The financial system is a set of markets and financial institutions that enable funds to flow from lenders to borrowers. The objectives of the financial system are to:
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Lower transaction costs: The financial system aims to reduce the costs associated with borrowing and lending money, making it easier and more affordable for individuals and businesses to access credit.
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Reduce risk: The financial system provides various products and services that help to mitigate risk, such as insurance and hedging instruments.
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Provide liquidity: The financial system ensures that there is enough money available to meet the demands of borrowers and lenders, allowing for the smooth flow of funds.
In addition to these objectives, the financial system also serves to promote economic growth and development by stimulating higher savings and investment expenditure. The financial system achieves these objectives through its various components, which include financial institutions, financial services, and financial markets. Financial institutions facilitate the transfer of funds and assets between borrowers and lenders, while financial services provide products and services that help to reduce risk and lower transaction costs. Financial markets, on the other hand, provide a platform for the buying and selling of financial instruments such as stocks, bonds, and derivatives. Overall, a well-functioning financial system is crucial for attaining sustained economic development over the long term.
