FINANCIAL INSTITUTIONS:Non Banking Financial Companies

<< Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS

CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions >>

Management of Financial Institutions - MGT 604

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.

Management of Financial Institutions - MGT 604

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.

Management of Financial Institutions - MGT 604

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.

Table of Contents: