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In a business organization, there are different aspects that affect its operations directly. Among the factors, playing a crucial role in monitoring the performance of a financial organization is a financial system. A financial system refers to the procedures used by an organization that monitors the organization’s financial activities. There are three approaches of a financial system used by a business organization. They are; an international, regional and lastly specific firm approach. On a firm approach, financial system monitors the financial activity of the organization.
Apparently, on an international approach, it monitors borrowers and lenders o money on a global scope. Lastly, under a regional approach, the financial system refers to exchange of money over given region as a country (Buckle, 2004).
Components of a financial system
There are five components of a financial system. They include:
Financial institutions- these refers to organizations where business people (lenders and borrowers) meet. Through these institutions, investors face a motivation of saving via the financial markets. Therefore, in the financial system, it is through the financial institutions that investors meet with their prospective borrowers (Buckle, 2004).
Financial markets- in a financial system; they refer to places where there is creation of financial assets. Similarly, with financial institutions, financial markets play a role of serving as intermediaries of savings mobilizing. More so, due to transfer of assets within these regions, they promote balanced economic growth in a financial setting. Financial markets capture investor’s attention and enable the financing process of companies aiming at growing. Within the financial market, there are services such as loans from banks (Pathak, 2011).
Financial instruments- in a financial system; there is an exchange of items between the investor and the borrower. These items are financial instruments. Examples of financial instruments are bonds, shares and debentures.
Financial services - these are services within a financial environment. These services often originate from Asset and Liability Companies within a financial setting. They play the role of determining the financial combination within the financial market. In addition, through their consultant services, they service lenders in these markets. These services aid during the purchasing, lending and investing, and as well borrowing of money within the financial market.
Money- this is the last component of a financial setting. It refers to any accepted payment method. In other words, it is a medium of exchange between buyers and sellers within the financial market. Money may be in the form of currency or even services (Buckle, 2004).
A). Role of money in a financial system
As stated earlier, plays an important role in the financial system. The following are roles of money in the financial system.
1. Medium of exchange - this is the most basic role played by money. This is when money acts as an intermediate exchange during trade. This role of money in the financial system prevents the shortcomings of barter trade such as coincidence of wants during the trade (Crane, 1995).
2. Store of value- In a financial setting, investors have the characteristic of saving. This is in terms of money or other assets. When money plays a role in savings, it, therefore, acts as a store of value. In a financial system, despite money storing value, time value of money determines its value after some time. This is due to external effects such as inflation that tend to reduce the value of money (Khan, 2007).
3. Measure of value - during assets classification, money often acts as a reference and representation of their actual values. In addition, when used as a medium of trade, if forms a basis of quoting and as well bargaining during the purchasing process within a financial setting. Lastly, money forms a basis of comparison of two or more objects that appear dissimilar and do not have a system of comparison (Pathak, 2011).
4. As a component of the financial system, money acts as a unit of account of transactions taking place within the financial marketing. This implies that money plays the role of measuring the value of goods and services offered within the financial market. Therefore, in a financial market, money forms an uniform base of representation of the value of commodities (Khan, 2007).
5. Lastly, money acts as a deferred payment. This means that money can be a method of payment aimed at settling debts between lenders and their borrowers. Money denominations play this role by identifying the value of the debt. Money as a deferred payment gives borrowers an easier time for repaying their debts (Pathak, 2011).
As highlighted above, it is clear that money plays important roles or giving buyers and sellers opportunities of determining the value of their products and as well as a medium of exchange during trade.
B). does money have to be a currency?
There lies a link between money and currency. Currency refers the acceptable form of money. This implies that the currency is an acceptable form of money used in a financial institution. Currency includes money in the form of coins and notes. Currency plays similar roles as money. It may be a medium of exchange and as well a store of value. In other words, currency refers to cash printed by Mint (Crane, 1995). Unlike money, currency differs from one nation to the other.
Money does not have to be a currency. However, currency needs to be money. This is because, despite the printed notes and coins used as money, there are other forms of money. The other common forms of money are; commodity money- in this form of money, buyers and sellers exchange their commodities with each other. Silver and gold are the common types of this type of money. Lastly, as a form of money, there are cheques (also called receipt money). Under this form of money, buyers pay for their commodities through cheques and these receipts (Crane, 1995).
As seen from the paper, financial system forms a crucial part of a financial organization. Thus is because it controls all activities dealing with finance within the organization. Likewise, financial system forms the basis of all financial deals between lenders and their borrowers. This is an important role of a financial system since it makes it possible for these financial activities. Money, one of the components, of the financial system is the backbone of all financial activities within a financial organization.
Money is a medium of exchange in a financial market. On the other hand, it is a method of deferred payment done by debtors to their creditors. Therefore, as a component of the financial system, money equips a channel of completing business activities between sellers and their buyers. Lastly, due to the different forms of money, money does not have to be currency. Currency comprises of acceptable printed or coins (cash money in form of coins or notes).
Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill.
Pathak, B. V. (2011). Indian financial system: Markets, institutions and services. Delhi: Pearson.
Buckle, M., & Thompson, J. (2004). The UK financial system: Theory and practice. Manchester [u.a.: Manchester Univ. Press.
Crane, D. B. (1995). The global financial system: A functioning perspective. Boston, Mass: Harvard Business School Press.
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