The role of financial system and give examples

        Financial system may be defined as a market where exchange of funds between lender and borrower is made through financial instruments, which would be discussed later. Financial systems are operating at the local and international level both. Financial system has significant role because it allows the investors to obtain the loan from lenders and investing in such an attractive capital opportunity to earn more than its cost of capital and keep returning the principle plus interest amount over the time (Burton, 2014). This financial system provides the platform to the people who have extra money to lend so that they can earn interest income; other people are the borrowers, which have attractive investment opportunity.

        In the absence of financial system, the rate of investment was quite low which would be leading to less economic activities. The exchange of funds keep the money into circulation from the one who needs it less to the one who needs it more. Financial system allows the people for saving by collecting the funds from large number of people to lend it to the big investors who can invest in big projects, which produces job opportunities, tax revenues, and then economy expands. The examples of financial instruments traded within the financial system are such as Treasury Bills, Shares, Derivates financial assets, equity, bonds and financial papers (Crane, 2014).

        There are various financial instruments, which are distributed from government, and private sector both. Government financial instruments are enjoying the more credibility and authority comparing to the private sector. Lenders analyze the private borrowers credit rating stated by the credit agencies and then accordingly decide the interest rate, time period and the ultimate decisions whether or not lend it to them (Dombret, 2014).

References of financial system and give examples