Financial Institutions, Instruments and Markets.

useful for finance students and as well for lectures..

2. Financial Institutions, Markets and
Institutions.
Prepared By:
AthaUllahAkakheel
MBA (Finance)
Management Sciences AWKUMDate: 26 Feb 2015 11:55

3. Finance Terms
•Finance:Thepropermanagementofmoney.
•Money:Thecurrentmediumofexchangeormeansofpayment.
•CreditorLoan:Asumofmoneytobereturnednormallywith
interest.
Classificationoffinance
Publicfinance
Privatefinance

4. Classification of finance
1.Public finance
•It studies the sources of funds of public authorities such as
states, local self-governments and the CentralGovernment.
•It is concerned with the income and expenditure of public
authorities and with the adjustment of one to another.
2.Privatefinance
•An individual
•Profit-seeking businessorganizations
•Externalfinance (outsidesources)
•Directfinancing (through issuingsecurities)
•Indirectfinancing (throughmiddlemen)
•Internalfinance (ploughing back ofprofits)
•Anon-profit organization

5. Financial system
A set of institutions, instruments and markets which promote savings
and channel them to their most efficient use.
Financial
Institutions
Financial
Markets
Financial
instruments
(Claims,
assets,
securities)
Financial
Services
Regulatory Inter-
mediaries
Non-
Inter-
mediaries
Others
Banking Non-
banking
Organized Un-
organised
Primary Secondary
Capital
Markets
Money
Markets
Equity Market Debt Market Derivatives Market
Primary Secondary
Short
term
Medium
Term
Long
Term

6. Financial Institution:
Afinancial institutionis an institution whose primary source of profits
is through financial asset transactions.
Afinancial institution acts as an agent that provides financial
services for its clients.
Financial institutions generally fall under financial regulation from a
government authority.
Financial Institutions-act as mobilisers and depositories of saving
and as the custodian of finance.

7. Functions of Financial Institutions
The principal function offinancial institutionsis to collect funds
from the investors and direct the funds to various financial services
providers in search for those funds.

8. Financial Markets
Afinancial marketis a market in which financial assets are traded. In
addition to enabling exchange of previously issued financial assets
•Financial markets include all markets where transactions relating to
thetradingof financialsecurities and extending credit take place.

9. 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

10. 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 whether
the assets are being bought or sold on the spot delivery or for
delivery 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 on
farmland.
The Primary Market:
When a security is created and sold for the first time in the financial
marketplace, the transaction takes place in the primary market. It is
also known as Initial Public Offering (I PO)

11. The Secondary Market:
Oncea security has been issued, it may be traded from one investor to
another.
The Money Market:
Short term securities are traded in money market. Network of dealers
operate 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.

12. Six basic functions of financial markets
•Borrowing and Lending
•Price Determination
•Information Aggregation and Coordination
•Risk Sharing
•Liquidity
•Efficiency

13. Financial Instruments
Financial instrumentsare cash, evidence of an ownership interest in an
entity, or a contractual right to receive, or deliver, cash or another
financial instrument.
Cashinstruments:are financial instruments whose value is
determined directly by markets. They can be divided intoSecurities,
which are readily transferable, and othercashinstruments such as
LoansandDeposits,where both borrower and lender have to agree on
a transfer
Derivativesinstruments:are financial contracts, or financial
instruments, whose prices are derived from the price of something
else

14. Types of Financial Institutions
Financial institution are divide into to forms
Depository
Non Depository
NonDepository
Arefinancialintermediariesthatdonotacceptdepositsbutdo
poolthepaymentsofmanypeopleintheformofpremiumsor
contributionsandeitherinvestitorprovidecredittoothers.
Pensionfunds,
Securitiesfirms,
Government-sponsoredenterprises,
Financecompanies.

15. Types Of Financial Institutions
•Banks
•Savings & loan Associations
•Investment Companies
•Credit Unions
•Insurance Companies
•Mutual Funds
•Pension Funds
•Brokerage Houses

16. 1)Banks
•Abankisacommercialorstateinstitutionthatprovides
financialservices,includingissuingmoneyinvariousforms,
receivingdepositsofmoney,lendingmoneyandprocessing
transactionsandthecreatingofcredit.

17. 1.1)Central Bank
•Acentralbank,reservebankormonetaryauthority,isan
entityresponsibleforthemonetarypolicyofitscountryorof
agroupofmemberstates,suchastheEuropeanCentralBank
(ECB)intheEuropeanUnion,theFederalReserveSystemin
theUnitedStatesofAmerica,StateBankinPakistan.
•Itsprimaryresponsibilityistomaintainthestabilityofthe
nationalcurrencyandmoneysupply,butmoreactiveduties
includecontrollingsubsidized-loaninterestrates,andacting
asa“lenderoflastresort”tothebankingsectorduringtimes
offinancialcrisis

18. 1.2) Commercial Banks
•Acommercialbankacceptsdepositsfromcustomersandin
turnmakesloans,eveninexcessofthedeposits;aprocess
knownasfractional-reservebanking.Somebanks(called
Banksofissue)issuebanknotesaslegaltender.

19. 1.3) Investment Banks
•Investmentbankshelpcompaniesandgovernmentsandtheir
agenciestoraisemoneybyissuingandsellingsecuritiesin
theprimarymarket.Theyassistpublicandprivate
corporationsinraisingfundsinthecapitalmarkets(both
equityanddebt),aswellasinprovidingstrategicadvisory
servicesformergers,acquisitionsandothertypesoffinancial
transactions.

