Financial Institutions, Markets and

Institutions.

Prepared By:
Atha Ullah Akakheel
MBA (Finance)
Date: 26 Feb 2015 11:55 Management Sciences AWKUM
 Finance Terms
• Finance: The proper management of money.

• Money: The current medium of exchange or means of payment.

• Credit or Loan: A sum of money to be returned normally with

interest.

Classification of finance

Public finance

Private finance
Classification of finance
1. Public finance
• It studies the sources of funds of public authorities such as
states, local self-governments and the Central Government.
• It is concerned with the income and expenditure of public
authorities and with the adjustment of one to another.
2. Private finance
• An individual
• Profit-seeking business organizations
• External finance (outside sources)
• Direct financing (through issuing securities)
• Indirect financing (through middlemen)
• Internal finance (ploughing back of profits)
• A non-profit organization
Financial system
A set of institutions, instruments and markets which promote savings
and channel them to their most efficient use.

Financial Financial Financial Financial

Institutions Markets instruments Services
(Claims,
assets,
securities)
Regulatory Inter- Non- Others
mediaries Inter-
mediaries Primary Secondary

Banking Non- Organized Un-

banking organised
Short Medium Long
term Term Term

Primary Secondary

Capital Money
Markets Markets

Equity Market Debt Market Derivatives Market

Financial Institution:

A financial institution is an institution whose primary source of profits

is through financial asset transactions.

 A financial institution acts as an agent that provides financial

services for its clients.

 Financial institutions generally fall under financial regulation from a

government authority.

 Financial Institutions- act as mobilisers and depositories of saving

and as the custodian of finance.
 Functions of Financial Institutions

The principal function of financial institutions is to collect funds

from the investors and direct the funds to various financial services
providers in search for those funds.
 Financial Markets
A financial market is a market in which financial assets are traded. In
addition to enabling exchange of previously issued financial assets

• Financial markets include all markets where transactions relating to

the trading of financial securities and extending credit take place.
Financial Markets
• Physical Asset markets
• Spot markets
• Money markets
• Mortgage markets
• The primary market
• The secondary market
• Private markets
• The money market
• The capital market
• Security exchanges
Financial Asset Markets:
Financial asset markets, on the other hand deal with stocks,
bonds, notes, mortgages and other financial instruments.

Spot Markets:
Spot markets and future markets the terms that refer to whether
the assets are being bought or sold on the spot delivery or for
delivery at some future date. Such as six months or a year in future.
Money Markets:
Are the markets for short term, highly liquid debt securities.
Mortgage Markets:
Deals with loan and residential, commercial and real estate and on
farmland.
The Primary Market:
When a security is created and sold for the first time in the financial
marketplace, the transaction takes place in the primary market. It is
also known as Initial Public Offering (I PO)
The Secondary Market:
Once a security has been issued, it may be traded from one investor to
another.

The Money Market:

Short term securities are traded in money market. Network of dealers
operate in this market.

The Capital Market:

Long term securities traded in the capital market.

Security Exchanges:
Security exchanges facilitate trading of stock or bond among investors.
Six basic functions of financial markets

• Borrowing and Lending

• Price Determination
• Information Aggregation and Coordination
• Risk Sharing
• Liquidity
• Efficiency
Financial Instruments
Financial instruments are cash, evidence of an ownership interest in an
entity, or a contractual right to receive, or deliver, cash or another
financial instrument.

Cash instruments :are financial instruments whose value is

determined directly by markets. They can be divided into Securities,
which are readily transferable, and other cash instruments such as
Loans and Deposits, where both borrower and lender have to agree on
a transfer

Derivatives instruments: are financial contracts, or financial

instruments, whose prices are derived from the price of something
else
Types of Financial Institutions
Financial institution are divide into to forms
Depository
Non Depository

Non Depository
Are financial intermediaries that do not accept deposits but do
pool the payments of many people in the form of premiums or
contributions and either invest it or provide credit to others.

 Pension funds,
 Securities firms,
 Government-sponsored enterprises,
 Finance companies.
Types Of Financial Institutions

• Banks
• Savings & loan Associations
• Investment Companies
• Credit Unions
• Insurance Companies
• Mutual Funds
• Pension Funds
• Brokerage Houses
 1) Banks

• A bank is a commercial or state institution that provides

financial services, including issuing money in various forms,
receiving deposits of money, lending money and processing
transactions and the creating of credit.
1.1)Central Bank

• A central bank, reserve bank or monetary authority, is an

entity responsible for the monetary policy of its country or of
a group of member states, such as the European Central Bank
(ECB) in the European Union, the Federal Reserve System in
the United States of America, State Bank in Pakistan.

