Aasim Bin Bakr Roll: 12 Class: 02

Healthy Financial Systems

All components of a financial system must work together efficiently to have a healthy financial
system. Funds or money act as the blood flow in the system. The most important part is trust
and confidence. That is why markets are highly regulated. A breach of trust or confidence can
lead to serious impact on any component of the system. For example, due to an ATM scam in
recent years, DBBL’s relationship with Visa was hindered for a few months. As a result,
customers of the bank could not use DBBL Visa card abroad. This eventually led to impact the
reputation and relationship of DBBL with its customers.

Financial Inclusion

Another important factor is financial inclusion. Financial inclusion refers to how many people can
access the financial system. Usually, the development of a country is proportional to financial
inclusion. Higher inclusion leads to higher amount of fund transfer. This eventually leads to
more channeling among the units, leading to growth in national income. A growth in national
income results in economic development. Despite the importance of financial inclusion and
instructions by the Central bank, banks cannot often open branches is rural or suburban areas
due to feasibility issues. Thus, mobile financial services (MFS) are playing a key role in
increasing financial inclusion in Bangladesh and all other underdeveloped and developing
countries. The government, at the same time, is trying to regulate the market to ensure trust and
confidence in the system.

Financial Instrument

Financial instruments can be of two types:

1. Primary Instrument

2. Secondary Instrument

IFRS 7,9, and 14 deals with financial instruments.

Financial Assets

Assets are something that you have to possess and that can generate future benefits.
Previously ownership was also considered to be one of the main characteristics. However, it
has been removed from being a prerequisite since all assets do not have to be owned.
Examples of this include capital leases and assets of a subsidiary company in a consolidated
financial statement.

Assets can be of two types:

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1. Real Assets: Real assets are assets which have physical existence. They are
appropriate for inclusion in most diversified portfolio due to their low correlation with other
assets.

2. Financial Assets: Financial assets are tangible liquid assets, which do not necessarily
have physical worth but are backed by a real asset or some other financial asset. If the value of
the underlying asset comes down, the value of the financial asset will also fall.

Money vs Financial Instrument

Money is anything widely accepted that can be a medium of exchange. Examples of money are
note currencies, coins, and cheques. The evolution of money is as following:

1. Barter economy (exchange of commodity, not everyone’s needs are aligned, not able to
match)
2. Stone money (stone were available everywhere)

3. Gold/silver (state controlled, natural resource limitation, inflation protected)

4. Paper money (1300s, printing press then paper money, idea of inflation came from
there, learning for Britain)

5. Plastic money (cards)

6. Electronic money (paypal, cryptocurrency in the future)

Difference between paypal and bkash is that we transfer cash through bkash, but paypal has a
currency of its own.

Money is a financial asset, since it is directly or indirectly always backed by real assets. For
example, many countries reserve gold or foreign currency to issue money. Dollar has received
the reputation of being backed as a real asset as USA has business with most countries in the
world, has a stable government, clear and transparent policies and a strong economy.
Bangladesh follows a floating exchange rate system.

All financial instruments cannot be traded. Those that can be traded are called marketable
securities.

Examples of such securities are shares.

Types of Financial Markets

Markets in an economy are of two types:

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1. Real Asset Markets

2. Financial Markets; can be further divided in to money market and capital market; capital
market can be further divided into equity market and debt market; both can be further divided
into primary and secondary market

Everything is a debt security in the money market. Money market instruments have a period
less than one year.

Capital is any long-term fund that is invested in the business. It is of two types:

1. Borrowed Capital

2. Equity Capital

A loan is a financial asset, but a bank loan will not fall under any classifications of the market.
Similarly, savings certificates are not tradable either. If a bank writes a certificate of deposit
backing a loan and sells it in the debt market, it will become a money market tool.

Role of Financial Markets

- Offer liquidity to borrowers and savers

- Pool and communicate information

- Allow risk sharing

Characteristics of Well-Run Financial Markets

- Low transaction costs

- Information communicated must be accurate