
tax advisory, return filing, and compliance services.

5. Retirement Planning:Retirement planners help individuals prepare for retirement

by assessing their financial readiness, offering strategies for savings, and advising
on retirement account management.

6. Legal Services: Law firms offer legal services related to financial matters, such as
contract review, business incorporation, intellectual property protection, and dispute
resolution. Clients pay legal fees for these services.

7. Corporate Finance Advisory:Investment banks and financial advisors assist

businesses with mergers and acquisitions, fundraising, initial public offerings (IPOs),
and other corporate finance transactions. Fees are typically based on the transaction
size or complexity.

8. Real Estate Advisory:Real estate professionals, such as realtors and property

consultants, offer services related to property acquisition, sales, leasing, and
investment. Fees are paid for these services.

9. Wealth Management:Wealth management firms provide comprehensive financial

services, including investment management, estate planning, and tax advice, to
high-net-worth individuals. Clients pay fees for the full suite of wealth management
services.

10. Financial Education and Seminars: Organizations and professionals offer

financial education seminars, workshops, and courses. Participants pay fees to
attend and gain knowledge about personal finance, investing, or specific financial
topics.

11. Notary Services:Notaries public charge fees for notarizing documents, witnessing
signatures, and providing verification services.

12. Credit Counseling: Credit counseling agencies provide debt management and
financial counseling services to individuals facing financial challenges. Clients pay
fees for budgeting, debt repayment plans, and credit counseling.

13. Consulting Services:Financial consultants and experts offer specialized

consulting services, such as risk management, financial modeling, and business
strategy. Fees are charged based on the scope and complexity of the consulting
project.

14. Forensic Accounting: Forensic accountants offer investigative accounting

services, often related to fraud, embezzlement, or financial disputes. Clients pay fees
for forensic accounting investigations.

15. Investor Relations Services: Investor relations firms assist publicly traded
companies in managing communications with shareholders and the investment
community. They charge fees for these services.

Fee-based services are designed to provide clients with expert guidance, support,
and solutions for their financial and legal needs. The fees for these services can be
structured as hourly rates, flat fees, project-based fees, or AUM-based fees,
depending on the nature of the service and the agreement between the service
provider and the client.

1.4 Role/Functions of financial system

The financial system plays a pivotal role in any economy, facilitating the efficient
allocation of resources and contributing to economic growth and stability. Its primary
functions and roles include:

1. Intermediation:The financial system acts as an intermediary between savers and

borrowers, channeling funds from those with surplus money (savers) to those in
need of capital (borrowers). This intermediation helps to optimize the allocation of
financial resources within the economy.

2. Resource Allocation:It allocates resources to their most productive uses. This

means directing capital to businesses and projects that have the potential to
generate economic growth and create jobs.

3. Risk Management:The financial system provides various tools and instruments to

manage and mitigate financial risks. This includes insurance, derivatives, and other
risk management products.

4. Monetary Policy Transmission: Central banks, which are part of the financial
system, use monetary policy tools to control the money supply and interest rates.
They influence economic activity by adjusting these variables to achieve stability and
growth.

5. Payment System: Financial systems facilitate the smooth flow of payments within
an economy, allowing individuals and businesses to transact efficiently. This includes
payment methods like checks, credit cards, electronic funds transfers, and digital
wallets.

6. Capital Formation: The financial system helps in the formation of capital by

collecting savings from individuals and institutions and making these savings
available for investments. This process supports economic development.

7. Financial Market Functions:Financial markets provide a platform for buying and

selling financial assets, such as stocks, bonds, and commodities, allowing investors
to diversify their portfolios and manage risk.

8. Innovation and Economic Development: The financial system encourages

innovation by funding research, development, and entrepreneurship. It plays a
crucial role in fostering economic growth and technological advancements.

9. Liquidity Provision:The financial system ensures that there is liquidity in the

market, making it easier for investors to buy and sell assets. Liquidity is essential for
market efficiency.
10. Crisis Management: In times of financial crises, the financial system provides
mechanisms to address and mitigate the impact of these crises. Central banks, for
example, can provide liquidity support to stabilize markets.

11. Consumer and Business Services:Financial institutions offer a range of services

to consumers and businesses, including savings accounts, loans, and financial
advisory services.

12. Regulatory Framework:The financial system operates within a regulatory

framework to ensure that it operates ethically and in a manner that is safe and
sound. Regulatory authorities help protect consumers and maintain the stability of
the financial system.

