Introduction & Overview of Financial System

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Introduction & Overview of Financial System by Mind Map: Introduction & Overview of Financial System

1. Banking System

1.1. Bank Negara Malaysia: Roles

1.1.1. Issue currency (issue, re-issue, and exchange noted and coins)

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

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

1.1.4. Banker to other banks

1.1.5. Promote monetary stability and a sound financial structure

1.2. Commercial Banks

1.2.1. Roles Raise funds by collecting deposits thru savings, current and fixed deposit accounts Provide current account facilities where payments / deposits can be made through issuing or receiving checks Accept deposits for savings account, FD and negotiable instruments Offer financing and other financial services – remittances and letters of credit

1.2.2. Functions Mobilize savings Provide facilities to make payments and receive money Extend loans and advances for working capital, investment and consumption Finance government paper – MGS and TBs Provide various banking facilities and services as authorized by BNM 1. Execution of standing instructions 2. Transfer funds 3. Collection of zakat 4. Issue letter of credit 5. Lockers facility 6. Foreign exchange transactions 7. Others

1.2.3. Sources of Funds Deposit Account Foreign

1.2.4. Users of Funds Domestic Foreign

1.3. Investment Banks

1.3.1. Roles Provide banking facilities and services to meet financial needs of participants Main contributors of assets in the financial system

1.3.2. Sources of Funds Deposits from customer Borrowing Deposits and placement of bank and other financial institutions Balance due to clients and brokers

1.3.3. Uses of Funds Loan, advances and finance Deposit placement with financial institutions Security held for trading and maturity Security available for sale Statutory deposit with BNM Property, plant, and equipment Investment into subsidiary companies

2. Non-Bank Financial Institutions (NBFI)

2.1. Movement of funds from surplus to deficits units

2.2. Roles

2.2.1. Pension funds

2.2.2. Provide insurance business

2.2.3. Promote economic activities for economic development

2.2.4. Credit institutions

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

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

2.5. Provide managerial and technical assistance apart from financing

2.6. Provident and Pension Fund

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

2.6.2. Main source of funds: Deductions from employees/employers + return on investment

2.6.3. Main use of funds: investment in securities, withdrawals

2.7. Insurance Companies

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

2.7.2. Main source of funds: sum of money (premium) paid by policyholders

2.7.3. Main use of funds: investment in securities, claims, financing to corporations

3. Islamic Banking

3.1. Defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah

3.2. Philosophical Foundations

3.2.1. 1. Tawhid 2. Khilafah 3. Amanah 4. Al-adalah 5. Tazkiyah 6. Huriyyah

3.3. Principles of Islamic Banking

3.3.1. Based on Shariah laws

3.3.2. Prohibition of riba’

3.3.3. Equity participation – profit and risk sharing in business venture

3.3.4. Prohibition of gharar – undertake a venture blindly without sufficient knowledge

3.3.5. Contractual relationship – depends on nature of transactions (seller-buyer, lessor-lessee, partnership, etc)

3.3.6. Money as potential capital

3.4. Objectives of Islamic Banking

3.4.1. Offer financial services

3.4.2. Economic development

3.4.3. Optimum resources allocation

3.4.4. Optimum approach

3.4.5. Equitable distribution of resources

3.4.6. Facilitate stability in money value

3.5. Sources of Funds

3.5.1. Al-Wadiah (saving)

3.5.2. Al-Mudharabah (investment)

3.6. Uses of Funds

3.6.1. Ijarah / Ijarah Thumma al-Bai’ (motor vehicle financing)

3.6.2. Bai’ al-Inah (personal financing)

3.6.3. Mudharabah / Musharakah (project financing)

4. Risk Faced by Financial Institutions

4.1. Credit Risk

4.1.1. risk that promised cash flows from loans and securities held by FIs may not be paid in full

4.2. Liquidity Risk

4.2.1. unexpected increase in liability withdrawals may require an FI to liquidate assets in a very short period of time and at low prices

4.3. Market Risk

4.3.1. incurred in trading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices

4.4. Off-Balance-Sheet Risk

4.4.1. incurred by an FI as the result of its activities related to contingent assets and liabilities

4.5. Foreign Exchange Risk

4.5.1. exchange rate changes can affect the value of an FI's assets and liabilities denominated in foreign currencies

5. Financial System

5.1. It plays a critical role for intermediaries process to function efficiently. It also enables leaders and borrowers to exchange funds where funds can flow effectively from surplus units to deficits unit. Besides, it monitored closely by a supervisory authority to ensure rules and regulations are followed.

5.2. Functions

5.2.1. Provision of payment mechanism For commercial transaction. Examples: ATM, credit card

5.2.2. Provision of loan/ credit Supply credit to serve finance capital investment. Example: housing

5.2.3. Money creation Provide a mechanism for making money

5.2.4. Saving Provide profit outlet for saving. Example: saving account

5.3. Components

5.3.1. Financial Institutions Provide the location, acts as an intermdiary

5.3.2. Financial Instruments Vehicles or tools

5.3.3. Provider and Users of Funds Determine the amount available and needed

6. Function of Financial Intermediaries

6.1. lower transaction costs

6.2. reduce exposure of investors to risk

6.3. before transaction: adverse selection- try to avoid selecting the risky borrower

6.4. deal with asymmetric information problems

6.4.1. after transaction: moral hazard- ensure borrower will not engage in activities that will prevent him/her to repay the loan

7. Benefits of Financial Intermediaries

7.1. Well diversified portfolio of depository or investment instruments

7.2. More options of borrowing, financing or advances at lowest possible prices

7.3. Reliable information of instruments – such as level of safeties and liquidity

7.4. Act as advisor to participants

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

8. Overview of Financial Markets

8.1. Financial Market

8.1.1. Market that channel funds from economic players that have saved surplus funds to those that have a shortage of funds

8.1.2. 4 financial markets MM/FX MM: Short-term debts are traded (< 1 year maturity) Widely traded. More liquid FX: Deal with trading one currency for another Capital Market Debts (bonds) and equity instruments are traded Equity – provide means of raising funds by corporations by issuing stocks and shares (primary and secondary markets) Bonds – private and public sectors can raise funds by issuing private and government debt securities Derivatives Market in which derivatives securities are traded Instruments that derived its value from the movement of price/rate of some underlying assets such as interest rate, foreign exchange, commodity and index Offshores Labuan International Offshore Financial Centre (IOFC) – formed on Oct 1, 1990. Offer wide range of offshore financial products and services such as offshore companies, banking, leasing, insurance, fund management, investment holding, company management services, etc Market: More than 5000 offshore companies originating from more than 70 countries in Labuan Deals in currencies other than MYR