• Its primary responsibility is to maintain the stability of the

national currency and money supply, but more active duties
include controlling subsidized-loan interest rates, and acting
as a “lender of last resort” to the banking sector during times
of financial crisis
1.2) Commercial Banks

• A commercial bank accepts deposits 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 legal tender.
1.3) Investment Banks

• Investment banks help companies and governments and their

agencies to raise money by issuing and selling securities in
the primary market. They assist public and private
corporations in raising funds in the capital markets (both
equity and debt), as well as in providing strategic advisory
services for mergers, acquisitions and other types of financial
transactions.
1.4) Saving Banks

• A savings bank is a financial institution whose primary

purpose is accepting savings deposits. It may also perform
some other functions.
1.5) Micro Finance Banks
• For the purpose of poverty reduction program, such kind of
banks are working in the different countries with the
contribution of UNO or World Bank.
• In Pakistan 7 Micro Finance Banks are providing services
under the SBP prudential regulation.
1.6) Islamic Banks

• Islamic banking refers to a system of banking or banking

activity that is consistent with Islamic law (Sharia) principles
and guided by Islamic economics. In particular, Islamic law
prohibits usury, the collection and payment of interest, also
commonly called riba in Islamic discourse.
 1.7) Specialized Banks
1. ZTBL
• The Zarai Taraqiati Bank Limited It is also known as Agricultural
Development Bank of Pakistan (ADBP).

• It is the premier financial institution geared towards the

development of the agricultural sector through the provision of
financial services and technical know-how.

2. IDBP
• Industrial Development Bank of Pakistan is one of Pakistan's oldest
development financing institution created with the primary
objective of extending term finance for investment in the
manufacturing sector and SME Sector of the economy.
1.7cont…) Specialized Banks

3. SME Bank

• Promote the business.

• Positive impact on Financial environment.
• Financing of projects.
• Tell revenue generation schemes to entrepreneurs.
1.8) Non-banking financial company

• Non-bank financial companies (NBFCs) also known as a non-bank

or a non-bank bank, are financial institutions that provide
banking services without meeting the legal definition of a bank,
i.e. one that does not hold a banking license.

• Operations are, regardless of this, still exercised under bank

regulation. However this depends on the jurisdiction, as in some
jurisdictions, such as New Zealand, any company can do the
business of banking, and there are no banking licenses issued.
1.8 cont..) Non-banking financial company

• Non-bank institutions frequently acts as suppliers of loans and

credit facilities, supporting investments in property, providing
services relating to events within peoples lives such as funding
private education, wealth management and retirement planning.

• however they are typically not allowed to take deposits from the
general public and have to find other means of funding their
operations such as issuing debt instruments. In India, most NBFCs
raise capital through Chit Funds.
2) Investment company
• 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 invests the money it receives from

investors on a collective basis, and each investor shares in the
profits and losses in proportion to the investor’s interest in the
investment company.
 3) Leasing Companies

A lease or tenancy is the right to use or occupy personal property or

real property given by a lessor to another person (usually called the
lessee or tenant) for a fixed or indefinite period of time, whereby the
lessee obtains exclusive possession of the property in return for
paying the lessor a fixed or determinable consideration (payment).
4) Insurances Companies

• Insurance companies may be classified as

1. Life insurance companies, which sell life insurance,

annuities and pensions products.

2. Non-life or general insurance companies, which sell

other types of insurance.
 5) Mutual Fund

• An investment which is comprised of a pool of funds collected

from many investors for the purpose of investing in securities
such as stocks, bonds, money market securities and similar
assets.

• Mutual funds are operated by money mangers, who invest the

fund's capital and attempt to produce capital gains and income
for the fund's investors. A mutual fund's portfolio is structured
and maintained to match the investment objectives stated in its
prospectus
6) Pension Funds:

Pension funds are retirement plans funded by corporations

or government agencies for their workers and administered
generally by the trust departments of commercial banks or by life
insurance companies. Pension funds invest primarily in bonds,
stocks, mortgages and real estate.
7) Credit Unions:

• Credit unions are cooperative associations whose

members are supposed to have a common bond, such
as being employees of the same firm. Member's
savings are loans and home mortgage, credit unions
are often the cheapest source of funds available to the
individual borrowers.
 8) Brokerage Houses

Stock brokers assist people in investing, online only companies

are called 'discount brokerages', companies with a branch
presence are called 'full service brokerages' or 'private client
services.
Conclusion

To review, we have looked at the relationship between

institutions and Financial Markets. This growing field of
research may offer us a new insight into the dynamics of
economic growth within and among various economies.