FINANCIAL SYSTEM (2)

Operations and Functions

• How does this financial system works?
• How exactly does the financial system of a country keeps the economy afloat?
• What are the functions of the financial system?

These and many more questions are going to be answered in today's post, stick with me...

Last time we were able to define what a financial system is and how funds move from one sector to the another with the help of the financial intermediaries who serve as a linkage between the deficit-unit and the surplus-unit. Today we are going to be expanding more on the how the financial system operates and its functions in the economy.

Like we established in my first post on financial system, financial system is a system that facilitates the movement of funds among people in an economy and it is a means by which funds are exchanged between lenders and borrowers. But I would like us to understand that for this exchange to occur there are different processes by which it must go through and this process is comprised of elements like the financial intermediaries, financial institutions, financial markets, and financial instruments which work together to facilitate the smooth transfer of funds and this system exist at both national and international levels which means we have national financial system and international financial system.

In my last post, I shared with us a glance into how the financial intermediaries source for funds in the surplus-unit and supply it to deficit-unit to ensure that funds is always available in the economy. They use tools such as financial instruments which are traded in the financial markets to acquire money from those keeping it idle and distribute it among those who uses it to generate wealth in the country.

Now you may ask that what do those with surplus funds gain from releasing their funds to be used by those in need of it?
The answer to this question is simple, when fund raisers go to financial intermediaries in search of funds there is an obligation on them to pay interest which serve as incentive to the fund suppliers in form of commission, dividends or interest.

Functions of the Financial System

These are the ways by which the financial system basically works in the economy and keep all the economic activities running smoothly.

1. Mobilizes Funds

It helps in allocating idle lying resources with peoples into productive means. Financial system is the one which obtains funds from savers and provide it to those who are in need of it for various development purposes.

2. Smooth Financial Operation

It also ensures that necessary operating procedures, rules and regulations are provided for the smooth interactions and transactions within the confines of the system.

3. Facilitates Investment

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

4. Funds Transfer

The financial system provides the necessary market mechanism for mutual interactions between the suppliers of funds and the fund raisers that use the funds for short-term and long-term purposes.

5. Risk Allocation

Financial system helps people to allocate their resources to various investment in other to diversify their risk, therefore minimizing their risk of loss.

We have been able to talk about how the financial system operates and the reason why savers always supply their funds to be used because of the interest and dividends they get and some functions of the financial system. I'm sure you have been able to learn one or more things from this educative post, kindly let me know what stood out for you in the comment section.
See you soon.