Financialsystem is a system that permits the trading of assets between banks, financialspecialists, lenders and borrowers. It is a system that permits exchange ofcash between the savers and the borrowers. It helps in capital formation. The components of a formal Financial system are :i) Financial Marketsii) Financial Institution iii) Financial Assets i) Financial Markets – Financialmarket are the markets that helps in providing means of purchasing and sellingthe financial assets like Stock, bond, equity, etc.
The primary financial market in a nation are typically money market and capitalmarket. Money market are the markets to meet short term securities whilecapital market is to meet long term debts and securities. ii) Financial Institution – Financialinstitutions are kind of intermediaries or mediators that organizes savings andencourages the distribution of assets in a proficient way. These institutionsare of two types Banking and Non banking institutions. iii) Financial Assets – FinancialAssets signifies as a claim against a person or an institution for paying the money at some future date. Example :stock, bond, future contract, etc.
Legaldocuments, receipts are few forms of financial assets. There are two types offinancial assets: Marketable assets and Non marketable assets. b) “A market based financial system ispreferable over a bank based system ” comment criticallyAns : A market based financialsystem gives methods for raising assets by changing the financial assets intocash. It helps to create wealth for businesses and protects the customers,business from any risk involved. Activities like Borrowing and lending offinancial assets can be done throughfinancial system. This system is giving possibly productive and generally safei.
e low risk means for the savings of public. Whereas for bank based system, banks are the financial intermediary means ofproviding loans and deposits for the public. They play a main role in preparingthe funds, allocating capital and provide a lot of risk and danger inmanagement mediums. Banks and other securities exchanges all develop and turn out to be moredynamic and productive as the countrybecomes richer. With the growth of the income the financial system develops.Stock markets turn out to be more efficient and active than banks as thecountries income increases. And thus, market based financial system isconsidered to be more preferable over a bank based system.
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c) “A financial system is well-integrated system whose parts interact with each other “explainAns : Financial system has a set of sub systems that are Financial market,Financial assets and financial institutions which provides facilities of theallotment and transfer of funds efficiently.Financial market is the creation andthe trading market of financial assets like stock, equity. They are the stores where the funds fromsurplus units are exchanged to deficiency units. Financial Assets represents as aclaim against a person or an institution for paying the money at some future date. There are twotypes: Marketable assets like equity, preference stock, mutual funds and Nonmarketable assets like company’s deposits, bank deposits, etc. Financial institutions come in betweenthe extreme borrowers and the extreme loan specialists. Thus, these components are closely linked to each other and are interdependentand also interact with each other.
2. a) Defined money market? Why is sucha market needed? List out the instrumentsthat involved money market? Who are the principle borrowers and lenders inmoney market?Ans : Money market are the markets where the instruments of money areexchanged to meet the short term and high liquid debt securities whose maturity period can vary up to oneyear. 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 salariesand wages , to buy stocks, in dividend payment, taxes, etc. It is needed sothat the government can deal with their short term cash needs.Money market also gives access to suppliers and clients of short term funds tosatisfy 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. Andthe lenders are Banks, Central bank. b) Explain in details the instruments ofmoney market.
Ans : The instruments of money market are:- Call money market: It is alsoknown as notice money market. It is credited by the bank that must be repaid onrequest and it is where the funds are acquired rapidly. The participants of call money market areInsurance companies, banks. – Commercial paper: Commercial paperis an unsecured and short term money instrument that is issued by highly pacedcompanies to broaden their sources of short term investments. The interest rateis low. – Treasury bills: In treasury billany person can invest. It is a short term debt obligations that are issued byCentral Bank of Oman and they have a maturity period of 1year or less.
It isset from time to time by Central bank. – Repurchase agreement: Repurchaserate are the short term loans that is carried out between two parties i.e centralbank or RBI and commercial banks. Where the central bank provides loans tocommercial banks against government securities. – Certificate of deposits: Certificatesof deposit have a fixed maturity period and is a fund certificate that areissued by the commercial banks.
