Functions of Financial System. For the economic transformation of a country, the financial system is the key to the institutional and functional vehicle. Finance assists in reducing the gap between the present and the future, and covers every aspect like channelization and effective usage of savings and making an efficient investment. It formulates the base, the sets, and the tone for the accomplishment of wider national objectives.
1) To Connect the Investors with the Savers:
The key function of a financial system is to bridge the gap between the one who saves money and the one who needs the funds. Thereby, the financial system helps in channelizing the savings in an effective manner to reap the best possible outcome. The resources are allocated in such a manner that there is regular advancement in technology and sustained growth can be achieved.
2) Assistance in the Selection of a Project:
A good financial system helps in the selection of an optimum project for investment purposes. Alongside this, it also constantly monitors the outcome of the project. It facilitates in the payment process for goods and services and the movement of the products to different industries and geographical areas.
3) Risk Allocation: ( Functions of Financial System )
A good financial system helps get the best balance by limiting the amount of savings that can be invested in a particularly risky venture. set a tolerance limit and ensure that investments are made only within the prescribed limits.
4) Availability of Information:
It further ensures that the information associated with the price is available all the time which helps in taking economic and financial decisions. Reducing the Cases of
5) Asymmetric Information:
An ideal financial system aims in avoiding the occurrence of cases when the information available is found to be asymmetric. Such situations are highly adverse in nature and affect the motivation among the operators and also a person who possesses information that the other person does not have. Besides this, it provides other services like insurance pension and adjustment of the portfolio, etc.
6) Reduction in the Borrowing and the Transaction Cost:
A sound financial system creates an ideal financial scenario that reduces the cost of the transactions. By reducing the cost, the returns for the investors are likely to rise. The borrowing cost is similarly reduced. So, this builds the habit of saving in society.
7) Liquidity Promotion: ( Functions of Financial System )
In a financial system, the key function is to have adequate resources of money for the manufacturing of goods and services. In the case of a production firm, the money should not fall short. Here, the term “money” and “monetary resources” signify liquidity. Liquidity in a liberal sense is that form of the asset that can be readily converted into cash. In a financial system, all the activities are thus related to money and the focus is on having a better liquidity position to ensure that the activities are carried on in a smooth and effective manner.
8) Financial Broadening and Deepening:
An ideal financial system encourages the process of financial deepening and broadening. Financial deepening refers to an increase in financial assets as a percentage of the Gross Domestic Product (GDP). Financial broadening refers to building an increasing number and a variety of intermediaries and instruments.
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