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    1 views3 pages

    Lecture-01-Financial-System..-1

    Uploaded by

    lamiabblamia83

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    © All Rights Reserved
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    of 3

    Mohamed Khaider University, Biskra

    Faculty of Economics, Commerce and Management Sciences

    Commerce Department

    Module: English
    Branch: Finance and International Trade
    Level: Third year Bachelor

    Lecture 01: An overview of The Financial System

    Learning Objectives

    After teaching this Lecture the Students should be able to:

    - Define the Financial System

    - Identify the Elements that make up the financial System

    - Name and define the Sectors of the Economy that constitute the Savers and Borrowers.

    The Lecture is about the Fundamentals of the financial System. It is an attempt to


    explicate this System by going back to the basics, and it is better to show and illuminate its
    Components. The following definitions cover the essence of the financial system

    1- Defining the financial System

    The financial System is a set of arrangements embracing the lending and borrowing
    of funds by non-financial economic units and the intermediation of this Function by
    financial intermediaries so as to facilitate the transfer of funds, to create Money when
    required, and to create markets in debt and equity instruments (and their derivatives) so
    that the price and allocation of funds are determined efficiently. A financial system
    consists of institutional units and markets that interact, typically in a complex manner, for
    the purpose of mobilizing funds for investment and providing facilities, including payment
    systems, for the financing of commercial activity. The role of financial institutions within
    the system is primarily to intermediate between those that provide funds and those that
    need funds, and typically involves transforming and managing risk. Particularly for a
    deposit taker, this risk arises from its role in maturity transformation, where liabilities are
    typically short term (for example, demand deposits), while its assets have a longer
    maturity and are often illiquid (for example, loans). Financial markets provide a forum

    1
    within which financial claims can be traded under established rules of conduct and can
    facilitate the management and transformation of risk.

    From the above definitions we could say:

    - The Lenders and Borrowers, i.e. the non-financial economic units that undertake the
    lending and borrowing process.

    - The financial Markets, i.e. the institutional arrangements that exist for the issue and
    trading (dealing) of the financial instruments.

    - The financial intermediaries, which intermediate the lending and borrowing process,
    meaning that they interpose themselves between the lenders and borrowers

    - The financial Instruments which are created to satisfy the needs of the various
    participants.

    2- Flows of Funds through the financial System

    Indirect Finance

    Funds Funds

    Financial Intermediation

    Funds

    Lender-Savers Lender-Savers

    -Households Funds Funds -Households


    Financial Markets
    -Business Firms -Business Firms

    -Government -Government

    - Foreigners - Foreigners
    Direct Finance

    Figure 01: Flows of Funds through the financial System

    2
    From the above figure we could say that those who have saved and are lending funds, the
    lender-savers, are at the left, and those who must borrow funds to finance their spending,
    the borrower-spenders, are at the right. The principal lender-savers are households, but
    business enterprises and the government (particularly state and local government), as well
    as foreigners and their governments, sometimes also find themselves with excess funds
    and so lend them out.

    The most important borrower-spenders are businesses and the government (particularly the
    federal government), but households and foreigners also borrow to finance their purchases
    of cars, furniture, and houses. The arrows show that funds flow from lender-savers to
    borrower-spenders via two routes (Financial Intermediation and Financial Markets).

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