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The Financial System and Retail Banking

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All these factors called for a standard means of exchange for the produced and saleable goods (and services, as the case may be). As the human civilisation advances, the society had the currency as the fixed standard. Different goods were traded on the basis of currency of the land. It ultimately led to other important factors like demand and supply to influence the trade. The goods that had higher demand and lesser supply enjoyed the premium status and were priced higher. Similarly, the goods which had abundant supply with little demand. were priced lower. The same concept was also applicable for the fund holders in the society as there are people who have abundant source of money. Again there are persons, who are in the dire needs of the same.

In simple words, the financial system is the system and process of channelizing funds from those who have it in excess to those who require it. So, it is under the financial system that the suppliers and the demanders of the funds come together. With the development of the banking system across the globe, the financial system has primarily governed by the central banks of the respective countries. As international financial bodies like that of the International Monetary Fund or the World Bank came into being, they also became the part and parcel of the global financial system.

In the early years of the decade, Franklin Allen and Douglas Gale observed that the primary objective of a financial system is to channel funds from agents with surpluses to agents with deficits (Allen &amp. Gale, 2001).

But as the financial system has become complex day by day, it has been virtually impossible to trace out the demanders and the suppliers of the funds individually. Here comes the role of financial intermediaries. Financial intermediaries collect the money from that of the suppliers in the form of deposits and channelize the same to the demanders in lieu of certain pre-specified rate of interests in the form&nbsp.of loans.&nbsp.