FINANCIAL SYSTEM

FINANCIAL SYSTEM

• Facilitate resource transfer and mobilizes savings to the productive sectors thereby contributing to the economic development


• Includes;

• Markets


• Institutions


• Instruments

Markets:

• Mechanism designed to facilitate the exchange of  financial assets by bringing buyer and seller together


• Provides channels and pricing mechanism through which flow of savings are allocated to the investment


• Can be classified in to Money and Capital Markets


• Participants are financial institutions, agents, brokers, dealers, borrowers, savers and many others

Institutions:

1.      Regulatory Institutions

• Regularly monitor markets and participants to ensure fairness, transparency and credibility in the market


• Also responsible for executing government policies


• Develop and implement various policies depending on the situation of the market


• Example; In Nepal: Central Bank (Nepal Rastra Bank)- banking regulator; Securities Board of Nepal- securities market regulator; Insurance Board, Company Registrar's Office; Institute of Chartered Accountants of Nepal etc.

2.      Market Intermediaries

·         Intermediate between investors and savers

·         Lend money as well as mobilize savings

·         Liabilities are towards ultimate savers and assets are from investors or borrowers

·         Can be classified in to:

• Banking: Commercial banks, finance companies and other depository institutions- collects deposits


• Non-bank Financial Institutions: Insurance Companies, Investment Companies (Securities Market Intermediaries: Issue Managers, Brokers, Dealers, Market Makers etc.), Mutual Funds, Pension Funds, Employee Provident Funds, Co-operatives, NGOs etc.

3.      Non-intermediaries

·         Perform loan business but their resources are not directly obtained from the savers

·         Created with the efforts of Government to provide assistance to the specific purpose, sectors or regions

·         Philosophy of creation is credit need of certain sectors can not be met by the private institutions

·         Example; Agriculture Development Bank, Nepal Industrial Development Corporation, Rural Development Banks

Instruments:

• Money Market Instruments: (Maturity less than one year)


• Treasury bills: Issued by the government


• Certificate of Deposits: NCDs are also traded in the secondary markets


• Commercial Papers: Issued by high rated companies


• Bankers’ Acceptance: Created to facilitate international trade


• Capital Market Instruments: (Long term maturities; more than one year)


• Government Bonds


• Corporate Securities: Corporate Bonds, Equities (Ordinary Shares, Preference Shares


• Mutual Funds

Others securities instruments: Municipal Bonds, Mortgage-Backed Securities, and Derivatives etc.