The
process of savings, financing and investing in various sectors involves a
variety of institutions, markets and intermediaries that needs to be regulated
and monitored by a legal body. Access to a variety of financial instruments
enables an economic agent to pool, price and exchange risks in the markets.
Trade, the efficient use of resources, saving and risk taking are the
cornerstones of a growing economy. In fact, the country could make this
feasible with the active support of the financial system. The financial system
has been identified as the most catalyzing agent for growth of the economy,
making it one of the key inputs of development

A financial system provides services that are
essential in a modern economy. The use of acceptable and stable medium of
exchange reduces the cost of transactions. Finance bridges the gap between
present and future by either mobilizing saving or by efficiently allocating the
savings as investments to various sectors, that helps achieve national
objectives.

                                                                                                
ECONOMIC GROWTH

                                                                                              
CAPITAL FORMATION

                  SAVINGS                    FINANCE                            INVESTMENTS

                                            
FINANCIAL SYSTEMS

In the above diagram, the money flows from
households to businesses as investments and again reaches households as wages.
The primary goal of the financial system is to create a link between the
savings of the households to reach the businesses as investments. Distribution
of savings to industrial investment and stimulating the capital will lead to
economic growth of the economy.

                        Factors
of production                                                       Land, labor &capital

                                   Wages                                                                    Income

                                        Revenue                                                         Spending

                      Goods and services                                                 Goods
and services bought

As mentioned above, Investments play a crucial part
in the economic growth. The investment is nothing but the savings of the
households. These are the sources of investments for firms, businesses and
other organizations which produce goods and services. The flow of money in the
economy is circular and is in the opposite direction to the flow of resources.

The word “Financial System” means set of
inter-related set of closely connected institutions, practices and liabilities
in the economy. The financial system of the economy is concerned about the
money, credit and the finance in the economy. It includes various institutions,
markets, agencies.

The Economic development of any economy is mostly
dependent on its financial structure. The greater the proportion of financial
assets to that of real assets, the scope of economic growth is higher. The
economic conditions post-independence of India has a seen a lot of changes. The
economy has made an enormous diversification in various fields. Investments
play a crucial role in the economic growth of any economy.

Introduction to Financial Systems