A system that aims at establishing and providing a regular, smooth, efficient and cost effective linkage between depositors and investors is known as financial system. The functions of financial system are to channelise the funds from the surplus units to the deficit units. An efficient financial system not only encourages savings and investments, it also efficiently allocates resources in different investment avenues and thus accelerates the rate of economic development. The financial system of a country plays a crucial role of allocating scare resources to productive uses. Its efficient functioning is of critical importance to the economy.

Financial system is one of the industries in an economy. It is a particularly important industry that frequently has a far reaching impact on society and the economy. The product of the financial industry is not tangible rather it is an intangible service. The financial system performs certain essential functions for the economy, including maintenance of payment system, collection and allocation of the savings of savers.

Financial function has many functions

Capital formation function

This is the process of diversion of the productive capacity of the economy to the making of capital goods which increase future productive capacity. It has involve three functions Saving, Finance and Investment.

Allocative function.

Financial system in process of capital formation has to decide as to how capital is to be used. The better the quality of judgment exercised in allocation, the more rapid economic progress will be.

Service function

An effective financial system offers the economic segments services in form of providing opportunities to hold wealth in secured and convenient way so that they pay appositive rate of return. The availability of these services of the financial system contributes importantly, if in a intangible way, to the satisfaction of consumers.

The role of financial system is thus, to promote savings and their channalisation in the economy through financial assets that are more productive than the physical assets.