1. Introduction to Financial
Institutions and Markets
Financial System- implies a set of Complex
and closely connected institutions, markets,
transactions, agents, practices, claims and
liabilities in a economy

2. What is the financial system
concerned with?
 Money
 Credit
 Services
 finance

3. Functions of Financial system
 Financial Institutions- act as mobilisers
and depositories of saving and as the
custodian of finance.
 Provides various financial services to the
society.

4. Financial institution
 A financial institution is an institution
whose primary source of profits is through
financial asset transactions

5. Classifications of Financial
Institutions
 Banks
 Stock Brokerage Firms
 Non Banking Financial Institutions
 Building Societies
 Asset Management Firms
 Credit Unions
 Insurance Companies

6. Functions of Financial Institutions
 The principal function of financial
institutions is to collect funds from the
investors and direct the funds to various
financial services providers in search for
those funds.

7. Financial Markets
 A financial market is a market in which
financial assets are traded. In addition to
enabling exchange of previously issued
financial assets

8. Six basic functions of financial
markets
 Borrowing and Lending
 Price Determination
 Information Aggregation and Coordination
 Risk Sharing
 Liquidity
 Efficiency

9. Financial Instruments
 Financial instruments are cash,
evidence of an ownership interest in an
entity, or a contractual right to receive, or
deliver, cash or another financial
instrument.

10. Categorization of Financial
Instruments
 Cash instruments :are financial instruments
whose value is determined directly by markets.
They can be divided into securities, which are
readily transferable, and other cash instruments
such as loans and deposits, where both
borrower and lender have to agree on a transfer
 Derivatives instruments: are financial
contracts, or financial instruments, whose prices
are derived from the price of something else

11. Equilibrium in financial Markets
 When the expected demand for funds
matches with the planned supply of funds
generated out of saving and credit
creation or when the total desired
borrowing is equal to the total desired
lending.

12. Determinants of supply of funds
 Aggregate savings by the household
sector
 Aggregate savings by the business sector
 Aggregate savings by the government

13. Determinants of demand for funds
 Investment in fixed and circulating capital
(working capital)
 Demand for consumer durables
 Investment for housing

14. Theories on savings and
investment
 Prior Savings Theory- Samuelson
 Credit Creation Theory- Kalecki and
Schumpeter
 Theory of forced Savings- Keynes and
Tobin
 Financial Regulation theory- Stiglitz
 Financial Liberalisation Theory- Mckinnon
and Shaw

15. Prior Savings Theory- Samuelson
 Saving as a Prerequisite for Investment
 Appropriate monetary and fiscal policy
 Generate high rate of inflation
 Controlled by interest rate
 Role of financial system – to promote financial
development-transformation like
 Liability- Asset transformation
 Size- transformation
 Risk- transformation
 Maturity- transformation

16. Credit Creation Theory-
 Credit creation in anticipation to saving
 Investment through credit creation results
in prompt income generation

17. Theory of forced Savings
 Other wise known as inflationary financing
– through forced savings
 It is the saving that determines the
investment- monetary expansion
 Four channels for monetary expansion- if
the resources are unemployed, if
resources are fully employed, inflation
changes income distribution among the
profit earners, inflation imposes taxes

18. Financial Regulation theory-
 Financial markets are prone to market
failures
 Government interventions makes them
function better
 Lowering interest rates and credit
programmes

19. Financial Liberalisation Theory-
 In the form of interventions, political
pressures
 Financial liberalisation, privatisation.