In this article, You’re going to learn about What is financial system and Components of Financial system.

What is Financial System?

A ‘financial system’ is a system that allows money exchange between lenders, investors, and borrowers. The financial system works at the national and global level. They formed in conjunction with complex, closely related services, markets, and institutions. Also, It has done with the aim of providing an efficient and regular relationship between investors and depositors.

A financial system can define at a global, regional or firm-specific level and it is a set of implemented processes that track financial activities. On a regional scale, the financial system is a system that enables lenders and borrowers to exchange money. Also, A financial system is a system that covers financial transactions and exchanges of money between investors, lenders, and borrowers. The financial system is made up of complex and complex models. That depict financial services, institutions, and markets, which connect depositors with investors.

Money, credit, and finance are used in the form of a medium of exchange in financial systems. Also, They act as a medium of known value for which exchange of goods and services can be exchanged as an option of exchange. So, A modern financial system may include banks (public sector or private sector), financial markets, financial instruments, and financial services. Financial systems allow for the allocation, investment, or investment between the financial sectors. They enable individuals and companies to share related risks.

Components of Financial system

Components of Financial system

Financial Institutions:

It ensures the smooth operation of the financial system by fulfilling investors and borrowers. They mobilize the investors’ savings directly or indirectly through various financial instruments. Through financial markets using the services of many financial service providers. They can be classified into regulatory, arbitrator, non-arbitrator and others. They provide services to organizations advising on various issues, including restructuring of diversification strategies. Also, provides the complete range of services to those organizations who want to raise funds from the markets and look after the financial assets. For example, deposits, securities, loans, etc.

Financial market:

A financial market can be defined as the market in which financial assets are created or transferred. The creation or transfer of financial assets involves a financial transaction against actual transactions or exchanging money for real goods or services. Financial assets or financial instruments represent periodic payments of money and/or periodic payments in the form of interest or dividends for some time in the future. Components of Financial system. There are four components of financial markets given below:

1. Currency Market: The money market is a wholesale loan market for low risk, highly liquid, short term means. Funds from one day to one year are available in this market. This market dominated by most government, banks and financial institutions.

2. Capitol Market: The capital market has been prepared for long-term investment. The transactions occurring in this market will be for more than one year.

3. Foreign exchange market: The foreign exchange market related to the multiple choice requirements which exchanged with exchange of currencies. Also, Depending on the exchange rate, the money transferred in this market. It is one of the most developed and integrated markets in the world.

4. Credit Market: A credit market is a place where banks, financial institutions (FIs) and non-bank financial institutions (NBFCs) give pure, medium and long term loans to corporates and individuals.

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Financial instruments:

It is an important component of the financial system. Products that are trading in the financial markets are financial assets, securities or other types of financial instruments. Also, There are many types of securities in the market because the needs of investors and credit seekers are different. So, They claim to settle the principal under the road or pay the regular amount through interest or dividends. Equity shares, debentures, bonds, etc. are some examples.


Money considered as anything which accepted for payment of products and services or for repayment of the loan. Above all, It is a medium of exchange and acts as a reservoir of value.

Financial Services:

Financial services include services provided by Asset Management and Liability Management Companies. They help in obtaining the necessary funds and also ensure that they deployed efficiently. Also, helps in determining the financing combination and expanding their professional services till the stage of the servicing of lenders. So, They help in borrowing, selling and purchasing securities, lending and investing, making payments and settlements and caring for risk risks in the financial markets. These include leasing companies, mutual fund houses, merchant bankers, portfolio managers, bill discounts and acceptance houses.

The financial services sector provides many professional services such as credit rating, venture capital financing, mutual fund, merchant banking, depository services, book building, etc. Similarly, Financial institutions and financial markets help in the financial system’s work through financial instruments. To be able to fulfill the given jobs, they need many services of financial nature. So, financial services considered to be the fourth major component of the financial system. This is an important Components of Financial system.

In conclusion:

Therefore, it can be said that a financial lender and a borrower provides a platform for interacting with each other for their mutual benefit.

Thus, Now You all know that What is Financial System, and Components of financial system. Read this article also – Economic growth | Top 10 factors of economic growth.