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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture # 2
FINANCIALINSTITUTIONS
In financial economics, a financialinstitution acts as an agent thatprovides financial
services for its clients. Financialinstitutions generally fallunder financial regulationfrom a
governmentauthority.
Types of Financial Institutions
Commontypes of financial institutionsinclude banks, Insurance Co,Leasing Co,
InvestmentCo, and Mutual Funds.
Banks
A bank is a commercial or stateinstitution that providesfinancial services, includingissuing
money in various forms, receivingdeposits of money, lendingmoney, and processing
transactions and the creating of credit.
CentralBank
A central bank, reserve bank or monetary authority, is an entity responsible for the
monetarypolicy of its country or of a group of member states, such as the EuropeanCentral
Bank(ECB) in the European Union,the Federal Reserve System in theUnited States of
America,State Bank in Pakistan.
Itsprimary responsibility is to maintainthe stability of thenational currency and money
supply,but more active dutiesinclude controlling subsidized-loaninterest rates, and acting
as a "bailout" lender of lastresort to the banking sector during times of financialcrisis
(private banks often being integral to the national financialsystem).
CommercialBank
A commercial bank acceptsdeposits from customers and in turn makes loans, even in
excess of the deposits; a process known as fractional-reserve banking. Some banks (called
Banks of issue) issue banknotes as legaltender.
InvestmentBank
Investment banks help companies and governments and their agencies to raisemoney by
issuing and selling securities in theprimary market. They assistpublic and private
corporations in raising funds in thecapital markets (both equity and debt), as well as in
providingstrategic advisory services for mergers, acquisitions and other types of financial
transactions.
SavingBank
A savings bank is a financialinstitution whose primary purpose is accepting savings
deposits. It may also perform someother functions.
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Management of Financial Institutions - MGT 604
VU
Micro Finance Bank
Forthe purpose of poverty reductionprogram, such kind of banks is working in the
differentcountries with thecontribution of UNO or WorldBank.
In Pakistan 7 Micro Finance Banksare providing services underthe SBP prudential
regulation.
IslamicBank
Islamicbanking refers to a system of banking or banking activitythat is consistentwith
Islamiclaw (Sharia) principles and guided by Islamiceconomics. In particular, Islamiclaw
prohibitsusury, the collection and payment of interest, also commonlycalled ribain Islamic
discourse.
SpecializedBanks
1. ZTBL
TheZarai Taraqiati Bank Limited It is also known as AgriculturalDevelopment
Bank of Pakistan (ADBP).
It is the premier financialinstitution geared towardsthe development of theagricultural
sector through the provision of financial services and technicalknow-how.
2. IDBP
IndustrialDevelopment Bank of Pakistan is one of Pakistan's oldest developments
financinginstitution created with theprimary objective of extendingterm finance for
investment in the manufacturing sector and SME Sector of the economy.
3. SME Bank
SMEbank Ltd was established to exclusively cater to the needs of theSME
sector. It was created to address theneeds of this niche marketwith specialized financial
products and services that will help stimulateSME development and pro poorgrowth in the
country.
Non Banking FinancialCompanies
Non-bankfinancial companies (NBFCs) also known as a non-bank or a non-bank.Banks
arefinancial institutions thatprovide banking services withoutmeeting the legaldefinition
of a bank, i.e. one that doesnot hold a banking license.Operations are, regardless of this,
still exercised under bank regulation.However this depends on thejurisdiction, as in some
jurisdictions,such as New Zealand, anycompany can do the business of banking, and there
arenot banking licenses issued. Non-bankinstitutions frequently acts as suppliers of loans
and credit facilities, supportinginvestments in property, providing services relating to
eventswithin peoples lives such as funding private education,wealth management and
retirementplanning. However they aretypically not allowed to take deposits from the
generalpublic and have to findother means of funding theiroperations such as issuing debt
instruments. In India, most NBFCs raisecapital through ChitFunds.
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Management of Financial Institutions - MGT 604
VU
InvestmentCompanies
Generally, an "investment company" is a company(corporation, business trust,partnership,
or Limited Liability Company)that issues securities and is primarily engaged in the
business of investing in securities.
An investment company investsthe money it receives frominvestors on a collectivebasis,
and each investor shares in theprofits and losses in proportion to the investor's interest in
theinvestment company.
Theperformance of the investmentcompany will be based on (but it won't be identicalto)
theperformance of the securities and other assets that theinvestment companyowns.
BrokerageHouses
Stockbrokers assist people in investing,online only companies arecalled 'discount
brokerages', companies with a branch presenceare called 'full service brokerages' or 'private
client services.
LeasingCompanies
A lease or tenancy is theright to use or occupypersonal property or realproperty given by a
lessor to another person (usually calledthe lessee or tenant) for a fixed or indefiniteperiod
of time, whereby the lesseeobtains exclusive possession of the property in return forpaying
the lessor a fixed or determinableconsideration (payment).
InsuranceCompanies
Insurance companies may be classified as
1. Lifeinsurancecompanies, whichsell life insurance,annuities and pensions
products.
2. Non-lifeor general insurancecompanies, whichsell other types of insurance.
MutualFunds
An investment, which is comprised, of a pool of funds collected frommany investors forthe
purpose of investing in securities such as stocks, bonds, money marketsecurities and similar
assets.Mutual funds are operated by money mangers, which investthe fund's capital and
attempt to produce capital gains and incomefor the fund's investors. A mutual fund's
portfolio is structured and maintained to matchthe investment objectivesstated in its
prospectus.
FinancialInstitution Functions
Financialinstitutions provide a service as intermediaries of the capital and debt markets.
Theyare responsible fortransferring funds frominvestors to companies, in need of those
funds.The presence of financialinstitutions facilitates theflow of monies throughthe
economy. To do so, savings accountsare pooled to mitigate therisk brought by individual
accountholders in order to providefunds for loans. Such is the primary meansfor
depositoryinstitutions to develop revenue.Should the yield curvebecome inverse, firms in
thisarena will offer additionalfee-generating services includingsecurities underwriting,
sales & trading, and prime brokerage.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,