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What is financial system? Briefly describe its components and their purpose and functions

Financial system components 1 :Financial system is a system comprising a set of sub systems of financial markets, financial and financial services.There is the presence of an integrated and organized financial markets in the financial system.The main component is mobilizations of resources for financing economic development, channelizing the funds raised in productive activities, creating assets for the use of people, contributing to the development of the economy and facilitating equitable development of the economy.

Financial system components 2: There is also the presence of regulatory organizations to regulate the financial system.That means the financial system is not only organized but also regulated. It plays an important role in the selection of the productive projects to be financed.This system monitors the performance of the projects financed. it also provides payment mechanism for exchange of good and services and for settlement of debts, transfer of funds across the countries.

Financial system components 3:The financial system has financial institutions that meet the short term and the long term financial needs of a individuals, firms and companies.It provides information to the operators in the financial markets and helps them to play their role effectively.The financial system also provides the mechanism by which the savings of the community are transferred into productive investments.It helps to capital formation of the country.

Financial system components 4: The 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.Financial system plays an important role in controlling the risks involved in the mobilization of savings and in the allocation of credits to different productive investments or projects.
Financial systems help inform your organization’s
planning and action plans. Financial systems
also help you track and manage the resources
required to successfully complete your work.
These tips provide basic practices you will
need to build financial sustainability in your
Demonstrating good stewardship of resources assists
CSOs in efforts to be accountable to stakeholders
and funders, and helps build confidence that your
organization is a good place for funders to invest.
Other reasons why developing financial systems are
important include:
Financial systems and capacity help the
organization to make sound decisions based on
cash flow and available resources
Monitoring funds, or comparing actual income
and expenses versus budgeted amounts, helps
managers ensure that the necessary funds are in
place to complete an activity
Most governments require that registered, charitable
organizations create accounts that track income and
Funders require reports that demonstrate that
grants were used for intended purposes
Establishing financial controls and clear accounting
procedures help ensure that funds are used for
intended purposes
Transparency, clear planning and realistic projections
contributes to the credibility of the organization.

Financial controls and monitoring methods have a
dual role in supporting internal needs and external
requirements. There are five key aspects to financial
controls and monitoring. These include:
Accounting Records (or Accounts Receivable
and Payable): Establish a process that records
every financial transaction by maintaining paper
files, an electronic database, and copying all
records in a virtual library. Your organization
needs to be able to demonstrate what funds
were received and how funds were spent.
Accounting records should be consistent.
Choose a method and regular schedule for
tracking income and expenses that works for
your organization. This is important in case the
organization is audited or if a funder requests
information for a specific item or transaction.
A system should also be developed to track
donations from individuals to keep donors
updated of the organization’s progress or to
solicit annual and repeat contributions. A
separate accounting system should be developed
for funding from foundations with the original
proposal and budget, dates of receipt of funds,
notes on allowable expenditures, and reporting
requirements so that you can respond to funders’
requests for financial records or in case of audits.

Financial Planning:Financial planning converts
your organization’s objectives into a budget.
The budget serves as a critical planning guide
for your staff and governing board. It is a public
record for funders of how you intend to spend
the funds received. Financial planning allows
you to review your organization, examining
successes and challenges in the past. Planning
also enables you to make projections and set
targets, informing strategies for future success.

Financial Monitoring and Reporting:Drawing
from the information in the accounting records,
your organization can create internal reports
that help monitor progress by comparing
budgets to actual expenses. Frequent reviews
and monitoring allows the governing board and
staff to measure your organization’s progress
and helps inform decisionmaking about the
organization’s or a project’s future. Internal
reports, sometimes called management reports,
allow you to be forward thinking as you assess
the financial status of the organization and
what will be needed to realize your goals.
Accounting records are also the source for creating
external financial reports that demonstrate to
funders and other stakeholders how funds have
been spent. Funders may require financial reports
at the completion of the project or periodically
during the project’s implementation.

Governing Board: A governing board, whether
comprised by a board of directors or leadership
from the community, serves as stewards of an
organization’s resources. Governing boards
should participate in approving budgets, financial
monitoring and reviews, and agree upon and
Curt Carnemark/The World Bank

Examples of Internal Controls
Examples of how to ensure that funds are spent transparently and in a manner for which
they are intended:
Have two people, such as the director and board treasurer, approve and sign the expenses
over a certain amount of money
Keep records that can not be altered by numbering receipts, using a system where the
data entry corresponds with a specific invoice or contract
Assign qualified and experienced personnel to manage accounts
Assign different staff in your organization distinct responsibilities related to managing
income. For example, one person is responsible for authorizing expenses, another is
responsible for handling cash, and another is responsible for recording transactions
Develop a procedural manual for
Post your financial statements in a
public space so that all stakeholders
are aware of external funds that
may have been received in the
community’s name
Have an external accounting or
auditing firm conduct regular reviews
of financial monitoring and systems
ensure that internal controls are implemented.

The board treasurer who has skills in accounting
should be the lead person in working with the
staff in ensuring financial accountability.

Internal Controls: Controls are organizational
practices that help safeguard your assets and
ensure that money is being handled properly.
Controls help detect errors in accounting, pre-
vent fraud or theft, and help support the people
responsible for handling your organization’s fi-

Just as organizations create a plan, you may wish
to document your financial systems, your methods
for financial management, and your plans for
sustainability. A written document can serve as an
important reference point for your organization and
assist in your periodic reviews and planning sessions.
It also helps build confidence among stakeholders
that you have a long-term vision and plan for your
organization’s operations.
Employing financial systems that help build checks
and balances, support your program planning abil-
ity, and increase your success with budgeting and
assessing progress in programming, can significantly
advance an organization’s capacity to begin thinking
about long-term plans and financial sustainability.

Financial systems are of crucial significance to capital formation-
The main function of financial systems is the collection of savings and their distribution for industrial investment thereby stimulating the capital formation and accelerating the process of economic growth.
The process of capital formation involves three activities-
•   Savings – the ability by which claims to resources are set aside and become available for other purposes
•   Finance- the activity by which claims to resources are either assembled from those released by domestic savings, obtained from abroad or created as bank deposits or notes and then placed in the hands of the investors
•   Investments-
The activity by which the resources are actually committed to production.
The effective mobilisation of savings, the efficiency of the financial organization/system and the channelisation of these savings into the most productive forms of investment have a great bearing on the contribution of capital formation to economic development.
The organisation/structure of the financial system consists of the following-
•   Financial intermediaries
•   Financial markets
•   Financial assets/Instruments
•   Financial Intermediaries
•   Banks
•   Mutual funds
•   Insurance organisation


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Leo Lingham


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18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc


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