Gaukhar Dauletbayeva,

Master Science of International Finance Management

Baitursynov Kostanay State University (Kazakstan)

Kamshat Saginbekova, PhD in economics

KAZNEXT, Kazakstan

MAIN TYPES OF FINANCIAL SYSTEMS

Depending on the market structure, such as “Environmental stability” and “Role of market mechanisms in the environment”, it is possible to distinguish two main groups of the financial system: the first one is focused on banks (“German”, “Japanese”), and second one – on the capital market (Anglo-Saxon countries). Bank-oriented financial system is divided in such groups as “with participation” and “without participation of the Government”. Bank-oriented financial system with participation of the banking system is not attractive from the economical point of view, and, therefore, it is not reviewed in this work.

The exogenous element “Environmental stability” may be considered as changes in the environment: collapse of the socialistic camp and Soviet bloc, global privatization wave, technological innovations and radical changes in the market environment [3, P. 312].

The next influencing factor – “Role of market mechanisms in the environment” – is a partially endogenous element, since it is related to the influence of market mechanisms inside the financial system or through it. While influencing on market mechanisms in non-financial environment, such as market of human resources and market of innovations and science, it is partially exogenous. Classified important features of the main types of financial system are given in Table 1.

Financial systems, which are focused on the capital market or banks, cause allocation of financial savings through markets. Bonds and shares are one of the most important financial instruments. In this case, banks play the role of intermediaries [14, P. 116].

Impersonal relationships between market participants lead to free actions when changing the structure of business financing or creditor’s portfolio. The Government is restricted when trying to interfere in the allocation and its intervention is considered by the public as a violation of the rules of functioning of the free market [9, P. 471].

Table 1

Main types of financial system

	Bank-oriented	Capital market
The share of banking credit in financing volume	high	small
The share (contribution) of the banks in GDP	high	small
The share of marketable value of the national (internal) JSC in GDP	small	high
The number of companies, which shares is quoted in the market	small	high
The share of participation in capital of households and banks	Low permits	high be forbidden
Сoncentration of the owners and stockholders	high	low
The market for futures and options	non-liquid	non-liquid
Level of the entrepreneurs' debts	high	small
Accessibility of the information about JSC	restricted	plentiful
The control of the entrepreneurs	Participation in the capital by banks	The market for the entrepreneur's control

Source: Allen, F. (1995), P.181.

Bank-oriented financial systems without intervention of Government redistribute savings through financial institutions, primarily, through banks. The main instrument of long-term financing is bank loans, and, therefore, banks are direct intermediaries. In this case, the volume of the securities market is low and not attractive. Banks and other financial institutions are the main participants on this market [6, P. 37]. Relationships between these market participants are personal and long-term. Due to a plenty of the rules in the commercial banking sector, possibility of influence by the Government is high, but it is used very carefully. If this potential of the intervention by the Government is not exhausted, the savings are mobilized through various investment opportunities, primarily, through the credit market. Thus, banks have no significant impact on the development of the national economy [8, P. 7].

Bank-oriented financial systems with the participation of the Government control the redistribution of savings, primarily, through banks. The most important long-term financing instruments for business activity are bank loans. In contrast to the abovementioned financial system, in this case, the Government takes an active part as on the capital market, so on the money market and the credit market, and it results in formation of administrative prices. Government bonds are traded on the securities market; financing of business activity comes through the banks and public financial institutions. Such actions are the characteristics of underdeveloped countries with low level of financial system development.

The issue of compliance of the financial systems is vigorously discussed in today publications. American authors prefer the financial system, which is focused on the capital market, and they recommend to apply it for economic policy, since, in their opinion, the bank-oriented financial system is “backward”.

They put forward as another argument the solution of the problem in mobilizing capital for investment, which is beyond its function and time opportunities in case of individual investors. A shareholder is involved with its own capital as in the success of the enterprise, and so in its failure. At the same time, it stimulates the decentralized control of the business activity. Supporters of this system emphasize the role of the active secondary market, since pricing on this market is crucial in case of renewable capital market. In case of active trading of the securities with equity participation, there is an opportunity for acquisition of a company with a low market value and opportunity for its effective control.

Although the Anglo-Saxon scientists hold to the opinion that the prevalence of the bank's influence in the financial sector is economically backward, nonetheless, they emphasize the decisive contribution of the bank-oriented financial system in Germany to the high economic growth of the country [4, P. 41]. Due to long-term relationships between the Bank and Entrepreneur, information costs remain low, and, comparing with individual investors, advantages of banks may be used [5, P. 135]. In addition, banks have more profitable opportunities for influence and control than physical investors on the capital market. Particular (main) difference between financing of the business activity through banks lies in the fact that the individual contracts are signed in this form. Rybczynski substantiates it by the fact that the national economy in the transition of society from manufacturing to providing of services is connected with the development of the financial system at the same time [13, P. 9]. Conditions set by the Government have influence on the formation of the financial system, which is focused either on the capital market or the banks [10, P.11]. Roe sees the financial system not only as a product of economic development, but also as a political, historical and cultural system of the country: „corporate structure is highly sensitive to the organization of financial intermediaries, while the organization of intermediaries is highly sensitive to a nation’s politics“[12, P. 1997].

When choosing between the main types of the financial system, it should take into account two criteria: the state of development of the country and „asset specifity“ (innovative orientation). For developing countries, the bank-oriented financial system is recommended with close ties between banks and entrepreneurs that promote the country as a whole [11, P. 34], [1, P. 39]. Formation of functioning and workable capital market depends on a sufficient number of wealthy individuals and institutional investors, as well as on high requirements for legal guarantees of investors. It is known that these preconditions are not fulfilled in developing countries. For this reason, the financial system, which is focused on the capital market, is not recommended [7, P. 81]. Bank financing is beneficial in cases when it comes to investments in standard techniques, since due to long-term connections with entrepreneurs banks are able to analyze optimally the efficiency of debtors. While the result of innovative processes or product development is initially unclear. Acquisition of information and monitoring function are performed by many potential investors independently. Consequently, the bank-oriented financial system is popular in the countries with traditional industry. The financial system focused on the capital market is dominating in case of the industrial countries with application of innovative technologies [2, P. 95].

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