The Mechanism of Financial System

The Mechanism of Financial System

DOI: 10.4018/978-1-7998-1643-0.ch001

Abstract

Financial systems bring fund demanders and fund suppliers together. Therefore, with the help of these systems, fund suppliers can earn interest income by using their savings. On the other hand, fund demanders can find money they need so that they can make their investments more easily. Since the investment increase leads to higher GDP, it can be said that effective financial systems make an important contribution to the economic improvement of the countries. Therefore, to provide recommendations to have more effective financial systems, the mechanism of the financial system should be understood appropriately. Hence, in this chapter, firstly, general information about the financial system is given. After that, different fund demanders and suppliers are explained. In the final part, financial instruments are identified.
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Fund Demanders

Fund demanders refers to the parties that have some purposes, but they do not have enough money in order to achieve this objective (Wang and Yang, 2016). Therefore, they demand money from the outside for this purpose. As it can be understood fund demanders play a significant role in the financial system. When their needs can be satisfied in this market, it contributes the development of the economy in the country. In other words, if the funds can be allocated to the fund demanders effectively, it has an increasing effect on the investment amount. Thus, this situation leads to lower unemployment rate in the countries. Fund demanders can be individuals, companies or government and they are explained detailed in the following subtitles.

Individuals

Individuals can be fund demanders in many different ways. First of all, they aim to start a new business. In other words, they think that they can earn a significant amount of income with their entrepreneurial spirit. However, they may not have enough money in order to reach this objective. In this circumstance, they demand money from third parties. Hence, it is obvious that by having an effective working financial system, the individuals, who aim to start business, can reach the money easily and it has a contributing factor on investment in the countries (Naczyk and Hassel, 2019).

In addition to the individuals who aim to start a new business, there may also some individuals that need money to satisfy their personal needs. For example, some individuals aim to become the owner of a house, but they may not have enough money for this purpose. Moreover, some other individuals may want to purchase new furniture. As it can be seen they demand this money from the financial intermediaries. In this case, the funds coming from fund suppliers can satisfy the needs of these individuals (Muda, 2017; Li et al., 2019).

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