system is a system that permits the trading of assets between banks, financial
specialists, lenders and borrowers. It is a system that permits exchange of
cash between the savers and the borrowers. It helps in capital formation.
The components of a formal Financial system are :
i) Financial Markets
ii) Financial Institution
iii) Financial Assets
i) Financial Markets – Financial
market are the markets that helps in providing means of purchasing and selling
the financial assets like Stock, bond, equity, etc.
The primary financial market in a nation are typically money market and capital
market. Money market are the markets to meet short term securities while
capital market is to meet long term debts and securities.
ii) Financial Institution – Financial
institutions are kind of intermediaries or mediators that organizes savings and
encourages the distribution of assets in a proficient way. These institutions
are of two types Banking and Non banking institutions.
iii) Financial Assets – Financial
Assets signifies as a claim against a person or an institution for paying the money at some future date. Example :
stock, bond, future contract, etc. Legal
documents, receipts are few forms of financial assets. There are two types of
financial assets: Marketable assets and Non marketable assets.
b) “A market based financial system is
preferable over a bank based system ” comment critically
Ans : A market based financial
system gives methods for raising assets by changing the financial assets into
cash. It helps to create wealth for businesses and protects the customers,
business from any risk involved. Activities like Borrowing and lending of
financial assets can be done through
financial system. This system is giving possibly productive and generally safe
i.e low risk means for the savings of public.
Whereas for bank based system, banks are the financial intermediary means of
providing loans and deposits for the public. They play a main role in preparing
the funds, allocating capital and provide a lot of risk and danger in
Banks and other securities exchanges all develop and turn out to be more
dynamic and productive as the country
becomes richer. With the growth of the income the financial system develops.
Stock markets turn out to be more efficient and active than banks as the
countries income increases. And thus, market based financial system is
considered to be more preferable over a bank based system.
c) “A financial system is well-
integrated system whose parts interact with each other “explain
Ans : Financial system has a set of sub systems that are Financial market,
Financial assets and financial institutions which provides facilities of the
allotment and transfer of funds efficiently.
Financial market is the creation and
the trading market of financial assets like stock, equity. They are the stores where the funds from
surplus units are exchanged to deficiency units.
Financial Assets represents as a
claim against a person or an institution for paying the money at some future date. There are two
types: Marketable assets like equity, preference stock, mutual funds and Non
marketable assets like company’s deposits, bank deposits, etc.
Financial institutions come in between
the extreme borrowers and the extreme loan specialists.
Thus, these components are closely linked to each other and are interdependent
and also interact with each other.
2. a) Defined money market? Why is such
a market needed? List out the instruments
that involved money market? Who are the principle borrowers and lenders in
Ans : Money market are the markets where the instruments of money are
exchanged to meet the short term and high liquid debt securities whose maturity period can vary up to one
year. Loans in money market have maturity period of 1 year or less than a year.
Such market is needed as they provide loans which helps the businesses and government to pay the workers their salaries
and wages , to buy stocks, in dividend payment, taxes, etc. It is needed so
that the government can deal with their short term cash needs.
Money market also gives access to suppliers and clients of short term funds to
satisfy their acquiring and investment conditions.
The instruments that are involved in money market are –
Call money market, Commercial paper, commercial bills, treasury bills,
certificates of deposit, repurchase agreement.
The borrowers of the money market are the finance companies, government. And
the lenders are Banks, Central bank.
b) Explain in details the instruments of
Ans : The instruments of money market are:
– Call money market: It is also
known as notice money market. It is credited by the bank that must be repaid on
request and it is where the funds are acquired rapidly. The participants of call money market are
Insurance companies, banks.
– Commercial paper: Commercial paper
is an unsecured and short term money instrument that is issued by highly paced
companies to broaden their sources of short term investments. The interest rate
– Treasury bills: In treasury bill
any person can invest. It is a short term debt obligations that are issued by
Central Bank of Oman and they have a maturity period of 1year or less. It is
set from time to time by Central bank.
– Repurchase agreement: Repurchase
rate are the short term loans that is carried out between two parties i.e central
bank or RBI and commercial banks. Where the central bank provides loans to
commercial banks against government securities.
– Certificate of deposits: Certificates
of deposit have a fixed maturity period and is a fund certificate that are
issued by the commercial banks.