STRUCTURE OF THE FINANCIAL SYSTEM
A financial system functions as an intermediary between savers and investors. It facilitates the flow of
funds from the areas of surplus to the areas of deficit.
The financial structure can be seen as a mix of:
Debt
Equity that a company or government uses to finance its operations
The composition has a bearing on the risk and value of business or responsibilities and it can include
the decision between managing a private or public business and the opportunities that come with
each.
The financial system on the other hand is a network of:
Financial Institutions
Financial Markets
Financial Instruments
Financial services to facilitate the transfer of funds to their most efficient uses
The system consists of savers, intermediaries, instruments, and the ultimate user of the funds. The
level of economic growth largely depends upon and is facilitated by the state of the
financial system prevailing in the economy.
Generally, financial systems consist of banks, non-bank financial institutions which are
regulated by the central banks or Reserve Bank as the case may be, the finance ministries,
Deposit Insurance Corporations, Securities and Exchange commissions, and Insurance corporations.
They also include and consist of many instruments and markets, even pawn shops, money lenders,
pension funds, brokerage houses, and investment trusts.
As a business entity or government, the onus is on the managers and leaders to ensure that a good
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combination of short-term liabilities, short-term debt, long-term debt, and equity is put in place either
to augment budget shortfalls or major sources of revenue to deliver services.
However, this financial structure can be risky, since the firm or the country has a lot of debt
obligations that must be paid as well as social services to be provided.
A business in this latter position needs to skew its financial structure in the direction of more equity,
for which there is no payback requirement. Consequently, one of the most critical issues for a CFO to
deal with is the proper mix of debt and equity to employ in a company’s financial structure.
Whether private or public companies and governments use the same framework for developing their
financial structure, though with some differences between the two.
Private and public companies have the same framework for developing their structure but
several differences distinguish the two.
Both types of companies can issue equity. Private equity is created and offered using the same
concepts as public equity but private equity is only available to select investors rather than the public
market on a stock exchange.
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