Question

A Financial system will perform even if one of its (5) component does not exist. Analytically evaluate the statement express your opinion.

Answer 1

Financial system in a country provides a way to exchange funds within the entities having it in surplus an who requires them. To facilitate the same, a financial system requires five components, namely:

1) Financial Markets

2) Financial Institutions

3) Money

4) Financial Instruments

5) Financial Services

>Financial Markets are money market, capital market, foreign exchange market and credit market which acts as the platform for exchange or creation or conversion of financial instruments.

>Financial Institutions are the bodies which facilitates smooth working of finance exchange by providing its expert services.

>Money acts as a medium for exchanging financial instruments by having a value. This is necessary for the transactions to be at ease.

>Financial Instruments acts as the products which is being exchanged or created at financial markets.

>Financial Services are the services of lending, borrowing, facilitating payments, buying and selling of securities and financial instruments etc.

> Foreign exchange market is the market facilitating the funds shifting at international level.

All of the above components are depending upon each other and facilitates each other forming an interdependent whole financial system. Hence, each component is crucial to the financial system working efficiently.