FINANCIAL SYSTEM (4)

Financial System Participants

Without the secondary participants, there can be no movement of funds from the funds suppliers to the funds raisers who need it for investment purposes.

Last week, we spoke about the primary financial system participants where we talked about the role of the funds suppliers and funds raisers in the financial system. Today, I will be talking about the secondary participants in the financial system and how they complement the primary participants to enable a smooth running of the economy.

The Secondary Participants

As their name implies, they come after the funds suppliers and the funds raisers in the financial system. They are as follows; Financial Intermediaries, Financial Markets and Financial system regulators. 

Financial Intermediaries

They are the middlemen who enable financial transactions between different parties in the economy. They are individuals or institutions who serve as a linkage between the primary participants - funds raisers and funds suppliers of the financial system. They include the following institutions:

1. Commercial banks
2. Merchant banks
3. Specialized banks like development and investment banks
4. Insurance companies
5. Primary Mortgage Institutions
6. Credit union etc.

All the banks perform an important role in the intermediary process because they are responsible for sourcing funds from the funds suppliers and channelling those funds to the prospective users (funds raisers).

Note: They are different categories of financial intermediaries; non-bank financial intermediaries and bank financial intermediaries, but we will be talking about them later in another post.

Financial Markets and Financial Instruments

During the intermediation process, the financial intermediaries raise funds from the funds suppliers by trading financial instruments in the financial market which makes financial markets and financial instruments a crucial component of the financial system.

Financial markets refer to the type of market that is being used to deal in financial instruments Financial instruments are contracts for monetary assets that can be purchased, traded, created, modified, or settled for, and like I explained earlier, they are used to raise and supply funds in the financial system. The financial market is divided into two categories, which are known as the capital market and the money market.

The Capital Market is a place where long-term financial instruments are traded, that is, it is a place where long-term funds for investment are raised while the Money Market is a place used for trading short-term instruments for those in need of funds on a short-term basis. 

Examples of financial instruments traded in the Capital Market are;

1. Equity Shares
2. Bonds
3. Hire Purchase
4. Debenture Stocks etc.

Examples of financial instruments traded in the Money Market are;

1. Treasury bills
2. Treasury certificate
3. Bill of Exchange
4. Promissory Notes
5. Certificates of Deposits etc.

Financial System Regulators

In a country's financial system, there are entities put in place by the government to regulate the operations of the financial system, there are known as financial system regulators. Therefore Financial System Regulators are regulatory bodies established by governments or other organizations to oversee the functioning and fairness of financial markets and firms that engage in financial activity. The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly.

Some examples of regulators present in the financial system of a country include Securities and Exchange Commission (SEC), and The Stock Exchange, among other regulatory agencies.

In conclusion, the financial system embodies financial intermediaries and institutional facilities as well as the system of rules, regulations and operational norms which govern financial transactions and financial flows within the economy. Therefore, the financial system provides a necessary market mechanism for mutual interactions between suppliers of funds and fund raisers for short-term and long-term purposes. 

I'm sure you learnt a lot in today's post, let me know what stood out for you in the comment section. Till I bring you another enlightening post next time, see you soon.