Presented by James Mania

NATURE AND IMPORTANCE

OF FINANCIAL SYSTEM
 Introduction: Financial system

Is a set of arrangements or conventions embracing the lending and

borrowing of funds by non-financial economic units and the
intermediation of this function by financial intermediaries in order
to facilitate the transfer of funds, to create additional money when
required, and to create markets in debt and equity instruments so
that the price and allocation of funds are determined efficiently
The natures of
financial system are:
·Transfer Funds

Financial system helps in transferring of financial resources

from one person to another person. This system includes
financial markets, financial intermediaries, financial assets and
services which facilitates fund movements in an economy.

·Mobilize Savings

It helps in allocating ideal lying resources with peoples into

productive means. Financial system is the one which
obtainsfunds from saversand provide it to those who are in need
of it for various development purposes.
The natures of
financial system are:
·Risk Allocation

Diversification of risk in an economy is important feature of

financial system. Financial system allocates people’s funds in
various sources due to which risk is diversified.

·Facilitate Investments

Financial system encourages investment by peoples into

different investment avenues. It provides various income-
generating investment options to peoples for investing their
savings.

·Enhances Liquidity

Financial system helps in maintaining optimum liquidity in an

economy. It facilities free movement of funds from households (savers)
to corporates (investors) which ensures sufficient availability of funds.
 Importance of
Financial System
1. To attain economic development, financial systems are
important since they induce people to save by offering attractive
interest rate. These savings are then channelized by lending to
various business concerns which are involved in production and
distribution.

2. It helps in monitor corporate performance.

3. It links savers and investors. This process is known as capital

formation.

4. It helps in lowering the transaction cost and increase returns

which will motivate people to save more.

5. It helps government in deciding monetarypolicy.

 ELEMENTS OF
FINANCIAL
SYSTEM
• Lenders and borrowers(Who are the players?)

Lenders and borrowers are also known as fund provider and fund
demanders, respectively. These are the most essential stakeholders
that make up the foundation of a transaction in the financial
system. Without these two parties, the financial system will not
exist.
Lenders are parties that have excess funds that they can lend out to
other entities for a required return. Borrowers are parties who are
willing to pay the required return to obtain additional funds to
finance their investment initiatives.
 ELEMENTS OF
FINANCIAL
SYSTEM
2. Financial intermediaries (How will the exchange
occur?)

Financial intermediaries are special type of financial

entity that acts as a third party to facilitate the
borrowing activity between lenders and borrowers.
They gather funds from lenders and redistribute it to
borrowers through an investment vehicle like loans.
Potential lenders and borrowers then just need to visit
a financial intermediary to participate in the financial
transaction.
 ELEMENTS OF
FINANCIAL
SYSTEM
3. Financial instruments (What will be used?)

Financial instruments are medium of exchange of contractual

obligation of a party, where such contract can be traded. These
can be tangible or intangible. There are two types of financial
instruments; it could be cash or derivative financial
instruments. International Financial Reporting Standards (IFRS)
defined financial instruments as a contract where a party
recognizes it as an asset and another is a liability. Other
examples are receivables, loans, and other debt and equity
instruments.
 ELEMENTS OF
FINANCIAL
SYSTEM
4. Financial markets (Where will it be traded?)
Financial Markets is same with the other economic markets where suppliers
and buyers of financial instruments meet. There are two types of financial
markets depending on the instrument that were being traded. For cash financial
instruments, these are exchanged in the money market. For derivative financial
instrument, it will be traded in the capital markets.

5. Regulatory environment (How it is controlled?)

Risk is inherent in every business operation. Moreover, for financial systems
since it involves different business and financial risks, government should
intervene in the system. Regulatory environment is the governance body to
ensure that the transactions that occur within the financial systems complies
with the laws and regulations imposed to the actors as well as the elements
that plays withinthe system. Financial systems are normallyregulated by
Centralbanks.
 ELEMENTS OF
FINANCIAL
SYSTEM
6. Money creation (What is the value it creates?)
With the flow of financial instruments, money is created. Money is
used to either be reinvested or earned out from the system flows. In
economics, the money as it was given value out of the financial
transactions because of the exchange that occurred in the system may
be converted into another form.

7. Price discovery(How much is created?)

As the financial system continuously flows and operates, the
financial instruments create value. Price discovery is the process of
determining or valuing the financial instrument in the market. The
price is normally
NATURE AND IMPORTANCE
OF FINANCIAL MARKET
 Financial market
Refers to channels or places where funds and financial instruments such as
stocks, bonds, and other securities are exchanged between willing individuals
and/or entities. Its main economic function is to serve as a channel to transfer
excess funds from fund providers to fund demanders.

Its nature is that of a forum where buyers and sellers can meet to facilitate
transactions. It provides options to the lenders and borrowers on the form of the
transaction they want to enter.
Importance of
Financial Market
Financial markets are common to each country, and they play a
major role in the economic growth of the country. Such markets
act as an intermediary between savers and investors, or they
help savers to become investors.

On the other hand, they also help businesses to raise money to

expand their business. Investors and businesses access the
financialmarkets to raise money and also to make more money.
Moreover,they also help in lowering unemployment as these
markets create massive job opportunities.
MONEY MARKET
VS.
CAPITAL MARKET
 MONEY MARKET
VS.
CAPITAL MARKET
Money market is the sector of the financial system where financial
instruments that will mature or be redeemed in one year or less from
issuance date are traded. Specifically, money markets cater to fund
demanders who need short-term funds from fund providers who have
excess short-term funds. Short- term is defined as one year or less.

