TOPIC 1: INTRODUCTION AND OVERVIEW OF FINANCIAL SYSTEM

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TOPIC 1: INTRODUCTION AND OVERVIEW OF FINANCIAL SYSTEM by Mind Map: TOPIC 1: INTRODUCTION AND OVERVIEW OF FINANCIAL SYSTEM

1. FINANCIAL SYSTEM

1.1. Functions

1.1.1. Provision of payment mechanism

1.1.2. Provision of loan/credit

1.1.3. Provide a mechanism for making money

1.1.4. Provide a profitable outlet for saving

1.2. Components

1.2.1. Financial institutions

1.2.1.1. Provide the location and acts as an intermediary

1.2.2. Financial instruments

1.2.2.1. Vehicles or tools

1.2.3. Provider and user of funds

1.2.3.1. Determine the amount of available and needed

2. BANKING SYSTEM

2.1. BANK NEGARA MALAYSIA

2.1.1. Roles

2.1.1.1. Issue currency

2.1.1.2. Keeper of international reserves and safeguarding the value of RM

2.1.1.3. Act as a banker and financial advisor to the government

2.1.1.4. Banker to other banks

2.1.1.5. Promote monetary stability and a sound financial structure

2.1.1.6. Influence credit situation to the advantage of the country

2.1.1.7. Supervise, regulate and develop insurance industry

2.1.1.8. Administer the Exchange Control Act 1953

2.2. COMMERCIAL BANKS

2.2.1. Roles

2.2.1.1. Raise funds by collecting deposits through savings, current and fixed deposit accounts

2.2.1.2. Provide current account facilities where payments or deposits can be made through issuing or receiving checks

2.2.1.3. Accept deposits for savings account, FD and negotiable instruments

2.2.1.4. Offer financing and other financial services

2.2.2. Functions

2.2.2.1. Mobilize savings

2.2.2.2. Provide facilities to make payments and receive money

2.2.2.3. Extend loans and advances for working capital, investment and consumption

2.2.2.4. Finance government paper

2.2.2.5. Provide various banking facilities and services as authorized by Bank Negara Malaysia

2.2.3. Sources of funds

2.2.3.1. Deposit Account

2.2.3.1.1. Capital and reserves

2.2.3.1.2. Deposits (public and private sectors)

2.2.3.1.3. Bankers acceptances (BA)

2.2.3.1.4. Negotiable certificate of deposits

2.2.3.2. Foreign

2.2.3.2.1. Amounts due to financial institutions and other liabilities

2.2.4. Uses of funds

2.2.4.1. Domestic

2.2.4.1.1. Cash

2.2.4.1.2. Statutory reserves

2.2.4.1.3. Money at call

2.2.4.1.4. Investments (treasury bills, government and private sectors)

2.2.4.1.5. Fixed and other assets

2.2.4.2. Foreign

2.2.4.2.1. Amounts due from financial institutions

2.2.4.2.2. Term loans, trade bills, investments and other assets

2.3. INVESTMENT BANKS

2.3.1. Roles

2.3.1.1. Provide banking facilities and services to meet financial needs of participants

2.3.1.2. Main contributors of assets in the financial system

2.3.2. Sources of funds

2.3.2.1. Deposits from customers

2.3.2.2. Deposits and placement of bank and other financial institutions

2.3.2.3. Balance due to clients and brokers

2.3.3. Uses of funds

2.3.3.1. Property, plant and equipment

2.3.3.2. Investment into subsidiary companies

2.3.3.3. Loan, advances and finance

2.3.3.4. Security available for sale and held for trading and maturity

2.3.3.5. Statutory deposit with Bank Negara Malaysia

2.3.4. Examples

2.3.4.1. AmInvestment Bank Berhad

2.3.4.2. Maybank Investment Bank Berhad

2.3.4.3. CIMB Investment Bank Berhad

2.3.4.4. ECM Libra Investment Bank Berhad

2.4. NON-BANK FINANCIAL INSTITUTIONS (NBFI)

2.4.1. Roles

2.4.1.1. Provide insurance business

2.4.1.2. Provide capital for industrial, agriculture, commercial or other economic development (specialized in nature)

2.4.1.3. Support development in strategic and new growth area, to complement the financial service in meeting the national policies

