Financial system is a set of complex and closely intermixed financial institutions, markets, instruments, services, practices & procedures. It plays a positive and important role by providing finance or credit through creation of credit in anticipation of savings. The investments financed through credit generates appropriate source of income which in turn leads to an amount of saving which is equal to an investment already undertaken. A well developed financial system facilitates the normal production process and exchange of goods and to enlarge markets over space and time. Thus, the financial system enhances the efficiency of the function of medium of exchange and thereby helps in economic development. A financial system also directly helps to increase the volume and rate of savings by supplying diversified portfolio of financial instrument, offering investment inducement and choice.
Currency and exchange form an essential part of any financial system. The financial system of any country consists of specialized and non-specialized financial institutions. The financial institutions are divided into banking and n0n-banking institutions. They can also classified into intermediaries and non- intermediaries. The financial system deals with financial services and claims or financial assets. These financial assets differ from each other in respect of their investment characteristics.