Financial System is one of the most important aspects of the economic development of a country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties.

Effective circulation of wealth promotes industrial development of the country, which supports economic development. If money is not transmitted effectively in the economy, money will be seized, which will negatively affect economic development, in which the establishment and development of industries can be blocked. Like effective circulation, effective use of money is equally important. Economic development cannot be possible if the circulated wealth is not used properly in the producing areas. The financial system helps in spreading the wealth in the economy.

The financial system refers to a set of complex and interconnected components consisting of specialized and non-specialized financial institutions, organized and unorganized financial markets, financial instruments and financial services. The aim of the financial system is to facilitate the circulation of funds in an economy.

Financial institutions provide financial services for members and clients. It is also termed as financial intermediaries because they act as middlemen between the savers and borrowers. Banks are financial intermediaries that lend money to borrowers to generate revenue and accept deposits. They are typically regulated heavily, as they provide market stability and consumer protection. Non-bank financial institutions facilitate financial services like investment, risk pooling, and market brokering. They generally do not have full banking licenses. Non-bank financial institutions include: Finance and Loan companies, Insurance companies, Mutual funds etc.

Financial markets are markets in which securities and commodities are traded at prices representing supply and demand. Primary markets: The primary market (or initial market) generally refers to new issues of stocks, bonds, or other financial instruments. Secondary markets: The secondary market refers to transactions in financial instruments that were previously issued.

Financial instruments are monetary contracts between parties. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver. Examples of financial instruments are Currency, Bonds, Shares, Futures/Options etc. Financial instruments are tradable financial assets.

Financial services are offered by a large number of businesses that encompass the finance industry. These include banks, credit card companies, insurance companies, stock brokerages, mutual funds etc.

Thus, the Financial System consists of Lenders, Borrowers, Investors, Financial Markets (Primary Market and Secondary Market), Financial Instruments (Equity, Debt and Derivatives), Financial institutions (Banks, NBFC, Insurance companies, Mutual Funds, Brokerage companies, Advisory firms) and Financial services offered by the above mentioned financial institutions.