2.4.1.4. Provide managerial and technical assistance apart from financing

2.4.2. Examples

2.4.2.1. Bank Simpanan Nasional

2.4.2.2. EPF

2.4.2.3. Lembaga Tabung Haji

2.4.2.4. Mortgage housings

2.4.3. Provident and pension funds

2.4.3.1. Safeguard savings of members and provide future benefits upon retirement, death or disabilities

2.4.3.2. Main source of funds

2.4.3.2.1. Deductions from employees/employers and return on investment

2.4.3.3. Main use of funds

2.4.3.3.1. Investment in securities and withdrawals

2.4.4. Insurance companies

2.4.4.1. Provide financial coverage to policyholders in the event of death/ loss of property

2.4.4.2. Main source of funds

2.4.4.2.1. Sum of money (premium) paid by policyholders

2.4.4.3. Main use of funds

2.4.4.3.1. Investment in securities, claims and financing to corporations

3. ISLAMIC BANKING

3.1. Principles

3.1.1. Based on Shariah laws

3.1.2. Prohibition of riba

3.1.3. Equity participation

3.1.4. Prohibition of gharar

3.1.5. Contractual relationship

3.1.6. Money as potential capital

3.2. Objectives

3.2.1. Offer financial services

3.2.2. Economic development

3.2.3. Optimum resources allocation

3.2.4. Optimum approach

3.2.5. Equitable distribution of resources

3.2.6. Facilitate stability in money value

3.3. Sources of Funds

3.3.1. al-Wadiah (saving)

3.3.2. al-Mudharabah (investment)

3.4. Uses of Funds

3.4.1. Home/Property Financing

3.4.1.1. al-Bai Bithaman Ajil (BBA)

3.4.1.2. Musharakah

3.4.1.3. Musharakah Mutanaqisah

3.4.2. Motor vehicle Financing

3.4.2.1. al-Ijarah

3.4.2.2. al-Ijarah Thumma al-Bai

3.4.3. Personal Financing

3.4.3.1. Bai' al-Inah

3.4.4. Credit card

3.4.4.1. Bai' al-Inah

3.4.4.2. Bai' al-Tawarruq

3.4.4.3. al-Qardhul Hasan (Benevolent loan)

3.4.5. Project Financing

3.4.5.1. Mudharabah

3.4.5.2. Musyarakah (Joint venture)

3.4.6. Working capital Financing

3.4.6.1. Murabahah

3.4.7. Letter of credit

3.4.7.1. al-Wakalah

3.4.7.2. Musyarakah

3.4.7.3. Murabahah

3.4.8. Islamic accepted bills

3.4.8.1. Bai' al-Dayn (Debt trading)

3.4.9. Bank guarantee

3.4.9.1. al-Kafalah

3.4.10. Other financing based on Bai' Al-Salam

4. OVERVIEW OF FINANCIAL MARKETS

4.1. FINANCIAL MARKETS

4.1.1. MM

4.1.1.1. Short-term debts are traded with less than 1 year maturity

4.1.1.2. Widely traded and more liquid

4.1.1.3. Example: Treasury bills, commercial paper, repurchase agreements and bankers' acceptance

4.1.2. FX

4.1.2.1. Deals with trading one currency for another

4.1.2.2. Spot FX transaction and Forward FX transaction

4.1.3. Capital market

4.1.3.1. Debts and equity instruments are traded

4.1.3.2. Example: Government bonds, corporate bonds

4.1.4. Derivatives

4.1.4.1. Market in which the derivatives securities are traded

4.1.4.2. Example: Future and forward contract, options and swaps

4.1.5. Offshores

4.1.5.1. Formed on Oct 1 1990, Labuan International Offshore Financial Centre (IOFC)

4.1.5.2. Offers wide range of offshore financial products and services such as offshore companies, banking, leasing, insurance, etc.

4.1.5.3. Deals in currencies other than MYR

5. RISKS FACED BY FINANCIAL INSTITUTIONS

5.1. Credit risk

5.2. Liquidity risk

5.3. Interest rate risk

5.4. Market risk

5.5. Off-Balance-Sheet risk

5.6. Foreign exchange risk

5.7. Country or sovereign risk

5.8. Technology risk

5.9. Operational risk

5.10. Insolvency risk

6. FINANCIAL INTERMEDIARIES

6.1. Functions

6.1.1. Lower the transaction costs

6.1.2. Deal with asymmetric information problems

6.1.3. Reduce the exposure of investors to risk

6.1.4. Engage in the process of indirect finance

6.2. Advantages

6.2.1. Reliable information of instruments

6.2.2. Offer products and services through virtual banking or internet banking

6.2.3. Identify actual provider and users of funds through effective banking network

6.2.4. Well diversified portfolio of depository or investment instruments