The Downfall of Chanda Kocchar – India’s Rockstar Woman CEO
The ICICI bank is the largest private sector bank in India. It was also famous for being one of the organizations where a woman was able to break the glass ceiling and hold the top job. Chanda Kocchar, the bank’s woman Chief Executive Officer had been responsible for its rapid growth. The bank had scaled […]
Advantages and Disadvantages of Swingline Loans
In the previous article, we have already studied what Swingline loans are. We now know that such loans are different from revolving credit which is offered by many commercial banks. Over the years, Swingline loans have come to occupy a very important place in commercial banking. There are some people who believe Swingline loans are […]
Problems With Using Internal Rate of Return (IRR) for Investment Decision Making
In the past article we discussed about the concept of internal rate of return. We discussed how it could be used to make proficient investment decisions. In this article we will see the drawbacks and pitfalls of the Internal Rate of Return (IRR) number. We will see how these problems make it a number that […]
What are Demergers: Its Pros and Cons
Mergers and acquisitions are often used by conglomerates to create value. However, in some cases, demergers have also been effectively used. While the workings of mergers and acquisitions are well known to many people, demerger is still considered somewhat of a mystery. In this article, we will have a closer look at what a demerger […]
Treasury Bills – Meaning and its Characteristics
In the previous articles, we have studied various money market instruments as well as how they are traded in the market. In this article, we will have a closer look at treasury bills. It needs to be understood that treasury bills are the most widely sold instruments in the global money markets. They are the […]
Financial resources are scattered across the economy. This is the reason that there is a need for a financial system that can enable the timely deployment of these resources across different parts of the economy at the right time. A well-functioning financial system is supposed to perform several functions. Some of these functions have been mentioned in this article.
The transfer of goods and services can take place smoothly only if there is a mechanism in place to ensure that the payments reach in time. This function is carried out by the payments system. The payment system can be viewed as a subset of the financial system. It is composed of several institutions, such as banks, depository institutions, and private companies.
These institutions pool in their services to provide convenience to users. As a result, users can use different mechanisms like a check, credit cards, and even wire transfers to pay for goods and services.
The slow movement of money had been an impediment to trade and commerce for many years. However, now, with the advancement in technology, money can be transferred instantaneously to almost any part of the world.
From the consumer’s point of view, these services appear to be seamless. However, the reality is that for every swipe or check that is issued, a complex settlement process needs to be undertaken. This is why there are special institutions called clearing houses that undertake this process.
The cash flow which individuals and companies have sometimes may not match with the cash flow that they desire. For instance, a retired person may have a lump sum of money. However, they may be more interested in a periodic sum of money.
On the other hand, a company may want a significant sum of money upfront so that they can invest it in a project. In return, they may be willing to make a series of payments.
Both of these tasks are accomplished through the financial system. The financial system allows investors to transform their resources and access it during a point of time that is convenient for them.
The derivatives market and the insurance market are an important part of the financial system. These markets have been created with the sole purpose of rationalizing the risk, which is an inevitable part of the life of individuals as well as businesses.
Using the financial system, individuals are able to pool in their resources and cover themselves in case any unforeseen event happens in their lives. In many countries, the government has created a social welfare system. This can also be seen as a system of insurance, which is a part of the larger financial system.
The financial system provides important information, which is important for the well-being of the economy as a whole. One of the most important information provided by the markets is about prices. The price information is the basis on which all of the economic theory has been developed. It is the basis on which all economic decisions are made.
For instance, the law of demand as well as supply, both have a price as an important parameter. Hence, traders and other individuals use this information in order to decide the amount they will produce or buy. This means that the economy as a whole also rations its resources based on the price information. This mechanism is extremely important for the economy since it is this mechanism that enables maximum utilization of underlying resources and, therefore, maximum economic growth.
Other prices like interest rates, foreign exchange rates, and even stock prices are important indicators. Individuals can cater to their investment plan based on the information received from the financial system.
The financial system plays the role of an efficient middleman. This is because the financial system allows the savings to be diverted towards productive activities with the least amount of transaction costs.
The financial system consists of various systems that have been created, keeping in mind the needs of the specific markets.
For instance, banks and debt holders based system has been created to fund infrastructure projects which continue over the long term. At the same time, equity-based securities have been created for investors who want to participate directly in the business by taking the associated risks.
The financial system makes it possible for a group of investors to achieve what they could not have done individually. For instance, individual investors are limited by their knowledge when they start investing in stocks. However, when a group of investors gets together, the pool of funds becomes so large that they can afford to hire a team of specialists. This enables them to compete with the bigger funds on an equal footing.
The ability to pool resources and deploy them safely is the hallmark of any financial system. All major financial systems and services like banking, insurance, and even mutual funds are the result of the proper discharge of this function.
Therefore, it would be appropriate to say that financial systems perform a lot of functions that can be considered fundamental. If these functions are not discharged, the markets, as we know today would not exist.
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