financial institutions, instruments and markets
TRANSCRIPT
Financial Institutions, Markets andInstitutions.
Prepared By:
Atha Ullah Akakheel
MBA (Finance)Management Sciences AWKUMDate: 26 Feb 2015 11:55
Finance Terms
• Finance: The proper management of money.
• Money: The current medium of exchange or means of payment.
• Credit or Loan: A sum of money to be returned normally withinterest.
Classification of finance
Public finance
Private finance
Classification of finance1. Public finance
• It studies the sources of funds of public authorities such asstates, local self-governments and the Central Government.
• It is concerned with the income and expenditure of publicauthorities and with the adjustment of one to another.
2. Private finance• An individual• Profit-seeking business organizations• External finance (outside sources)• Direct financing (through issuing securities)• Indirect financing (through middlemen)• Internal finance (ploughing back of profits)• A non-profit organization
Financial systemA set of institutions, instruments and markets which promote savingsand channel them to their most efficient use.
FinancialInstitutions
FinancialMarkets
Financialinstruments
(Claims,assets,
securities)
FinancialServices
Regulatory Inter-mediaries
Non-Inter-
mediaries
Others
Banking Non-banking
Organized Un-organised
Primary Secondary
CapitalMarkets
MoneyMarkets
Equity Market Debt Market Derivatives Market
Primary Secondary
Shortterm
MediumTerm
LongTerm
Financial Institution:
A financial institution is an institution whose primary source of profitsis through financial asset transactions.
A financial institution acts as an agent that provides financialservices for its clients.
Financial institutions generally fall under financial regulation from agovernment authority.
Financial Institutions- act as mobilisers and depositories of savingand as the custodian of finance.
Functions of Financial Institutions
The principal function of financial institutions is to collect fundsfrom the investors and direct the funds to various financial servicesproviders in search for those funds.
Financial MarketsA financial market is a market in which financial assets are traded. Inaddition to enabling exchange of previously issued financial assets
• Financial markets include all markets where transactions relating tothe trading of financial securities and extending credit take place.
Financial Markets
• Physical Asset markets• Spot markets• Money markets• Mortgage markets• The primary market• The secondary market• Private markets• The money market• The capital market• Security exchanges
Financial Asset Markets:Financial asset markets, on the other hand deal with stocks,bonds, notes, mortgages and other financial instruments.
Spot Markets:Spot markets and future markets the terms that refer to whetherthe assets are being bought or sold on the spot delivery or fordelivery at some future date. Such as six months or a year in future.
Money Markets:Are the markets for short term, highly liquid debt securities.Mortgage Markets:Deals with loan and residential, commercial and real estate and onfarmland.The Primary Market:When a security is created and sold for the first time in the financialmarketplace, the transaction takes place in the primary market. It isalso known as Initial Public Offering (I PO)
The Secondary Market:Once a security has been issued, it may be traded from one investor toanother.
The Money Market:Short term securities are traded in money market. Network of dealersoperate in this market.
The Capital Market:Long term securities traded in the capital market.
Security Exchanges:Security exchanges facilitate trading of stock or bond among investors.
Six basic functions of financial markets
• Borrowing and Lending• Price Determination• Information Aggregation and Coordination• Risk Sharing• Liquidity• Efficiency
Financial Instruments
Financial instruments are cash, evidence of an ownership interest in anentity, or a contractual right to receive, or deliver, cash or anotherfinancial instrument.
Cash instruments :are financial instruments whose value isdetermined directly by markets. They can be divided into Securities,which are readily transferable, and other cash instruments such asLoans and Deposits, where both borrower and lender have to agree ona transfer
Derivatives instruments: are financial contracts, or financialinstruments, whose prices are derived from the price of somethingelse
Types of Financial InstitutionsFinancial institution are divide into to forms
DepositoryNon Depository
Non DepositoryAre financial intermediaries that do not accept deposits but dopool the payments of many people in the form of premiums orcontributions and either invest it or provide credit to others.
Pension funds, Securities firms, Government-sponsored enterprises, Finance companies.
Types Of Financial Institutions
• Banks• Savings & loan Associations• Investment Companies• Credit Unions• Insurance Companies• Mutual Funds• Pension Funds• Brokerage Houses
1) Banks
• A bank is a commercial or state institution that providesfinancial services, including issuing money in various forms,receiving deposits of money, lending money and processingtransactions and the creating of credit.
1.1)Central Bank
• A central bank, reserve bank or monetary authority, is anentity responsible for the monetary policy of its country or ofa group of member states, such as the European Central Bank(ECB) in the European Union, the Federal Reserve System inthe United States of America, State Bank in Pakistan.
