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What is Financial System and role of financial System in economic development in a country?

Economic growth and development of a country depends upon a well-knit financial system. Financial system comprises, a set of sub-systems of financial institutions financial market, financial instrument and services which help in the formation of capital. It provides a mechanism by which savings are transformed into investments. Thus, a financial system can be said to play a significant role in the economic growth of a country by mobilising the surplus funds and utilizing them effectively for productive purposes.

The financial system is characterised by the presence of an integrated, organised and regulated financial markets, and institutions that meet the short term and long term financial needs of both the household and corporate sector. Both financial markets and financial institutions play an important role in the financial system by rending various financial services to the community. They operate in close combination with each other.
Role/Functions of financial System :
A financial system performs the following functions:-
1. It serves as a link between savers and investors. It helps in utilising the mobilised savings of the scattered savers in more efficient and effective manner. It channelises flow of savings into productive investment.
2. It assists in the selection of the projects to be financed and also reviews the performance of such projects periodically.
3. It provides a payment mechanism for the exchange of goods and services.
4. It provides a mechanism for the transfer of resources across geographic boundaries.
5. It provides a mechanism for managing and controlling the risk involved in mobilising savings and allocating credit.
6. It promotes the process of capital formation by bringing together the supply of savings and the demand for investible funds.
7. It helps in lowering the cost of transactions and increase returns. Reduced cost motivates people to save more.
8. It provides detailed information to the operators/players in the market such as individuals, business houses, government etc.


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