20. 1.4) Saving Banks
•Asavingsbankisafinancialinstitutionwhoseprimary
purposeisacceptingsavingsdeposits.Itmayalsoperform
someotherfunctions.

21. 1.5) Micro Finance Banks
•Forthepurposeofpovertyreductionprogram,suchkindof
banksareworkinginthedifferentcountrieswiththe
contributionofUNOorWorldBank.
•InPakistan7MicroFinanceBanksareprovidingservices
undertheSBPprudentialregulation.

22. 1.6) Islamic Banks
•Islamicbankingreferstoasystemofbankingorbanking
activitythatisconsistentwithIslamiclaw(Sharia)principles
andguidedbyIslamiceconomics.Inparticular,Islamiclaw
prohibitsusury,thecollectionandpaymentofinterest,also
commonlycalledribainIslamicdiscourse.

23. 1.7) Specialized Banks
1.ZTBL
•TheZaraiTaraqiatiBank LimitedIt is also known asAgricultural
Development Bank of Pakistan(ADBP).
•Itis the premier financial institution geared towards the
development of the agricultural sector through the provision of
financial services and technical know-how.
2. IDBP
•IndustrialDevelopmentBankofPakistanisoneofPakistan'soldest
developmentfinancinginstitutioncreatedwiththeprimary
objectiveofextendingtermfinanceforinvestmentinthe
manufacturingsectorandSMESectoroftheeconomy.

24. 1.7cont…)Specialized Banks
3. SME Bank
•Promote the business.
•Positive impact on Financial environment.
•Financing of projects.
•Tell revenue generation schemes to entrepreneurs.

25. 1.8) Non-bankingfinancial company
•Non-bankfinancialcompanies(NBFCs)alsoknownasanon-bank
oranon-bankbank,arefinancialinstitutionsthatprovide
bankingserviceswithoutmeetingthelegaldefinitionofabank,
i.e.onethatdoesnotholdabankinglicense.
•Operationsare,regardlessofthis,stillexercisedunderbank
regulation.Howeverthisdependsonthejurisdiction,asinsome
jurisdictions,suchasNewZealand,anycompanycandothe
businessofbanking,andtherearenobankinglicensesissued.

26. 1.8cont..)Non-bankingfinancial company
•Non-bankinstitutionsfrequentlyactsassuppliersofloansand
creditfacilities,supportinginvestmentsinproperty,providing
servicesrelatingtoeventswithinpeopleslivessuchasfunding
privateeducation,wealthmanagementandretirementplanning.
•howevertheyaretypicallynotallowedtotakedepositsfromthe
generalpublicandhavetofindothermeansoffundingtheir
operationssuchasissuingdebtinstruments.InIndia,mostNBFCs
raisecapitalthroughChitFunds.

27. 2) Investment company
•Generally,an"investmentcompany"isacompany(corporation,
businesstrust,partnership,orlimitedliabilitycompany)that
issuessecuritiesandisprimarilyengagedinthebusinessof
investinginsecurities.
•Aninvestmentcompanyinveststhemoneyitreceivesfrom
investorsonacollectivebasis,andeachinvestorsharesinthe
profitsandlossesinproportiontotheinvestor’sinterestinthe
investmentcompany.

28. 3) Leasing Companies
Aleaseortenancyistherighttouseoroccupypersonalpropertyor
realpropertygivenbyalessortoanotherperson(usuallycalledthe
lesseeortenant)forafixedorindefiniteperiodoftime,wherebythe
lesseeobtainsexclusivepossessionofthepropertyinreturnfor
payingthelessorafixedordeterminableconsideration(payment).

29. 4) InsurancesCompanies
•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 sell
other types of insurance.

30. 5) Mutual Fund
•Aninvestmentwhichiscomprisedofapooloffundscollected
frommanyinvestorsforthepurposeofinvestinginsecurities
suchasstocks,bonds,moneymarketsecuritiesandsimilar
assets.
•Mutualfundsareoperatedbymoneymangers,whoinvestthe
fund'scapitalandattempttoproducecapitalgainsandincome
forthefund'sinvestors.Amutualfund'sportfolioisstructured
andmaintainedtomatchtheinvestmentobjectivesstatedinits
prospectus

31. 6) PensionFunds:
Pension funds are retirement plans funded by corporations
or government agencies for their workers and administered
generally by the trust departmentsofcommercialbanks or by life
insurance companies. Pension funds invest primarily in bonds,
stocks, mortgages and real estate.

32. 7) CreditUnions:
•Credit unions are cooperative associations whose
members are supposed to have a common bond, such
as being employees of the same firm. Member's
savings are loans and home mortgage, credit unions
are often the cheapest source of funds available to the
individual borrowers.

33. 8) Brokerage Houses
Stock brokers assist people in investing, online only companies
are called 'discount brokerages', companies with a branch
presence are called 'full service brokerages' or 'private client
services.

34. Conclusion
Toreview,wehavelookedattherelationshipbetween
institutionsandFinancialMarkets.Thisgrowingfieldof
researchmayofferusanewinsightintothedynamicsof
economicgrowthwithinandamongvariouseconomies.