Functions of Financial System, Functions of Financial Market

Functions of Financial System, Functions of Financial Market

Functions of Financial System are given in the diagram below.↓

Functions of Financial System

Image credits © Manoj Patil.

Functions and Role of financial system, market are given below. ↓

  1. Pooling of Funds,
  2. Capital Formation,
  3. Facilitates Payment,
  4. Provides Liquidity,
  5. Short and Long Term Needs,
  6. Risk Function,
  7. Better Decisions,
  8. Finances Government Needs,
  9. Economic Development.

Functions of financial system are discussed in brief.↓

1. Pooling of Funds

In a financial system, the Savings of people are transferred from households to business organizations. With these production increases and better goods are manufactured, which increases the standard of living of people.

2. Capital Formation

Business require finance. These are made available through banks, households and different financial institutions. They mobilize savings which leads to Capital Formation.

3. Facilitates Payment

The financial system offers convenient modes of payment for goods and services. New methods of payments like credit cards, debit cards, cheques, etc. facilitates quick and easy transactions.

4. Provides Liquidity

In financial system, liquidity means the ability to convert into cash. The financial market provides the investors the opportunity to liquidate their investments, which are in instruments like shares, debentures, bonds, etc. Price is determined on the daily basis according to the operations of the market force of demand and supply.

5. Short and Long Term Needs

The financial market takes into account the various needs of different individuals and organizations. This facilitates optimum use of finances for productive purposes.

6. Risk Function

The financial markets provide protection against life, health and income risks. Risk Management is an essential component of a growing economy.

7. Better Decisions

Financial Markets provide information about the market and various financial assets. This helps the investors to compare different investment options and choose the best one. It helps in decision making in choosing portfolio allocations of their wealth.

8. Finances Government Needs

Government needs huge amount of money for the development of defense infrastructure. It also requires finance for social welfare activities, public health, education, etc. This is supplied to them by financial markets.

9. Economic Development

India is a mixed economy. The Government intervenes in the financial system to influence macro-economic variables like interest rate or inflation. Thus, credits can be made available to corporate at a cheaper rate. This leads to economic development of the nation.