InuncIuI SysLem

1. NANCA SYSTEM Is un InIormuLIon sysLem, comprIsed oI one or

more uppIIcuLIons, LIuL Is used Ior uny oI LIe IoIIowIng: coIIecLIng,
processIng, muInLuInIng, LrunsmILLIng, und reporLIng duLu ubouL
IInuncIuI evenLs; supporLIng IInuncIuI pIunnIng or budgeLIng ucLIvILIes;
uccumuIuLIng und reporLIng cosL InIormuLIon; or supporLIng LIe
prepuruLIon oI IInuncIuI sLuLemenLs
InuncIuI sysLem In Loduy`s worId Is perIups LIe mosL ImporLunL sysLem
umong uII LIe sysLems us uII LIe economIcs oI LIe worId Iuve become
InLerIInked IL Ius become u very compIex sysLem. TIe IInuncIuI sysLem In IL
IncIudes uII wIeLIer ILs bunks or sLock murkeL or IInuncIuI InsLILuLIons. n
finance, the financiaI system is the system that allows the transfer of money between savers (and
investors) and borrowers.
Financia; market

A financial market allows for intermediation of capital between households & firms. Broadly a financial market
performs the following functions:
O Determines the price of a transaction.
O Provides liquidity by transferring ownership of assets from one agent to the other.
O Performs measurement & management of asset price risk.
There are various types of financial markets doing specialised tasks. The types of financial markets can be seen
today are:
CapitaI Markets: Consists of primary markets & secondary markets. Newly issued bonds & stocks are exchanged
in the primary market & already existing bonds & stocks are exchanged in the secondary market. Bond market
provides financing through issuance & trading of bonds whereas shares are traded in stock markets.
2 Money Market: Facilitates short term debt financing & capital.
3 Derivative markets: Provides instruments for controlling financial risks.
4 Foreign Exchange Markets: Facilitates trading of foreign exchanges.
5 Commodity Markets: Facilitates trading in commodities.
For instance various investment houses provide asset management services, hedge fund management services etc.
nsurance companies provide insurance on various aspects of individual life as well as business houses.



Financial nstitutions
Trere are oas|ca||y lWo lypes ol F|rarc|a| lrsl|lul|ors W|lr respecl lo lre 0overrrerl; lrose lral la|| urder d|recl slale
aulror|ly ard lrose lral are pr|vale. Arolrer oas|s ol c|ass|l|cal|or Wou|d oe oased or lre |rsl|lul|ors lral are ra|r|y
|rvo|ved |r lrad|l|ora| oar||rg acl|v|l|es re|aled lo depos|ls ard lre |ssuarce ol loans ard lrose lral are corcerred
pr|rar||y W|lr |oars, |rsurarce, l|rarce ard credlL, rorlgage, sloc| ard olrer lurcl|ors re|aled lo lre wor|d ol l|rarce.

Tre rajor d|llererce |r lre aoove rerl|ored |rsl|lul|ors |s lre|r rodus operard| |r lre |ssuarce ol |oars or lre Way |r
Wr|cr l|rarce |s gereraled. 3lale rur |rsl|lul|ors gererale lre resources lror depos|ls ard sa|e ol srares; Wr||e pr|vale
|rsl|lul|ors gerera||y acl as |rlerred|ar|es |r gereral|rg l|rarce oy oller|rg |rveslrerl opporlur|l|es lo peop|e or
eslao||srrerls W|lr excess cap|la| ard lrus ra||rg |l easy lor corpar|es ard ous|resses lo oola|r lre recessary lurds.

Tre l|rarc|a| |rsl|lul|ors oased or lre serv|ce lral lrey oller ray oe oroad|y c|ass|l|ed as lo||oWs
1. 8ar|s
2. Cred|l ur|ors
3. lrsurarce Corpar|es
1. F|rarce Corpar|es
5. Vorlgage Corpar|es
. Trusl Corpar|es
Z. 3av|rgs ard Loar Assoc|al|ors

oI Iinunciul Institotions?
There are several diIIerent types oI Iinancial institutions, each with slightly diIIerent Ieatures and
beneIits to their customer. Most people only associate Iinancial institutions with banks, not really
realizing that there are many types oI institutions that Iall under the blanket oI Iinancial institutions.