13. Global Connectivity: Financial systems are increasingly interconnected on a

global scale, facilitating cross-border investment and trade, but also necessitating
global coordination and regulation.

In summary, the financial system is the backbone of an economy, serving as a

conduit for funds, a mechanism for risk management, and a catalyst for economic
growth and development. Its proper functioning is crucial for the stability and
prosperity of an economy.

1.5 Financial sector reforms

Financial sector reforms refer to a series of actions and changes implemented by
governments and regulatory authorities to improve the efficiency, stability, and
transparency of a country's financial system. These reforms are often undertaken to
address weaknesses in the financial sector, promote economic growth, enhance
consumer protection, and ensure the sector's resilience in the face of economic
challenges. Key aspects of financial sector reforms may include:

1.Banking Sector Reforms:

- Bank Recapitalization:Injecting capital into banks to strengthen their financial
positions and improve their ability to withstand economic downturns.
- Bank Consolidation: Merging smaller or weaker banks to create larger and more
stable financial institutions.
- Strengthening Regulatory Frameworks:Enhancing banking regulations, such as
capital adequacy requirements, to ensure that banks are well-capitalized and can
manage risks effectively.

2. Financial Inclusion: Expanding access to financial services for underserved and

unbanked populations, such as through the promotion of microfinance institutions
and mobile banking.

3. Market Reforms:
 - Stock Market Reforms: Implementing measures to enhance the efficiency and
transparency of stock markets, including the introduction of electronic trading
systems.
- Bond Market Development: Expanding and diversifying the bond market to
provide more options for raising capital.
- Derivatives Market Regulation:Strengthening the regulation of derivative products
to reduce systemic risk and promote transparency.

4. Insurance Sector Reforms:Enhancing the regulatory framework for the insurance

industry to protect policyholders and ensure the solvency of insurance companies.

5. Pension Reforms:Improving pension systems to provide better retirement security

for citizens and reduce the burden on government finances.

6. Financial Stability Measures:

- Systemic Risk Oversight: Establishing agencies or committees responsible for
monitoring and addressing systemic risks in the financial system.
- Resolution Mechanisms: Developing frameworks for the orderly resolution of
failing financial institutions to prevent financial crises.

7. Consumer Protection:Strengthening regulations to safeguard the rights and

interests of financial consumers and improve transparency in financial products and
services.

8. Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) Measures:

Implementing AML and CTF regulations to combat financial crimes and enhance the
integrity of the financial system.

9. Digital Financial Services: Promoting the adoption of digital financial services,

including mobile banking and electronic payments, to increase financial inclusion and
improve efficiency.

10. International Regulatory Standards: Adhering to international financial standards

and agreements, such as Basel III for banking regulations and International Financial
Reporting Standards (IFRS) for accounting.

11. Central Bank Independence:Ensuring the independence of central banks in

conducting monetary policy and maintaining price stability.

Financial sector reforms are essential for modernizing and strengthening the
financial system, attracting investment, and promoting economic growth. However,
they also require careful planning and execution to minimize disruptions and ensure
that the reforms achieve their intended goals while maintaining the stability and
integrity of the financial sector.
1.6 Financial system and Economic development

The financial system plays a crucial role in the economic development of a country.
Its impact on economic growth and development is multifaceted, as it serves as the
backbone of an economy, facilitating the efficient allocation of resources, risk
management, and capital formation. Here are some ways in which the financial
system and economic development are interconnected:

1. Resource Mobilization:The financial system channels savings from households,

businesses, and other economic agents into productive investments. This
mobilization of funds provides the necessary capital for businesses to expand, invest
in new technologies, and create jobs, which, in turn, spurs economic growth.

2. Capital Formation:A well-functioning financial system enables the efficient

formation of capital. It helps in the accumulation of savings, which can be used for
productive investments in infrastructure, technology, education, and other areas
critical for economic development.

3. Risk Diversification:Financial markets offer a platform for diversifying risks. By

investing in a range of financial instruments, individuals and institutions can spread
their risk, making it more attractive for them to invest in innovative and potentially
higher-return projects, which can contribute to economic development.

4. Efficient Resource Allocation:The financial system allocates resources to their

most productive uses. Businesses with good ideas and growth potential can access
capital through financial markets and institutions, allowing them to expand and
contribute to economic development.

