Basic needs served by the Financial System

Posted on

Basic needs served by the Financial System


We defined the financial system earlier as a set of arrangement of financial institutions, markets   and instruments for mobilizing   the resources.  Let us illustrate how it serves the basic needs of an economy   by a hypothetical example.

A business graduate is running a wholesale store of fancy goods in Kathmandu. He imports the goods from abroad and distributes them in various parts of Nepal. In the course of his business he faces the problem of receiving payments from its customers located in remote areas where modern banking facilities are not available.  His payments are delayed and he has not insured more cost for receiving the payments from those places. 

Sometimes, he has to face the problem of theft in transit and other hazards.  He (the wholesaler) also has to bear the adverse effect if retailers meet such will fate in  the  course  of  their  business. Moreover, he becomes very anxious about the fluctuation in the foreign currency exchange rate in international markets as the price of the fancy goods is highly sensitive to exchange rates. In the peak season, especially at national festivals such as Dashain and Teeja, he has to import in bulk quantity.  He may face the problem of shortage of funds to import goods in bulk quantity in peak season.

This is a typical example of problems being faced by a business community. Here, the basic problems are the management of payments, resource transfer and risk management. Making the payments of transactions, transfer of resources from surplus unit to deficit ones and protection of possible risks are the basic needs of trade to be served by the financial system. In this section, we will discuss how the financial system serves these basic needs.  It is noteworthy that financial system makes the trade easy by serving these basic needs-payments, resource transfer and risk trading (protection from possible risk).

Payment Methods

There are two types of business transactions., credit transaction and cash transaction.   Credit   transaction   is the exchange   of value for promise. For example, you can purchase home appliances for Rs 100,000 and promise to pay this amount after three months. This is the example of credit transaction. In this example, you exchange your promise for home appliances worth for Rs 100,000. Here, the promise is to pay after three months. But the seller has to bear some risk of default in payment. In cash transaction, you exchange the value for value. In our example, if you pay at the time of purchase of home appliances, then you can receive the home appliances worth for Rs 100,000 and in the mean time you transfer the value worth for Rs 100,000. You may hand over the bank check or cash or transfer the value using other modalities of payment such as debit card. In cash transaction, there is no question of default risk.


In the absence of modern financial system, traders face many problems related to payment. They will have to carry cash from one place to another. There could be the problem of theft of money in transit. Moreover, cost of payment in terms of time and money also increases. In our earlier example, if retailers are located in rural area or suburban area where there is no modern banking service, the retailers will have to come to Kathmandu carrying cash and make payment to the wholesaler. Thus, in the absence of banking institutions, a component of financial system, the retailers cannot make prompt payment even though they have money to pay for their credit purchases. 

In other words, the provision of financial system makes the payment simple and efficient. In credit sales, there is the problem of lack of trust.  For example, how a business graduate who is running wholesale business of fancy goods in Kathmandu trusts the retailer of Surkhet? In other words, a seller may not trust the buyer for his/her promise of. payment of credit purchase. In such a situation, the bank may provide guarantee of payment to the seller on behalf of the buyer. There are number of ways that financial system provides the guarantee of payment to the sellers. Letter of credit is one of the examples in international trading.

Comments

Post a Comment

Popular posts from this blog

Classification of Hotels by Location, Guest, Facilities, Rooms and Plan

Posted on
Image
Hotels are classified according to the hotel size, location, target markets, levels of service , facilities provided, number of rooms , ownership and affiliation etc. Hotels on the basis of location Downtown / Commercial / City Hotel These hotels are situated at the heart of city, basically designed to carting sheet stay business clients. The hotel is very expensive at the startup cost is very high. Hotel Vaishali is an example of Downtown hotel in Kathmandu, Nepal. Resorts These hotels are eco-friendly commercial hotel, basically designed for long stag guest entitled from hill, bank of the river, where the natural beauty has its significances. In European countries, resorts are seasonally operated cratering establishment. Resorts provide all the facilities as offered star categories hotel link as:- Godavary village resorts is in Godavary. Transit Hotels Transit hotel are usually located such as airport, railway, station, bus station, harbor or ports to cater...
Keep reading

Theories of Management - Contemporary management approaches - Chapter 1 - Part 8

Posted on
Image
D. Contemporary management approaches : Classical, Behavioral and scientific management approaches tend to focus more on the internal workings of organizations. The contributions of each school's of thought are still being applied today. However both researchers and practitioners are now giving more attention to interaction of the organizations with their external environment. The contemporary approaches to management include: 1.                 The Systems Theory 2.                 The Contingency Theory a. Contingency theory of management Contingency theorists argue that each organizational circumstance is unique and as a result management approaches should be selected and applied based on the specific situation at hand. The contingency theory therefore supports the view that "there is no one best way to manage" and em...
Keep reading

Theories of Management - Early Management Theory - Chapter 1 - Part 6

Posted on
Theories of Management A. Early Management Theory/ Administrative Management school of thought: Today's managers have access to an amazing array of resources which they can use to improve their skills. But what about those managers who were leading the way forward 100 years ago? Managers in the early 1900s had very few external resources to draw upon to guide and develop their management practice . But early theorists like Henri Fayol (1841-1925), managers began to get the tools they needed to lead and manage more effectively. Fayol, and others like him, are responsible for building the foundations of modern management theory. Through the years, Fayol began to develop what he considered to be the 14 most important principles of management. Fayol's principles are listed below: ·          Division of Work – When employees are specialized, output can increase because they become increasingly skilled and efficient. ·   ...
Keep reading