Task Analysis of financial instruments (7 points)

SELF-STUDY TASKS


TASK 2. ESSAY (4 POINTS)
Why do we need modern financial system?
A modern financial system is necessary for the development and progress of a country's economy. It is a system that enables individuals, businesses, and governments to raise capital, manage risks, and make transactions efficiently. Moreover, it provides essential services such as savings and investments, loans, insurance, and payment systems that are critical for economic growth.
One of the primary reasons for needing a modern financial system is to mobilize savings and allocate capital to productive uses. Banks and financial institutions play a crucial role in collecting deposits and channeling them into investment opportunities that generate income and create jobs. Without these financial intermediaries, savings would remain idle, and investment would be limited. This would result in slower economic growth and lower living standards.
Another crucial function of modern financial systems is to provide credit to individuals and businesses. Credit allows individuals to invest in education, purchase homes or start businesses, and businesses to invest in new equipment, expand their operations or develop new products. Credit is vital because most people and businesses lack sufficient savings to fund their big-ticket purchases. A modern financial system facilitates access to credit by providing affordable loans and other financial instruments that offer flexible repayment terms and reasonable interest rates.
The third reason for needing a modern financial system is to manage risk. Investing, lending, and participating in financial markets inevitably involves risk, and financial institutions provide mechanisms to manage or mitigate these risks. These mechanisms include insurance products, risk assessment tools, and financial derivatives that allow entities to transfer or hedge their risks. Without responsible risk management, financial systems are prone to instability, which can lead to widespread economic disruptions.
Finally, a modern financial system is needed to facilitate transactions and enable commerce. In today's globalized world, commerce transcends borders, and businesses need to engage in transactions beyond their country's borders with ease. A modern financial system provides robust and efficient payment systems, money transfer services, and foreign exchange facilities that enable businesses to transact with customers and suppliers worldwide.
In conclusion, a modern financial system is essential for a country's economic growth and development. It facilitates the allocation of capital to productive uses, provides access to credit, manages risks, and enables transactions. Moreover, it promotes financial inclusion by providing access to financial services for all members of society. As such, policymakers and regulators must ensure that countries have sound, well-regulated financial systems that encourage stability, growth, and prosperity for all.