F I N 53 536 PPT 2 Ma M arch 20 2015 15
OVERVIEW OF FINANCIAL SYSTEM (Sources and Uses of Funds)
CHAPTER 1b Dr. Norliza Che Yahya Center for Economics and Finance Studies Faculty of Business and Managem Management ent Universiti Teknologi MARA (UiTM), 42300 Puncak Alam Campus, Office: PFI PFI 04 -032 Office (tel): 03-3258 7077 Email:
[email protected] or
[email protected]
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Content of Syllabus CODE
CHAPTER
WEEK
Ppt 1- 4
Introduction and Overview of Financial System
1-3
Ppt 5-6
Interest rates and the role of a central bank
Ppt 7-8
NOTE
4
Test 1
Money & Foreign Exchange market
5-6
(15%)
Ppt 9-10
Capital market – market – Equity Equity and Bond market
7-8
Ppt 11
Derivatives market
Ppt 12
Offshore Offsho re market
9 - 10
Ppt 13
Financial Legal Framework
10 - 11
Test 2
Ppt 14
Banking products & services
11 - 12
(15%)
Ppt 15-16
Banking regulation and management
12 - 14
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2
Chapter Outline NO.
1.
2.
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CONTENT
Role, functions and sources & uses of funds of commercial banks and investment banks
Role, functions and sources and uses of funds of non bank financial institutions (NBFIs)
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Sources and Uses of Funds
Sources
Uses
• funds received by the financial institutions from various sources including funds placed by the surplus units in the form of deposits
• how funds are being used for the financial intermediaries to maximize its return and to meet regulators requirement
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FINANCIAL STATEMENT OF BANKING INSTITUTIONS
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A typical balance sheet of a bank (common items): Assets
Liabilities
Cash and short-term funds
Deposits from customers
Deposits and placement with other banks/ Deposits and placement from other financial institutions banks/financial institutions Securities
Obligations on securities sold under REPO
Loans, advances and financing
Bills and acceptances payable
Other assets
Other liabilities
Statutory deposits with BNM
Shareholders’ Equity
Property, plant and equipment
Share capital Reserves
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A typical Income Statement of a commercial bank RM
Interest Income
xxx
- Interest Expense
xxx
Net Interest Income
xxx
+ Other operating income
xxx
Net Income
xxx
- Overhead Expenses
xxx
- Allowances for losses for loans/advances
xx
Profit before tax
xxx
- Tax
xx
Profit/loss
xxxx 6
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Commercial Bank an institution that carries on the business of banking the business of banking is defined as the business of: Receiving deposits; Paying or collecting cheques; Provision of finance; and Such other business as BNM, with the approval of the
Minister, may prescribe’
(BAFIA 1989)
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Example of Commercial Banks in Malaysia
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Banking functions of Commercial banks
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Retail banking services Trade finance facilities Treasury services Cross border payment services Custody services
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Sources of funds of Commercial banks
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Deposits
Deposits dominated the sources of funds for banks.
Deposits are in the form of: i) savings account holders - funds placed by retail customers
ii) fixed deposits - placed by investors/corporates looking for low risk investment iii) deposits or placement by other financial intermediaries
Securities
Example – Repurchase Agreement (REPO)
Capital and reserves
serves as a safety cushion for depositors.
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Uses of funds of Commercial Banks
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Loans and advances (or For Islamic banks – Financing and
advances). Loan and advances have dominated the uses of funds. In 1996 loans contribution increased to 60.8%, in 1998 (63%) As at the end of 2006, loans contributed 54% of the total banking
system uses of funds. Trend is decreasing but still the main uses of funds because loans and
advances contribute substantially to the profit of banks.
Cash and short term funds are the liquid portion of the assets. used for short-term needs of commercial banks such as withdrawals of
depositors and investment in short-terms investments. Important indicator of level of liquidity of banks. 11
… continue
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Investment in marketable securities
are the investment portion of the funds to maximize returns for banks, mainly in safe short-term to medium term instruments.
Deposits and placement with banks and other financial
institutions Another alternatives of investment, safest, part of inter-bank deposits
transaction.
Statutory reserves with BNM placement with BNM as part of regulatory requirement such as
Statutory Reserve Requirement (SRR) and Liquidity reserves; for financial system protection. 12
Investment Banks
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Providing services for the corporate sector – corporate
advisory, management services and ’wholesale’ lending: Services of investments banks include:
- loan syndication
- management of consortium loans (latin word “partnership”). - corporate advisory services - underwriting services
- portfolio management - stock-broking services
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Sources and Uses of funds of Investment banks
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Main sources of funds Deposits from large corporations, banking institutions,
other approved financial institutions, associations, clubs and foundations.
