Financial Market Regulatory Structure in South Asia: An Overview

Financial System And Financial Markets: Introduction

The financial system of any country consists of specialized and non- specialized financial institutions, of organized and unorganized financial markets, of financial instruments and services which facilitate transfer of funds. (Kinnon, 1973) Procedures and practices adopted in the markets, and financial interrelationships are also parts of the System. These parts are not always mutually exclusive. For example, financial institutions operate in financial markets and are, therefore a part of such markets. The word system”, in the term “financial system” implies a Set of complex and closely connected or intermixed institutions, agents, Practices, transactions, claims, and liabilities in the economy (Gurney and Shaw, 1955). Financial institutions are business organizations that act as mobilizes and depositories of savings and as purveyors of credit or finance. They also provide various financial services to the community. (Pathak, 2003) They differ from non- financial (industrial and commercial) business organizations in respect of their wares, i.e. while the former deal in financial assets such as deposits, loans, securities, and so on, the latter deal in real assets such as machinery, equipment & so on. The activities of different financial institutions may be either specialized or they may overlap; quite often they overlap. Yet, we need to classify financial institutions and this is done on such bases as their primary activity or the degree of their specialization with relation to savers or borrowers with whom they customarily deal or the manner of their creation. (Shaw, 1973) In other words, the functional, geographic, sectoral scope of activity or the type of ownership is some of the criteria which are often used to’ classify a large number and variety of financial institutions which exist in the economy. However, it should be kept in mind that classifications are likely to be imperfect and tentative. According to one classification, financial institutions are divided into the banking and non- banking ones.(Stiglitz, 1993) The banking institution have quite few things common with the non-banking ones, but their distinguishing character lies in the fact that, unlike other institutions, they participation the economy’s payments mechanisms, that is, they provide transactions services, their deposit liabilities constitute a major part of national money supply, and they can, as a whole, create deposit or credit, which is money. Banks, subject to legal (Gurley, 1955) reserve requirements, can advance credit by creating claims against themselves, while other institutions can lend only out of resources put at their disposal by the savers. The distinction between the two has been highlighted Sayers by characterizing the former as “creators” of' credit, and the latter as mere “purveyors” of credit. Financial institutions are also classified as intermediaries and non-intermediaries. As the term indicates, intermediaries intermediate between savers and investors, they lend money as well as mobilize savings, their liabilities are towards the ultimate savers, while their assets are from the investors or borrowers. Non- intermediary institutions do the loan business but their resources are not directly obtained from the savers. Many non- banking institutions also act as intermediaries and when they do so they are known as Non- Banking Financial Intermediaries.

Financial markets are the centers or arrangements that provide facilities for buying and selling of financial claims and services. The participants on the demand and supply sides of these markets' are financial institutions, agents, brokers, dealers, borrower’s lenders, savers, who are inter-linked by the laws, contracts, covenants, and communication networks of the land (Basyal, 2002).