5. Entrepreneurship and Innovation: Access to finance is vital for entrepreneurs and

innovators to turn their ideas into viable businesses. The financial system provides
the necessary funding and resources to support entrepreneurship and drive
innovation, both of which are key drivers of economic development.

6. Infrastructure Development:Economic development often relies on the

development of critical infrastructure, such as transportation, energy, and
communication networks. The financial system helps finance large-scale
infrastructure projects that are essential for long-term growth.

7. Access to Financial Services:Expanding access to financial services, such as

banking, credit, and insurance, can significantly improve the economic well-being of
individuals and businesses. Financial inclusion contributes to poverty reduction and
supports broader economic development.
8. Monetary Policy Implementation:Central banks, as a part of the financial system,
implement monetary policies to maintain price stability and support economic growth.
Effective monetary policies can help control inflation and create a conducive
environment for investment and economic development.

9. Global Integration:A well-developed financial system allows a country to integrate

into the global economy. Access to international financial markets and foreign
investment can stimulate economic growth and provide new opportunities for
businesses.

10. Financial Stability:A stable financial system is essential for economic

development. Financial crises and systemic failures can disrupt economic growth,
making regulatory and supervisory mechanisms crucial for long-term development.

In conclusion, the financial system plays a critical role in supporting economic

development by mobilizing and allocating resources, facilitating risk management,
and promoting entrepreneurship and innovation. A well-functioning financial system
is not only a sign of a mature economy but also a key driver of sustained economic
growth and improved living standards.

1.7 Weakness of Financial system

Financial systems, while crucial for economic development, can also have
weaknesses and vulnerabilities. These weaknesses can pose risks to the stability of
the financial system and the broader economy. Some common weaknesses and
challenges in financial systems include:

1.Lack of Financial Inclusion:Many individuals and businesses may be excluded from

the formal financial system, limiting their access to essential financial services. This
can hinder economic growth and contribute to income inequality.

2. Underdeveloped Banking Sector:In some countries, the banking sector may be

underdeveloped, with a limited number of banks and limited banking services. This
can lead to inefficiencies and limited access to credit for businesses and individuals.

3. Weak Regulatory and Supervisory Frameworks: Inadequate regulation and

supervision of financial institutions can lead to misconduct, fraud, and excessive risk-
taking. Weak oversight can undermine the stability of the financial system.

4. Lack of Transparency:Lack of transparency in financial transactions and financial

products can lead to market abuses and undermine trust in the financial system.
5. Systemic Risk:Concentration of risk within the financial system, such as
interconnectedness between large institutions, can lead to systemic risk. The failure
of one institution can trigger a domino effect, leading to financial crises.

6. Credit Risk:Excessive lending without proper risk assessment can result in high
levels of non-performing loans (NPLs), which can weaken banks' balance sheets and
reduce their ability to provide credit.

7. Lack of Investor Protection:Weak investor protection measures can undermine

confidence in financial markets, leading to capital flight and reduced investment.

8. Inadequate Infrastructure:Poor infrastructure for financial services, such as

payment systems, can hinder the efficient functioning of the financial system.

9. Legal and Judicial Challenges:Delays in legal proceedings and weak enforcement

of contracts can affect the ability to resolve financial disputes and recover debt,
leading to inefficiencies in the system.

10. Money Laundering and Financial Crime:Inadequate anti-money laundering (AML)

and counter-terrorism financing (CTF) measures can allow illicit funds to flow through
the financial system, undermining its integrity.

11. Limited Capital Markets: Limited development of capital markets can restrict
access to long-term financing for businesses, which may rely heavily on bank loans.

12. Foreign Exchange Risks:Exposure to foreign exchange risks can impact the
stability of financial institutions and hinder their ability to manage currency
fluctuations.

13. Cybersecurity Threats: In the digital age, the financial system is vulnerable to
cybersecurity threats that can compromise the security and integrity of financial
transactions.

14. Overreliance on Short-Term Funding: Financial institutions that rely heavily on

short-term funding may be susceptible to liquidity crises during periods of market
stress.

15. Political and Regulatory Risks:Frequent changes in government policies and

regulations can create uncertainty and affect the stability of the financial system.

16. Market Manipulation:Manipulation and abuse of financial markets, such as

insider trading and market manipulation, can undermine market integrity.
Addressing these weaknesses and vulnerabilities in the financial system is essential
to ensure its stability and to support economic growth and development. Regulatory
and supervisory reforms, improved governance, financial education, and
international cooperation are among the measures that can help strengthen financial
systems and mitigate risks.