Finance and Financial System

Overview of Financial System

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Finance is a commercial study concerning management of money and other assets through crediting, banking and investing. It is an outgrowth of economics and accounting (Houston & Brigham, 2009, pg 4). The inter-relationship between finance and these two subjects has brought about financial economics and financial accounting. Another related field is corporate finance that deals with financial management, capital markets and investments.

The degree of importance in financial economics is significant especially in the business venture. Business firms and other institutions have made tremendous contributions in upgrading the economies of their respective countries. Finance is also vital in shaping efficient markets hypothesis (EMH) and behavioral finance among its practitioners (Houston & Brigham, 2009, pg 49). Moreover, the field creates a lot of slots for employment. It is, therefore, important to comprehend the knowledge of financial economics and how it affects vital decisions around individuals. Most importantly, financial role of decision making impacts more in behavioral finance.

Finance and Decision-making

The phenomenon of finance in decision-making is intuitive. Finance is a great contributor to business decision-making and the development of strategic marketing decisions. The planning and implementation of vital decisions is dependent on the availability of a budget. The budget poses as a financial tool under which the decision can be analyzed. The analysis, therefore, becomes a basis for decision making. Finance in decision making acts as insurance of the assessment being asserted. Any impending set back that might be experienced is refrained from causing termination of the decision.

Finance plays a considerable by providing a foundation on which rational policies are made by individuals, practitioners, managers and the business markets (Deaves & Ackert, 2009, pg 3). Finance achieves this by designing goals to be accomplished by the latter. Certainty and uncertainty are confronted at all angles in fully bombarding the decision being made. Models of finance such as demand and supply chains also contribute in decision-making. Individuals and corporate firms optimize their ability by . Assumptions are based on the outcomes of the decision, maximization of the decision’s utility and profit and deriving relevant information that the decision provides (Deaves & Ackert, 2009, pg 4).

Financial System

A financial system is crucial is ensuring a healthy economy in a nation by regulating rates of inflation, unemployment and growth. The study of finance is apprehensive in how the system organizes and channelizes flow of money through the lender-borrower relationship. This relationship is a link up due to the difference in positions of some people or firms amongst themselves (Burton & Brown, 2009, pg 7). The financial system also plays a role in monitoring the economic behavior of families, businesses, regimes and foreigners.

Functional Perspective

Though financial systems change over time, their functional perspectives do not. Operational financial systems are expected to be similar in all economies, hence, its necessitated reliability in the system. A functional perspective is mainly used in doing financial analysis in a financial system. It provides a foundation for referring to a country’s financial system. The financial perspective also assists in evaluating the system actions. Using a financial perspective in to risk management and transfer of resources inter-temporally.

Financial Innovation and Market Rates

A financial innovation system is an integral part in analyzing financial systems. It is a scheme implicit in the . It mainly addresses the issues in business finance that are used in initializing the financing of technological and innovative developments. Financing policies and programs need to dig into dynamics of this system. The financial innovation systems strengthen capabilities of achieving developments (Wonglimpiyarat, 2011, pg 36). Financial system refers to market rates as the to goods in a market. Agents of the assets optimize the rates by reflecting on the tendency of the demand chain of the asset in market (Rieger & Hens, 2010, pg 167).

Financial Intermediaries and Regulations

A financial intermediary is a depository institution that to the national financial system. They consist of mutual savings and commercial banks, credit unions, savings, checking and loan associations. They mainly get their deposit from firms, governments and people (domestic and foreign). Other intermediaries are life and casualty institutions and money market mutual funds, among others. They subject, other fiscal matters to the financial system (Burton & Brown, 2009, pg 12).

Many of these financial intermediaries have failed the financial system leading to a recession of financial crisis. For this reason, regulations have been effectuated to increase completion, safety and competence in order to balance financial services. It is, therefore, vital to possess some knowledgeable piece of information about finance. This is essential in understanding how economies are ran, and to accentuate necessary financial measures that can assist in curbing financial crises that are affecting many nations globally.


Burton, M & Brown, B. (2009). The Financial System and the Economy: Principles of Money and Banking. New York: M.E Sharpe.

Deaves, R & Ackert, L. (2009). Behavioral Finance: Psychology, Decision-Making, and Markets. New York: Cengage Learning.

Houston, J. F & Brigham, E.F. (2009). Fundamentals of Financial Management. New York: Cengage Learning.

Rieger, M. O & Hens, T. (2010). Financial Economics. New York: Springer.

Wonglimpiyarat, J. (2011). The dynamics of financial innovation system. Journal of High Technology Management Research. Vol 22, Issue 1. Pg 36-46.