A financial system comprises a range of financial institutions, financial instruments and financial markets which interact to facilitate the flow of funds through the financial system. Overseeing the financial system, and sometimes taking a direct role, is the central bank and/or the prudential supervisor. There are four participants in the financial system such as lenders, borrowers, financial intermediaries and regulatory bodies.
Firstly, lenders are a saving surplus unit is one whose income exceeds its expenditure for a particular period. Many individual are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she puts money in a saving account at a bank; contributes to a pension plan; pays premiums to an insurance company; invest in government bonds; or Invests in company shares.
Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets.
There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback). Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stock).
Additionally, borrowers are a saving deficit unit is one whose expenditure exceeds its income for a particular period. Individuals borrow money through bankers' loan for a short term needs to longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future bu ...