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The primary function of any financial system is to facilitate the allocation and deployment of economic Nachiket Mor
This is an excellent exposition.
resources, both spatially and temporally, in an uncertain environment. Professor Merton and Professor
Thank you for sharing it.
Bodie further distinguish six core functions performed by the financial system:
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Initial Reflections on Implications
Function 1: Transferring resources across time and space.
for Digital Financial Services · 4
A well developed financial system provides a way to transfer economic resources through time and
months ago
across geographic regions and industries. Loans help move resources from the future to today, and
savings products help do the opposite, but the underlying function for these two seemingly different Nachiket Mor
This is a very powerful post and
products is the same. Student loans, borrowing to buy a house and saving for retirement are all actions
brings an entirely fresh insight to
that shift resources from one point in time to another. The financial system also provides mechanisms to
the issue of privacy. Its...
shift resources from one place to another. So, when a person sends money to a family member in a
Big Data, Financial Inclusion and
different location, the basic function the movement of resources to him to the recipient. Privacy for the Poor · 4 months ago
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1/2/2018 Functional Perspective of Financial Systems – An Introduction « IFMR Blog
investors in exchange for some premium. Many financial contracts transfer risk without transferring the Blogroll
funds, as in the case with most insurance contracts and derivatives. Ajay Shah's blog
All About Finance – World Bank
Function 3: Clearing and settling payments blog
The financial system provides a payments system for the exchange of goods and services. Suppose you Center for Financial Inclusion
live in a country whose government sets a limit on the foreign currency that is accessible. In your country
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you will be able to pay for your goods and services with the local currency. But if you wish to travel, you
Financial Access Blog
will need to use other means of payment. One way of making payments is to barter, exchange goods
without making payments, but this would be inconvenient. An important function of the financial system is Financial Markets Blog
to provide an efficient way for people and businesses to make payments for the goods and services they Stanford Center for International
Development
wish to buy. Depository financial intermediaries serve this function with wire transfers, checking
accounts, and credit/cash cards. Other intermediaries such as money market mutual funds offer Vox
transaction-draft accounts and firms whose principal business is not financial, such as General Electric,
offer general credit cards. The key elements for managing the costs and risks associated with the Tag Cloud
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process of clearing and settling payments include netting arrangements, efficient use of collateral,
delivery-versus payment, immobilization of securities, and extension of credit. Bindu Ananth Capital
CCFS CFS CMF Conference
Function 4: Pooling resources and Subdividing shares
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The financial system provides a mechanism for the pooling of funds to undertake large-scale indivisible Dvara Research economic growth
enterprise or for the subdividing of shares in enterprises to facilitate diversification. Finance Matters Financial Depth
Suppose you wish to invest in a business that costs $100,000, but you only have $10,000 to invest.
financial inclusion
Forbes FSLRC Future of Finance
Since you cannot possibly divide the business to buy a part of it, you will not be able to make this
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investment. A financial system corrects this problem by bringing together a bunch of investors and
distributing shares to them, thereby dividing the $100,000 investment into smaller economic pieces. Any IFMR Finance
money the business earns from the race will then be distributed among the shareholders.
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Function 5: Providing information Holdings Ignacio Interview
The financial system provides price information that helps coordinate decentralized decision-making in KGFS LTDM Malegam MFI
various sectors of the economy. The clear function of financial markets is to allow individuals and microfinance Mosec
businesses to trade financial assets. An additional function of the capital market is to provide information Municipal Finance Nachiket Mor
that assists in decision-making. For example Interest rates and security prices are information that Pension RBI Regulation rural
households use in making their consumption-saving decisions. channels rural finance
Securitisation
Function 6: Dealing with incentive problems Securitization South Africa
The financial system provides a way to deal with the asymmetric-information and incentive problems Suitability Systems Design
when one party to a financial transaction has information that the other party does not. An efficient Conference Technology
financial system reduces these incentive problems. Incentive problems take a variety of forms – moral Urbanisation Workshop
hazard, adverse selection and principal-agent problems. The financial institutions develop mechanisms Archives Archives
to help overcome these problems. For example, they develop ways to take and manage collaterals to Select Month
address the moral hazard and adverse selection problems.
Applicability of this perspective is useful in different levels of analysis. It offers a useful frame of reference
for analysing the country’s entire financial system, by helping assess how well the system is doing vis-a-
vis its essential objectives – as understood in terms of these functions. It is also useful in the study of a
particular institutional form, which can be understood in terms of the functions it is supposed to fulfil is
management of risk. The functional perspective may also be applicable at an activity level. For example
– Lending is a homogeneous financial activity in the private and public sector decision making. But from
a functional perspective, lending falls under the two basic functional categories of ‘intertemporal transfer
of resources’ and ‘risk management’. The functional perspective can also be applied at the level of an
individual financial product.
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“Open data improves the situation from How Do India’s Payments Banks
a data privacy perspective” – … Measure Against Key Principles for …
1 comment • 2 years ago 1 comment • a year ago
Pras — While the benefits of collection and Rajeev Lal — Good article, very thoughtful.
usage of data have been well articulated, Please also
there are a couple of fundamental aspects … seehttps://www.linkedin.com/pu...
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