Financial System

Generally speaking, financial system is any system that helps in channeling funds between those having excess of fund to those who have productive use of the fund. The general component of the financial system are government, household, business unit, financial market and financial institution. The government, household and business unit can be both the user and the supplier of the fund. Financial market consist of share markets and or exchange market like NEPSE in Nepal. The financial institution consist of depository and non depository institution.

The depository institution are those who accept chequeable deposits. That means, the institutions provide cheques to the customer against their deposit and, customers can withdraw their amount by presenting the cheques as per the requirement and the order of the institution. The example of the depository financial institution are banks, finance companies, cooperatives etc. The non depository institution include those institution that accept deposit from the customer but doesn't allow them to withdraw it through the cheques. They receive the deposit in the form of installments like premium in insurance companies or in the form of investments of individuals as in mutual funds.
The transfer of fund from the savers to the borrowers can be of two types. Direct lending and indirect lending. Direct lending is the purchase of shares and bonds by the people. Indirect lending is the borrowing fund from the financial institution by the firms that need funds. It may be in the form of loan or debt.