A financial system is a set of procedures and processes implemented by a company's management to ensure financial accountability and control. These procedures and processes include recording, verification, and transaction reporting, all of which have an impact on the liabilities, revenues, assets, and expenditures over time. An effective financial must meet certain financial requirements, such as central financial management, which consists of the processes required to keep the system processing rules in compliance with traditional financial management norms and policy. It serves as the foundation and framework for all other financial systems. It also has a general ledger management, which is the highest summarisation level that maintains all account balances by the structure of the fund and general ledger of individual accounts created in the central financial system control function. In addition, it has funds management that is a system designed to ensure the firm does not disburse funds in a surplus of the authorized.
The financial system has a payment management that provides effective control over the entire payments being made on behalf of the firm. It also has a receipt management function, which is tasked with supporting activities relating to recording the firm cash receipts that include collecting receivables and servicing. The system additionally has cost management that is used in measuring the full cost firms programs, which entails their outputs and activities. Lastly, it has a reporting function, which assists in providing vital financial data on time to aid in supporting budget formulation, execution functions, fiduciary role, economic management delivery programs and the making of crucial decisions (United States Government Accountability Office, 2005).
Financial systems play a crucial role in running the financial companies and the entire market as it has many functions and benefits that enable many financial processes to take place. Firstly, it helps in the facilitation of payments as it offers adequate channels of payment of services and goods. The emergence of new payment methods that include credit cards, cheques and debit cards helps in faster and more comfortable facilitation of transactions.
The system also promotes a savings culture as it provides a wide range of financial assets that can act as value stores facilitated by the financial markets services and various types of intermediaries. For the holders of wealth, it offers a range of portfolios that have attractive income, yield and safety combinations and with the progress in financial technology and innovations, the portfolio scope has improved. It also facilitates making better decisions concerning various aspects of the financial markets. The financial markets help min providing crucial information concerning the market and financial assets. It aids the potential investors in making comparisons about the options of investment and chooses the best. The financial system additionally facilitates the provision of liquidity. The markets aid provision of an opportunity for investors to start the process of liquidating their investments at any given time through instruments such as shares, bonds, and debentures. The prices are determined on a daily basis and are determined by the market forces of supply and demand.
It also encourages capital formation through the mobilization of savings, and this happens when savers convert into financial assets through various means such as bank deposits, insurance policies, bonds, equity shares, and bills. Also, it helps in the management of risks, as investors can use future contracts, insurance contracts option contracts, forward contracts and other types of derivatives. The contracts serve to facilitate the offsetting the adverse effects of movements of asset prices that parties may in the future require to purchase or sell and while the risks may be opposite the parties can a achieve their intended goals with just a single transaction(Analyst Prep, 2016).
Depositories are firms or companies that hold securities of any given shareholder in the electronic nature at the shareholder's request and aids in the trade of securities. The shares are immobilized once they handed to the depository system, as they are no longer with shareholders. They play a crucial by facilitating the transfer of shares ownership from the account of an investor to another whenever a transaction occurs. It also enables elimination of risk associated with holding securities by shareholders in physical form. Additionally, they act as savings accounts and transferring of money and payments by debit cards or online banking.
Insurance companies play a crucial role in the financial markets, and they involve some processes such as rate-making, which is the insurance pricing and insurance premiums calculations. It also undertakes undertaking that is involved in selection, classification, and pricing of insurance applicants. Insurance activities involve production, which is engaged in the marketing and sales of insurers programs. Besides, it carries out settlement of claims that examines critical objectives in the adjustment of claims and different steps involved when settling any claim. Insurance undertakes a significant role in the financial market by the provision of certainty of payment in case loss occurs unexpectedly. It also ensures protection against foreseen probable loss chances thus protecting the assured from future sufferings. It also helps in sharing of risks in case one is exposed to loss. Additionally, it facilitates the provision of capital to the community as the funds realized are invested in productive sectors of the economy, and it helps in the improvement of efficiency by eliminating worries of losses or even death. Lastly, it enables economic progress by the protection of the community from damage losses, death or destruction and ensures access to capital (Singh, 2012).
Security is a crucial pillar in many financial market transactions as it acts as an intermediary for risk filtration. It eliminates false information in the capital market through financial intermediations thus ensuring investors can make correct and sound investment decisions. They also provide asset pricing and product creation which enabling investors to realize value appreciation and dispersing of risks. Additionally, they help in the provision of risk portfolios that are determined depending on the appreciation of assets.
Mutual funds are investments, which pool resources from people and then invest it based on its objectives and goals. There are varied types of mutual funds that include equity, money market, and fixed income funds. They are significant in the financial market as they enable diversification of portfolio hence gain-varied choices of investments. They also help in the professional management of one's investment, and they are flexible in meeting goals and needs. They also guarantee return potential that is higher because they invest in diversified sectors. It is also flexible as you can get systematically withdraw or invest at your convince.
Pension funds refer to contributions pooled together from pension schemes set up by companies for the provision of workers retirement benefits. They are significant as they help in the management of risks and uncertainties, provides means of economic resources transfer and providing information concerning pricing. The primary stakeholders in a financial system are the central bank, the federal government, banks, insurance companies, and other financial institutions. The central bank helps in the regulation, creation of awareness while the federal government is tasked with the development of required reforms through the enactment of relevant laws governing financial systems. The banks act as an intermediary for transactions and facilitate saving by investors, and lastly, the insurance companies help in the provision of protection against losses and other unforeseen uncertainties.
References.
United States Government Accountability Office (2005). Core financial system requirements. Retrieved from http://www.gao.gov/new.items/d05225g.pdf
Analyst Prep (2016). The main functions of the financial system. Retrieved from https://analystprep.com/cfa-level-1-exam/equity/main-functions-financial-system/
Singh, K. (2012). What are the primary and secondary functions of insurance? Retrieved from http://www.preservearticles.com/2012040529915/what-are-the-primary-and-secondary-functions-of-insurance.html