• Its primary responsibility is to maintain the stability of thenational currency and money supply, but more active dutiesinclude controlling subsidized-loan interest rates, and actingas a “lender of last resort” to the banking sector during timesof financial crisis
1.2) Commercial Banks
• A commercial bank accepts deposits from customers and inturn makes loans, even in excess of the deposits; a processknown as fractional-reserve banking. Some banks (calledBanks of issue) issue banknotes as legal tender.
1.3) Investment Banks
• Investment banks help companies and governments and theiragencies to raise money by issuing and selling securities inthe primary market. They assist public and privatecorporations in raising funds in the capital markets (bothequity and debt), as well as in providing strategic advisoryservices for mergers, acquisitions and other types of financialtransactions.
1.4) Saving Banks
• A savings bank is a financial institution whose primarypurpose is accepting savings deposits. It may also performsome other functions.
1.5) Micro Finance Banks
• For the purpose of poverty reduction program, such kind ofbanks are working in the different countries with thecontribution of UNO or World Bank.
• In Pakistan 7 Micro Finance Banks are providing servicesunder the SBP prudential regulation.
1.6) Islamic Banks
• Islamic banking refers to a system of banking or bankingactivity that is consistent with Islamic law (Sharia) principlesand guided by Islamic economics. In particular, Islamic lawprohibits usury, the collection and payment of interest, alsocommonly called riba in Islamic discourse.
1.7) Specialized Banks
1. ZTBL• The Zarai Taraqiati Bank Limited It is also known as Agricultural
Development Bank of Pakistan (ADBP).
• It is the premier financial institution geared towards thedevelopment of the agricultural sector through the provision offinancial services and technical know-how.
2. IDBP• Industrial Development Bank of Pakistan is one of Pakistan's oldest
development financing institution created with the primaryobjective of extending term finance for investment in themanufacturing sector and SME Sector of the economy.
1.7cont…) Specialized Banks
3. SME Bank
• Promote the business.• Positive impact on Financial environment.• Financing of projects.• Tell revenue generation schemes to entrepreneurs.
1.8) Non-banking financial company
• Non-bank financial companies (NBFCs) also known as a non-bankor a non-bank bank, are financial institutions that providebanking services without meeting the legal definition of a bank,i.e. one that does not hold a banking license.
• Operations are, regardless of this, still exercised under bankregulation. However this depends on the jurisdiction, as in somejurisdictions, such as New Zealand, any company can do thebusiness of banking, and there are no banking licenses issued.
1.8 cont..) Non-banking financial company
• Non-bank institutions frequently acts as suppliers of loans andcredit facilities, supporting investments in property, providingservices relating to events within peoples lives such as fundingprivate education, wealth management and retirement planning.
• however they are typically not allowed to take deposits from thegeneral public and have to find other means of funding theiroperations such as issuing debt instruments. In India, most NBFCsraise capital through Chit Funds.
2) Investment company• Generally, an "investment company" is a company (corporation,
business trust, partnership, or limited liability company) thatissues securities and is primarily engaged in the business ofinvesting in securities.
• An investment company invests the money it receives frominvestors on a collective basis, and each investor shares in theprofits and losses in proportion to the investor’s interest in theinvestment company.
3) Leasing Companies
A lease or tenancy is the right to use or occupy personal property orreal property given by a lessor to another person (usually called thelessee or tenant) for a fixed or indefinite period of time, whereby thelessee obtains exclusive possession of the property in return forpaying the lessor a fixed or determinable consideration (payment).
4) Insurances Companies
• Insurance companies may be classified as
1. Life insurance companies, which sell life insurance,annuities and pensions products.
2. Non-life or general insurance companies, which sellother types of insurance.
5) Mutual Fund
• An investment which is comprised of a pool of funds collectedfrom many investors for the purpose of investing in securitiessuch as stocks, bonds, money market securities and similarassets.
• Mutual funds are operated by money mangers, who invest thefund's capital and attempt to produce capital gains and incomefor the fund's investors. A mutual fund's portfolio is structuredand maintained to match the investment objectives stated in itsprospectus
6) Pension Funds:
Pension funds are retirement plans funded by corporationsor government agencies for their workers and administeredgenerally by the trust departments of commercial banks or by lifeinsurance companies. Pension funds invest primarily in bonds,stocks, mortgages and real estate.
7) Credit Unions:
• Credit unions are cooperative associations whosemembers are supposed to have a common bond, suchas being employees of the same firm. Member'ssavings are loans and home mortgage, credit unionsare often the cheapest source of funds available to theindividual borrowers.
8) Brokerage Houses
Stock brokers assist people in investing, online only companiesare called 'discount brokerages', companies with a branchpresence are called 'full service brokerages' or 'private clientservices.
Conclusion
To review, we have looked at the relationship betweeninstitutions and Financial Markets. This growing field ofresearch may offer us a new insight into the dynamics ofeconomic growth within and among various economies.