• Ешқандай Нәтиже Табылған Жоқ


In document Finance №7 (19)V5.0.indd (бет 68-71)


If we consider the financial sys- tem from a business point of view, it consists of three subsystems:

financing of business activity, in- cluding the financial sector, control over business activity and strategy of business activity.

Financial sector originates from the financing, and it acts both as a condition and as a part of financing of business activity. In accordance with model of redistribution and processing of information, there are two polar opposite opportu- nities for financing of business ac- tivity: financing though the finan- cial market and financing though banks. This differentiating corre- sponds to the difference between the financial system supported by the financial market and the finan- cial system supported by banks [4].

Control over business activity or Corporate Governance is a part of the financial system and deter- mined as “the totality of rules and mechanisms those determine which stakeholders and to what extent exert influence on import- ant decisions in firms” [5]. Insider and Outsider Systems are distin- guished in the aspect of corpo- rate governance. Outsider System is characterized by active market, Insider System – by high level of banks’ voting right [6].

Financial resources have direct impact on firms’ activity. Investors, following their interests, exert in- fluence on the decision making process in firms, and, therefore, on their strategy. Hence, firms’ strate- gy is a component of the financial system, and it is in casual relation- ships with the aforesaid parts of the financial system.

Transaction costs and informa- tion costs are present on imperfect markets. The main goal of the fi- nancial system is to allocate finan- cial resources in space and time.

The functions of this goal are as follows:

– Risk management is related to the most important function of the financial system. Effective fi- nancial system adopts the risks of business entities through financial leverages. They are based on the forms which reflect various levels of national economy [7]. The latest financial innovations were devel- oped in the industrial countries, which encourage to receive corpo- rate advantages in transfer of risks (e.g., Swaps, Futures, Options). The meaning of insurance instruments is obvious in this case. For example, in a number of developing coun- tries, holding of assets in foreign currency or purchasing of futures contracts is forbidden for entre- preneurs. The same is for farmers in these countries, who have no ac- cess to global futures markets, and, thus, have no opportunities for in- surance of the risks connected with fluctuations of world market prices of goods manufactured. It leads to low production volume because of low investment volume. Finan- cial system could contribute to avoiding of risks by redistributing it to other market players [8]. Allen and Santemoro consider the risk management function as the main purpose of financial institutions [9].

– Mobilization of savings is pre- sented as the second function of the financial system. On the one hand, investments in entities are possible through allocation of small savings. On the other hand, mobilization provides creditors with opportunity to participate in assets of entities and firms through purchasing of shares and other securities on the securities market and increase of savings [10]. Finan- cial deepening is reached through the investment of savings in the fi- nancial system, as a matter of fact,

by increasing the cost of financial assets in national economy. Rapid growths of the economy, high lev- el of investments, as well as high fi- nancial level, are the result of high volumes of savings [11].

– Allocation of resources is the central function of the financial sys- tem. National economy has differ- ent stages, at which there appears a high level of demand or supply for capital. In this case, a risk of op- portunistic behavior arises due to asymmetric distribution of infor- mation, and creditor is presented as the “Principal” and debtor – as the “Agent”. Financial institutions play the role of intermediaries in redistribution of regional and sec- tor resources and bring into bal- ance the interests of players (sav- ers and investors). Development of financial system – modern national economy in the first place – is con- nected with reliability of contract relations between creditor and debtor [12].

– Monetary function is under- stood as the provision of effective financial infrastructure with acting payment system. On the one hand, the central bank and commercial banks provide other economic sec- tors with payment means, and, at the same time, they maintain low level of transaction costs. On the other hand, this function provides cashless flow of funds. Bank as- sets – monetary assets on current accounts in the first place – are re- garded as the means of payment and exchange, and, therefore, they are accepted as money. In addi- tion, unconditional recognition of the bank assets owned by the central bank provides the clients of commercial banks with opportuni- ty to have required amount of cash at any time [13].

Developing countries show typically weak “informal” financial


system, which is characterized by limited alternatives of investments and financing [14]. Specific char- acteristics of the “informal” system include: indirect financing through commercial banks, weak develop- ment level of the securities market, lack of insurance and investment funds. Such market is character- ized by stable position of commer- cial banks, activity of which is regu- lated by the Government.

“Informal” sector prevails in many developing countries and the countries with transitional economy, where savers and inves- tors stand outside the organized financial market and take part in underdeveloped credit relations, in spite of existing special financial institutions. Personal loans prevail in this case, given directly to a nat- ural person or through intermedi- aries [15]. Chandavarkar describes the work of the “informal” sector as:

“(...) all legal but officially unrecord- ed and unregulated institutional finance” [16]. He distinguishes the following corporate advantages of the “informal” financial sector:

– Access to loans for the pop- ulation groups, which were not serviced by the institutions of the

“formal” financial sector;

– “informal” and fast granting of a loan;

– flexible schedule for reim- bursement of a loan and its use;

– low costs of loan servicing;

– personal and trust relations between the creditor and debtor.

Nevertheless, the following problems arise in the “informal”


– very high interest rates due to monopolistic position of creditors;

– narrow choice of the main fi- nancial services;

– obstacle for development of innovations, such as new financial instruments and proposal of new

financial services;

– lack of long-term lending and preference to short-term loans;

– unpredictable and unfore- seen relations between the cred- itor and debtor, and, therefore, high probability of debtor’s depen- dence on creditor.

In spite of the abovementioned disadvantages, “informal” sector should be regarded as the motiva- tion for innovations of the financial leverages connected with the “for- mal” sector. It may be a drag, for example, in reforming of financial institutions or in transition to the right of ownership, but, nonethe- less, it has some advantages, de- pending on peculiarities of every certain country.


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Financial System, Corporate Fi- nance and Corporate Governance, in: „European Financial Manage- ment“, Vol. 3, S. 159-187

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(2006): Development Macroeco- nomics, Princeton

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In document Finance №7 (19)V5.0.indd (бет 68-71)