Money market securities are usually more widely traded than longer-
term securities, and so tend to be more liquid. Once money market
securities are issued, they are traded in the secondary market. Money
markets are not exclusive for short-term investors. Long-term
investors need the money market as they tend to invest this market to
meet their short-term liquidity needs.
 MONEY MARKET
VS. CAPITAL
MARKET
Capital market is the sector of the financial markets
where financial instruments issued by governments
and corporations that will mature beyond one year
from issuance date (long-term) are traded. Long-term
financial instruments encompass financial instruments
that have maturity dates longer than one year and
perpetual securities (with no maturity). The foundation
of the capital markets is made up by the dealers and
brokers market which creates a venue for bond and
stock transactions.
 PRIMARY MARKET
VS.
SECONDARY MARKET
 Primary Market
Primary market is a type of financial market wherein fund demanders
such as corporation or a government agency rise funds through new
issuances of financial instruments e.g. bonds and stocks. Normally,
when internally generated funds (e.g. retained earnings) are not
enough, demanders need to raise additional funds in primary markets
to fully finance new projects or production expansion requirements.
Four types of issuance
methods
· Public offering

This occurs when securities are offered for sale to the

general public. Offering to the general public is done
through issuing a prospectus or placing a document
which contains an offer to the general public to
subscribe or purchase securities at a stated price.
Private companies, who will sell shares to the general
public for the very first time, is said to undergo an
initial public offering, or IPO. IPOs are usually done
through the help of investment banks.
Four types of issuance
methods
·Private placement (also called as limited public offer).

This occurs when the issuer looks for a single investor,

an institutional buyer or group of buyers to purchase the
whole securities issuance instead of offering it to the
general public. Traditionally, securities sold through
private placements lend to be illiquid and are not easily
converted into cash because of the very limited parties it
was sold to. As a result, it is a common that only
established financial institutions or firms are able to buy
and hold on to them.
Four types of issuance
methods
·Auction

Another way to offer securities to the general

public is through an auction process. Auction is
usually used for issuance of treasury bills,
bonds and other securities issued by the
government and are commonly executed
exclusively with market markers. Auction can
be done in three methods:
Four types of issuance
methods
·Auction

Auction can be done in three methods:

1. Dutch Auction
A type of auction where the seller begins the sale
at a high price. From that point, the price of
securities is continuously lowered down at
specific intervals until the potential buyer agrees
to purchase at that price.
Four types of issuance
methods
·Auction

Auction can be done in three methods:

2. English Auction
A type of auction where the prospective buyers
commence the auction by submitting an initial bid
price. Other buyers interested to purchase the
securities submit a new bid to top the previous
one.
Four types of issuance
methods
·Auction

Auction can be done in three methods:

3. Descending price sealed auction (or first-price

sealed auction)
A type of auction where bidders submit sealed bids
to the sellers,. The sealed bids are ranked from
highest to lowest price. The number of securities is
allocated first to highest priced bid and follows a
descending order.
Four types of issuance
methods
·Tap issue

This method occurs when issuers are open

to receive bids for their securities at all
times. Issuers maintain the right to accept
or reject bid prices based on their how
much fund they need, when they need the
fund and what is their outlook of the
market.
 Secondary Market
Refers to the market wherein the securities issued in primary
market are subsequently traded i.e. resold and repurchased
(secondhand). Buyers in the secondary market include households,
businesses and governments who have excess funds while the
sellers are the household, business and governments who are need
funds.
Two classifications of primary and
secondary markets based on where
financial instruments are traded:

• Exchanges

organizing an exchange involves buyers and

sellers of securities to meet in one central
location to conduct trades.
Two classifications of primary and
secondary markets based on where
financial instruments are traded:

2. Over-the-Counter Market

Dealers at different locations who have an

inventory of securities stand ready to buy
and sell securities “over the counter” to
anyone who comes to them and is willing to
accept their prices.
 Presented by James Mania

Thank you very

much!
 References
Textbook Sources:

Lascano, M. V., Baron H. C., & Cachero A. T. L. (2019). Fundamentals of

Financial Markets. Metro Manila

Mishkin, F. S. & Eakins S. G. (2012). Financial Markets & Institutions (Seventh

Ed.). United States. Pearson Education Inc.
 References
Internet Sources:

Borad, S. B. (2019, February 12). Financial Markets – Functions, Importance And Types. Retrieved from
https://efinancemanagement.com/financial-management/financial-markets-functions-importance-and-
types?fbclid=IwAR09x26kr_tAsWsm6thBE8ege8aIDnSCPyRfHU5Hx0PUoUpDj2pFiKYa-9M

Commerce Mates. (n.d.). Nature and Role of Financial System. Retrieved from
https://commercemates.com/nature-and-role-of-financial-system/?
fbclid=IwAR09x26kr_tAsWsm6thBE8ege8aIDnSCPyRfHU5Hx0PUoUpDj2pFiKYa-9M

Fairbourn, M. (2018, October02). What Are Equity Securities and Debt Securities? Retrieved from
https://tickertape.tdameritrade.com/investing/equity-securities-debt-securities-16959

Rahut, S. (n.d.). Meaning of Financial System. Retrieved from https://www.estartindia.com/knowledge- hub/blog/meaning-of-financial-system?

fbclid=IwAR1VGrloX3ZRSVdd6qMXr_xPG1D7tfKUQ1uWcyfn0NT9daxZrnjtaJ-fIo4