Main Uses of funds Loans and advances Purchase of Treasury Bills (TBs) and other government
securities.
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NON-BANK FINANCIAL INSTITUTIONS (NBFI S)
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NBFIs are part of the financial institutions in
the intermediation process; the movement of funds from the surplus to the deficits units. Their roles are specialized in nature such as
pension fund, providing insurance business, promoting economic activities for economic development, credit institution, and others.
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Examples of NBFIs
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Development Finance Institutions (DFIs) Savings Institutions (Bank Simpanan Nasional) Provident and Pension Funds (EPF) Insurance Companies Housing Credit Institutions Cagamas Berhad (Mortgage Housings) Pilgrims Fund Board (Lembaga Tabung Haji) Leasing, Factoring and Venture Capital Companies Unit trust funds
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Sources and Uses of funds of Development Financial Institutions
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Development Financial Institutions (DFIs) are specialized
financial institutions having specific or unique role for economic development. Example: SMEs, Bank Pembangunan Malaysia. SME Bank - formed to provide medium and long-term financing to small and medium scales companies. Main sources of funds Terms loan from government Share capital
Main uses of funds Loans and advances Cash & short-term funds Deposits with other fin. Institutions Securities portfolio 17
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Bank Pembangunan Malaysia Berhad - formed to provide medium and long-term financing to capital-intensive industry such as infrastructure projects, maritime and high technology sectors. Main sources of funds term loans from the government, term loans for EPF, deposits from
customers, share capital and reserves
Main uses of funds loans, advances and financing forming 68 % of total assets in 2008 in
transport, storage and communications; construction; electricity, gas and water supply and manufacturing sector Other uses cash and short-term deposits and securities 18
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Bank Kerjasama Rakyat Malaysia Berhad
is a full-fledged Islamic cooperative bank currently under the Ministry of Domestic Trade, Co-operatives and Consumerism and under the supervision of Bank Negara Malaysia under the Development of Financial Institution Act.
offers savings and investment facilities, business and personal financing (including Islamic pawn-broking) and card services.
Main source of funds Deposits from customers and deposits from other banks and financial
institutions
Main uses of funds Loans, financing and advances, cash and short-term funds and
securities portfolio.
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Sources & Uses of funds of Savings Institutions
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Bank Simpanan Nasional (BSN) a savings institution formed to encourage saving habit and
investment among small savers and provide financing to small businesses. Main sources of funds Deposits from customers and deposits from other banks/financial
institutions which formed 94 % of its total liabilities in 2009. Reserves
Main uses of funds Loans, financing and advances (e.g., 48 % of total assets in 2009), cash
and short-term funds and securities portfolio. Example of financing: home financing, personal financing and micro-
credit financing. 20
Sources and Uses of funds of Provident and Pension Funds
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Main role: to provide financial stability to members upon retirement or for specific
limited authorized withdrawal. Example: Employees Provident Funds (EPF), SOCSO.
Main source of funds Contributions made by members throughout their working life; e.g., 8
% member’s salary deduction and 12 % employer’s contribution, may change from time to time.
Main use of funds to invest in various classes of investment instruments - 68 % and 69 %
for 2007 and 2008 respectively, of the total assets of EPF. ‘assets classes’ of investment (i) MGS (ii) loans and bonds (iii) equity
(iv) money market instruments and (v) properties 21
Sources and Uses funds of Insurance Companies
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Are institutions that provide financial coverage to
policyholders/participants in the event of death or loss of property. Receive funds from the public for protection and savings
and invests these funds to generate returns. Sources of funds Premiums (payment by policy holders), share capital and reserves.
Uses of funds Claims from policy holders or participants; Investments in medium to long-term fixed-income instruments, equities
and unit trust and property trust.
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References
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Saunders A, and Cornett M.M., Financial Markets and Institutions,
McGraw-Hill Irvin, International Edition, 2009 Mishkin F.S. and Eakins S.G., Financial Markets and Institutions,
Pearson Prentice Hall, 2009 Rohani Abdul Ghani and Ibrahim Abdul Rahman, Financial Markets
and Institutions (FIN 536) Modul, Institute of Education Development (InED), UiTM 2008 Rohani Abdul Ghani and Ibrahim Abdul Rahman, The Development
of Malaysian Financial Institutions. Penerbit Press UiTM (2014) Ruziah A. Lattif, Tay Bee Hoong and Yuslizawati Mohd Yusoff.
Financial Institutions in Malaysia. An Introduction (2012) 23
Dr. Norliza Che Yahya, FIN 536
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