Nature of financial system:

A financial system is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments, and services which facilitate the transfer and allocation of funds, efficiently and effectively.

There are four constituents of a financial system, viz. (i) financial institutions, (ii) financial markets, (iii) financial instruments, and (iv) financial services.

Financial Institutions

Financial institutions are business organisations that act as mobilisers and depositors of savings and as purveyors of credit or finance.  They also provide various financial services to the community.

Financial institutions have been variously classified.  Two important classifications are as follows:
a) Banking institutions and Non-banking institutions
b) Intermediaries and non-intermediaries. 

a) Banking institutions and Non-banking institutions

The banking institutions have quite a few things in common with the non-banking ones, but their distinguishing character lien in the fact that unlike other institutions, (i) they participate in the economy's payments mechanism, i.e., they participate in the economy's payments mechanism, i.e., they provide transactions services, (ii) their deposit liabilities constitute a major part of the national money supply, and (iii) they can, as a whole, create deposits or credit which is money.  Distinction between the two has been highlighted by Sayers by characterising the former as "creators" of credit, and the latter as were "purveyors" of credit.

b) Intermediaries and Non-intermediaries

Intermediaries intermediate between savers and investors; they lend money as well as mobilise savings; their liabilities are towards the ultimate savers, while their assets are from the investors or borrowers. Non-intermediary institutions do the loan business but their resources are not directly obtained from the savers. All banking institutions are intermediaries, many non-banking institutions also act  as intermediaries and when they do so they are known as non-banking financial inter-mediaries.