FINANCIAL SYSTEM IN SRI LANKA

A financial system is a system that allows the exchange of funds between lenders and borrowers. Every financial system operates at national and global levels of an economy. They consist of complex and closely related services, markets and institutions intended to provide an efficient and regular linkage between investors and depositors. 

The financial system of a country includes various units which relates to the payment system of that country through money transactions. Therefore, financial development of a country depends on the development of the money and money transactions of that country.

Components of a Financial System                                                   

Functioning of a financial system in a country is reflected by some sections of an economy. Those are,

·         Circulation of Money and Central Bank

·         Financial Instruments and Financial Markets

·         Financial Institutions

·         Payments and Settlements Systems

·         Financial Safety Net

Roles of a Financial System

            A financial system plays an important role in the economic development and it is divided into financial markets and institutions. These financial markets and the financial institutions play an important role in the financial system by rendering a number of financial services to various section of the economy. These are the roles done by a financial system for the sake of an economy.

1.      Relationship between savings and investments

An economy’s growth is boosted by the savings-investment relationship. When there are sufficient savings, only then can there be sizable investment and production activity. This savings facility is provided by financial institutions through attractive interest schemes. The money saved by the public is used by the financial institutions for lending to businesses at substantial interest rates. These funds allow businesses to increase their production and distribution activities.

2.      Growth of capital markets

Another important work of finance is to boost growth of capital markets. Businesses need two types of capital, fixed and working.

o   Fixed capital refers to the money needed to invest in infrastructure such as building, plant and machinery. This fixes capital is raised through capital market by issuing debentures and shares. Financial service providers, both public and private, invest in them in order to get a maximum return with a minimized risk.

o   Working capital refers to the money needed to run the business on a day-to-day basis. This may refer to the ongoing purchase of raw materials, cost of finishing goods and transport of finished goods to stores or customers. The financial system helps in raising capital in the following ways.  Businesses issue bills, promissory notes etc. to raise short term loans. These credit instruments are valid in the money markets that exist for this purpose.

3.      Foreign exchange markets

In order to support the export and import businessmen, there are foreign exchange markets whereby businesses can receive and transmit funds to other countries and in other currencies. These foreign exchange markets also enable banks and other financial institutions to borrow or lend sums in other currencies. Moreover, financial institutions can invest and reap profits from their short term idle money. Governments also meet their foreign exchange requirements through this market.

4.      Government securities markets

Financial system enables to central government to raise both short term and long term fund requirements through issue bonds and bills at attractive interest rates and also along with tax concessions.

5.      Infrastructure and growth

The economic growth depends on the growth of infrastructural facilities available in the country. Key industries such as power, coal, and oil determine the growth of other industries. These infrastructure industries are funded by the finance system of the country.

6.      Trade development

Trade is the most important economic activity. Both, domestic and international trade are supported by the financial system. Traders need finance which is provided by the financial institutions. Financial markets on the other hand help discount financial instruments such as promissory notes and bills. Commercial banks finance international trade through pre and post shipment funding. Letters of credit are issued for importers, thereby helping the country to earn important foreign exchange.

7.      Employment growth

Financial system generates more employment to the economy. Businesses and industries are financed by the financial systems which lead to growth in employment such as leasing, factoring, merchant banking etc. Increase in trade leads to increase in competition which leads to activities such as sales and marketing which further increases employment in these sectors.

8.      To ensure a balanced economic growth

The growth of different sectors of an economy is balanced through the financial system. There are primary, secondary and tertiary sector industries and all need sufficient funds for growth. The financial system of the country funds these sectors and provides sufficient funds for each sector – industrial, agricultural and services.