Different Types of FinanciaI Institutions
inancial institutions usually Iall into two sub categories: banksand non- traditional banks. Banks are
what most people tend to associate with the words "Iinancial institution."
anks
When it comes to Iinancial institutions, many people think Iirst about their personal banking
institution. or some it may be a savings bank, Ior others it may be a credit union and still Ior others,
the word bank may reIer to a nationwide chain or a national bank.
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There are actually Iour categories, or classiIications, under the word bank when it comes to Iinancial
institutions. They are:
O Commercial
O Savings and loan
O Credit unions
O Internet banks
By deIinition alone, a bank is a Iinancial institution where deposits can be made, all oI which are
insured by Iederal government. or example, in the case oI a commercial bank or savings and loan,
the deposits are guaranteed by the IC (that is the ederal eposit Insurance Corporation). Other
Iinancial institutions may guarantee their deposits through a non-Iederal organization such as the
National Credit Union Administration which insures the Iunds in a credit union.
Commercial Banks. Most people patronize commercial banks. Commercial banks tend to oIIer an
array oI services that cater to their consumer base. Commercial banks typically do not oIIer the
highest interest rates on deposits Ior their consumers.
Savings and Loans. These banks may oIIer less products than a commercial bank; however, they
cater to their members by providing a higher interest rate on deposits than a commercial bank.
Credit Unions. A credit union is basically a bank which is owned by its members. Credit unions
decide what market they want to serve such as the employees oI a certain company or the residents oI
a certain city. Since they are oIten non-proIit organizations there is no real push to give proIits to
shareholders.
Internet Banks. The newest type oI bank, the Internet bank, pays higher interest rates on deposits
with a lower rate Ior loans because there are Iewer expenses to be paid. There are no physical
branches, so there are less employees. The Internet convenience, combined with the higher rates and
lower loan rates, are why some people may Iind banking via an Internet bank attractive.
on-anks
When we talk about non-banks as Iinancial institutions there are three major types oI companies that
can Iall under this Iinancial blanket. They are:
O Mortgage Iirms
O Mutual Iund corporations
O Brokerage Iirms
With these types oI institutions you open an account by taking out a loan, buying a mutual Iund or
opening a trading account. You can deposit money into your account by paying on your loan or
buying mutual Iunds or stocks. You can withdraw money by writing a check or having the institution
write a check to you.
Some brokerage Iirms are issuing ATM cards and credit cards as well as making loans. However,
there is no Iederal deposit insurance guarantee, and mutual Iunds and trading accounts Iunction
diIIerently than bank accounts.
$eIecting a FinanciaI Institution
When choosing a Iinancial institution you need to consider your needs. Are you looking to be able to
deposit Iunds and earn a high interest rate on the deposit or are you looking to be able to get loans,
mortgages or working capital? Consider iI you are looking Ior a low rate on loans or cash
management. Think about your goals and what each Iinancial institution can oIIer you to meet your
needs.
Compare and contrast several Iinancial institutions. Review the strengths oI each institution and then
take a good look at your Iinancial goals. Once you do this assessment, you will better be able to Iind
the right Iinancial institution to meet your needs. Additionally, consider whether or not you will need
to have more than one Iinancial institution that will better help you attain your goals.

The role of financial institutions within the system is primarily to intermediate between those that
provide funds and those that need funds, and typically involves transforming and managing risk.
Ls muIn IuncLIon Is In wIIcI IInuncIuI sysLem perIorm Is LIe cIunneIIzuLIon
LIe suvIngs oI IndIvIduuIs und mukIng IL uvuIIubIe Ior vurIous borrowers wIIcI
ure LIe compunIes wIIcI Luke Ioun In order Lo Increuse LIe producLIon oI
goods und servIces, wIIcI In Lurn Increuses LIe overuII growLI oI LIe economy.

L Is wILI LIe IeIp oI IInuncIuI sysLem LIuL one cun muke puymenL wIenever
und wIerever Ie or sIe wunLs wILI LIe IeIp oI cIecks, credIL curd und debIL
curd. n LIe ubsence oI IInuncIuI sysLem one Ius Lo Luke cusI wIerever Ie or
sIe goes wIIcI wouId Iuve been ImpossIbIe.
. InuncIuI sysLem uIso provIde un IndIvIduuI vurIous opLIons wIen IL comes
Lo proLecLIng uguInsL vurIous rIsks IIke rIsk urIsIng Irom uccIdenLs, IeuILI
reIuLed, eLc. LIrougI vurIous IIIe Insurunce opLIons.
q. InuncIuI sysLem uIso mukes sure LIuL one cun IIquIduLe IIs or Ier suvIngs
wIenever Ie or sIe wunLs IL und LIereIore IndIvIduuIs cun Iuve boLI LIe
LIIngs, wIIcI InvoIve reLurn on InvesLmenLs us weII us comIorL LIuL LIey cun
IIquIduLe LIeIr InvesLmenLs wIenever LIey wunL.
. AII LrunsucLIons wIeLIer LIey InvoIve IndIvIduuI buyIng Iouse or u bIg
compuny comIng wILI un InILIuI pubIIc oIIer LIey ure eIIecLed smooLIIy
becuuse oI IInuncIuI sysLem.
The financial system consists of:
4 financiaI markets, such as the money markets and capital markets .
They channel excess funds from lenders, i.e. businesses or
individuals who want to invest their money, to borrowers, i.e. those
who need capital;
4 financiaI intermediaries, such as banks and insurance companies.
They indirectly bring lenders and borrowers together but borrowers
can also obtain funds directly from financial markets by issuing
securities, e.g. shares and bonds;
4 financiaI infrastructure permits the transfer of payments as well as
the trading, clearing and settlement of securities.