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Manpreet Kaur, Lovely Professional University Unit 1: Financial System

Unit 1: Financial System Notes

CONTENTS
Objectives
Introduction

1.1 Functions of Financial System
1.2 Components of Financial System
1.3 Summary

1.4 Keywords
1.5 Self Assessment
1.6 Review Questions
1.7 Further Readings

Objectives

After studying this unit, you will be able to:

Explain the functions of financial system
Describe the components of financial system

Introduction

The questions and challenges that the world faces in the current times are fundamentally different
from those that it has wrestled with for decades after decades. Liberalization and globalization
have breathed new life into the foreign exchange markets while simultaneously besetting them
with new challenges. Commodity trading, particularly trade in commodity futures, have
practically started from scratch to attain scale and attention. The banking industry has moved
from an era of rigid controls and government interference to a more market-governed system.
New private banks have made their presence felt in a very strong way and several foreign banks
have ventured into territories other than their own. Financial market provides channels for
allocation of savings of assets to savers as well as various forms in which the investors can raise
funds.
1.1 Functions of Financial System

The functions of a good financial system are manifold. They are as follows:
1. Regulation of currency: As a part of the financial system, central banks generally control
the supply of a currency and interest rates, while currency traders control exchange rates.
2. Banking functions
(a) to assemble capital and make it effective;
(b) to receive deposits and make collections;
(c) to check out and transfer funds;

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