Introduction to Financial Systems

2 main functions of financial systems:

• Perform essential economic function
• Perform a monetary or financial function

Economic function

Channel and mobilise funds from units who have surplus funds (lenders) to units who have shortage of funds (borrowers). Basically, lenders provide the funds needed by the borrowers for their investments or to finance their spending.

Channelling of funds can be performed in 2 ways:

• Direct finance

Borrowers borrow funds directly from lenders in financial markets by selling them securities.

• Indirect finance

Funds are channelled through a financial intermediary, acting as the ‘middle-man’.

Monetary or Financial function

• Provide the mechanisms for settlements of debts.
• Enable wealth holders to adjust their portfolios if they want to invest for higher returns.
• Provide ways of payment.