Theprocess of savings, financing and investing in various sectors involves avariety of institutions, markets and intermediaries that needs to be regulatedand monitored by a legal body.
Access to a variety of financial instrumentsenables an economic agent to pool, price and exchange risks in the markets.Trade, the efficient use of resources, saving and risk taking are thecornerstones of a growing economy. In fact, the country could make thisfeasible with the active support of the financial system. The financial systemhas been identified as the most catalyzing agent for growth of the economy,making it one of the key inputs of developmentA financial system provides services that areessential in a modern economy.
The use of acceptable and stable medium ofexchange reduces the cost of transactions. Finance bridges the gap betweenpresent and future by either mobilizing saving or by efficiently allocating thesavings as investments to various sectors, that helps achieve nationalobjectives. ECONOMIC GROWTH CAPITAL FORMATION SAVINGS FINANCE INVESTMENTS FINANCIAL SYSTEMSIn the above diagram, the money flows fromhouseholds to businesses as investments and again reaches households as wages.The primary goal of the financial system is to create a link between thesavings of the households to reach the businesses as investments. Distributionof savings to industrial investment and stimulating the capital will lead toeconomic growth of the economy.
Factorsof production Land, labor &capital Wages Income Revenue Spending Goods and services Goodsand services bought As mentioned above, Investments play a crucial partin the economic growth. The investment is nothing but the savings of thehouseholds. These are the sources of investments for firms, businesses andother organizations which produce goods and services. The flow of money in theeconomy is circular and is in the opposite direction to the flow of resources.The word “Financial System” means set ofinter-related set of closely connected institutions, practices and liabilitiesin the economy. The financial system of the economy is concerned about themoney, credit and the finance in the economy. It includes various institutions,markets, agencies.The Economic development of any economy is mostlydependent on its financial structure.
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The greater the proportion of financialassets to that of real assets, the scope of economic growth is higher. Theeconomic conditions post-independence of India has a seen a lot of changes. Theeconomy has made an enormous diversification in various fields. Investmentsplay a crucial role in the economic growth of any economy.Introduction to Financial Systems