FINANCIAL SYSTEM

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A. Definition of the Financial System

The financial system is basically an order in the economy of a country that has a role especially in providing financial services facilities by other supporting financial institutions such as money markets and capital markets. The Indonesian financial system in principle can be divided into two types, namely the banking system and the system of non-bank financial institutions.

The financial system, which consists of financial authorities, the banking system, and the system of non-bank financial institutions, is basically an order in the economy of a country that has a major role in providing financial services. These financial service facilities are provided by financial institutions, including money markets and capital markets.

The most dominant characteristic of the financial sector that we can observe is the rapid changes that occur in it along with the rapid development in the economic field. Policies in the financial, monetary, and banking sectors from time to time need to be adjusted according to economic dynamics as a result of globalization where changes in the economy of a country, especially developed countries, will certainly have an impact on the economy of other countries, especially in activities on a country's stock exchange.

The financial system can be interpreted as a collection of institutions, markets, regulatory provisions, regulations, and techniques where traded securities, interest rates are set, and financial services are produced and offered to all parts of the world (Peter S. Rose, 7th editionm 2000).

So, it can be interpreted that the financial system is a collection of financial institutions (banks, insurance institutions, etc.), various government policies in the field of financial economics, which are arranged in such a way as to facilitate all ongoing financial transactions, which support the occurrence of financial transactions in a country, for the country's economic progress.

B. Financial System Stability (SSK)

The definition of Financial System Stability (SSK) essentially says that a financial system enters an unstable stage when the system has endangered and hampered economic activity. Below are quoted a number of SSK definitions taken from various sources:

"A stable financial system is able to allocate funding sources and absorb the shock that occurs so that it can prevent disruption to the activities of the real sector and the financial system."

"A stable financial system is a financial system that is strong and resistant to various economic disorders so that it is still able to carry out the intermediary function, carry out payments and spread risk well."

"Financial system stability is a condition where the economic mechanism in pricing, fund allocation and risk management functions well and supports economic growth."

The meaning of financial system stability can be understood by conducting research on factors that can cause instability in the financial sector. Financial system instability can be triggered by a variety of causes and fluctuations. This is generally a combination of market failure, both due to structural and behavioral factors. Market failure itself can be sourced from external (international) and internal (domestic). Risks that often accompany activities in the financial system include credit risk, liquidity risk, market risk and operational risk.

C. Functions and Characteristics of the Financial System

Market imperfections encourage the development of various types of financial contracts, financial markets, and financial intermediary institutions. Each function of the financial system can have an influence on economic growth through two paths, namely the accommodation path of capital (physical capital and human capital) and the path of technological innovation. Both lines are the main source of long-term economic growth. If the financial system is getting better in carrying out its basic functions, its contribution will be greater in economic growth. The financial system has five functions including:

1. Mobilize savings

The financial system is an effective and low risk drive instrument

2. Allocating resources

The financial system can be useful as a data collector or efficient investment information at a glance so that the allocation of resources can run better.

3. Monitor managers and supervise the company

The financial system can help to monitor and verify the impact that makes investment activities develop and the occurrence of economic efficiency

4. Facilitating trade, hedging, diversification, and combining risks

The financial system is one of the bridges of trade, hedging, diversification, and combining risks. What works best is risk diversification.

5. Facilitating transactions of goods and services to be efficient

The financial system supports economic productivity growth by providing transaction facilities that have low costs (Manurung, J. & Manurung, A.H., 2009).

D. Islamic Financial System

The Islamic financial system is a connecting instrument between parties who need funds with parties who have more funds through goods and services with sharia principles, therefore all transactions carried out must be in accordance with sharia principles. The sharia principle is interpreted as a principle that is in accordance with the Qur'an and Sunnah. There are three main instruments in the Islamic financial system including:

1. Financial instruments that are guided by justice that make the atmosphere possible for the allocation and distribution of resources according to what is taught by Islam. The use of resources must be fair and efficient. Even the use of money is not for consuming something fancy.

2. Price mechanisms that can increase efficiency in resource use.

3. Financial intermediation based on the principle of sharing results and risks. (Soemitra, 2009).


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