Financial Markets & Services

Meaning of Financial System:

A financial system is a complex, integrated network comprising financial markets, financial institutions/intermediaries, financial instruments, payment mechanisms, and regulatory bodies (such as Nepal Rastra Bank and SEBON).

Core Economic Function:

It facilitates the efficient mobilization, pooling, and channeling of idle domestic savings from surplus economic units (households) to deficit economic units (businesses and government) for productive capital investment and economic growth.

Definition of Financial Intermediary with Example:

A financial intermediary is an institution that acts as a financial conduit between net savers (suppliers of funds) and net borrowers (demanders of funds) by issuing secondary financial claims to savers and purchasing primary claims from borrowers.

Practical Example:

A Commercial Bank (e.g., Nabil Bank Limited) collects small, highly liquid savings deposits from thousands of retail households (secondary claims) and aggregates those funds into large-scale, long-term project loans to hydroelectric corporations (primary claims).

Concept and Functions of Financial Markets:

1. Concept of Financial Markets

A financial market is an institutional mechanism and physical/digital arena that facilitates the exchange of financial assets, funds, and contracts (stocks, bonds, currencies, commodities) between buyers and sellers under transparent pricing rules.

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2. Primary Functions of Financial Markets:

1. Mobilization and Allocation of Savings:
   • Aggregates fragmented surplus household savings and channels them directly into productive commercial and industrial ventures.
2. Price Discovery Mechanism:
   • Establishes transparent equilibrium prices for financial assets through the continuous interaction of demand and supply forces.
3. Liquidity Provision:
   • Provides ready secondary trading platforms where investors can instantly convert securities into cash with minimal price volatility.
4. Reduction in Search and Transaction Costs:
   • Eliminates prohibitive individual search and information costs by providing centralized trading venues and standardized disclosure information.
5. Risk Sharing and Diversification:
   • Enables businesses and individuals to hedge risks and reallocate investment exposure across diversified asset classes.