Course

• Financial Institutions
• Teacher: Faran Ali
• Recommended Books:
• Madura, Jeff. Financial Markets and Institutions, Florida: Thomson
Learning Inn. (Latest Ed.)
• Thygerson, J. Kenneth. Financial Markets and Institutions (Latest Ed.),
• Saeed, Khawaja Amjad. Financial Institutions in Pakistan: Operational
and Procedural Aspects
• Introduction to Financial Systems & Banking Regulations published by
Institute of Bankers Pakistan (IBP) Publication for ISQ Stage 1

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 Financial System
One of the biggest problems for any economy to figure out is
how to get money from people who want to save TO people
who want to borrow.

– Finance is the answer to that problem.

• A financial system is a set of institutions, such as banks,

insurance companies, and stock exchanges, that permit the
exchange of funds.

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 Parts of Financial System
1. Money
2. Financial Instruments
3. Financial Markets
4. Financial Institutions
5. Central Banks

https://www.intelligenteconomist.co 3
m/financial-system/
 Money
• Money is used as a medium to buy goods &
services. It also is a standard unit of
measurement and acts as a store of value.

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 Financial Instruments
• Financial Instruments are formal obligations
that entitle one party to receive payments or
a share of assets from another party.
Examples of tradable financial instruments
include loans, stocks, bonds.

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 Financial Instruments
• Stocks / Shares
• A share is an indivisible unit of capital, expressing
the ownership relationship between the company
and the shareholder.

– Types:
• Equity Shares (Has Voting Power)
• Preference Shares (Has preference over Equity
Shares)
• Bonus Shares (Given as reward / Dividend)

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 Debentures
• A debenture is one of the most typical
forms of long term loans that a company
can take. It is normally a loan
that should be repaid on a specific date, but
some debentures are irredeemable
securities
– Naked / Ordinary Debentures
– Secured Debentures
– Redeemable / Irredeemable Debentures
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 Financial Instruments
• Bonds
– A bond is a type of financial instrument. Bonds
are debt that firms and governments can issue
to raise money and they earn interest.

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 Financial Markets
• A Financial Market is a place or network
where financial instruments can be sold
quickly & cheaply.

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Functions of Financial Market

https://www.wallstreetmojo.com/func 10
tions-of-financial-markets/
 Functions of Financial Market
1 – Price Determination
– The financial market performs the function of
price discovery of the different financial
instruments which are traded between the
buyers and the sellers on the financial market.
The prices at which the financial instruments
trade in the financial market are determined by
the market forces i.e., demand and supply in the
market.

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 Functions of Financial Market
2 – Funds Mobilization
– The required return out of the funds invested by
the investor is also determined by participants
in the financial market. The motivation for
persons seeking the funds is dependent on the
required rate of return which is demanded by
the investors.
– So, the financial market helps in the
mobilization of the savings of the investors.

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 Functions of Financial Market
3 – Liquidity
– The liquidity function of the financial market
provides an opportunity for the investors to sell
their financial instruments at its fair value
prevailing in the market at any time during the
working hours of the market.
• Thus, in the financial market investors can sell their
securities readily and convert them into cash thereby
providing the liquidity.

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 Functions of Financial Market
4 – Risk Sharing
– With the help of the financial market, the risk is
transferred from the person who undertakes the
investments to those persons who provide the
funds for making those investments.

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 Functions of Financial Market
5 – Easy Access
– The industries require the investors for raising
the funds and the investors require the
industries for investing its money and earning
the returns from them.

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 Functions of Financial Market
6 – Reduction in Transaction Costs and
Provision of the Information

– Financial market helps in providing every type

of information to the traders without the
requirement of spending any money by them.
In this way, the financial market reduces the
cost of the transactions.

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 Functions of Financial Market
7 – Capital Formation
– Financial markets provide the channel through
which the new savings of the investors flow in
the country which aid in the capital formation
of the country.

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 Example
Let’s consider an example of the company XYZ ltd,
which requires the funds to start a new project but at
present, it doesn’t have such funds. On the other
side, there are investors who have spare money and
want to invest in some areas where they can get
the required rate of expected returns.
• So, in that case, the financial market will function
where the company can raise funds from the
investors and the investors can invest their money
through the help of the financial market.

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 Financial Institutions
• Financial Institutions are firms that connect
borrowers and lenders, provide savers and
borrowers access to financial instruments &
markets.
• There are two types of Financial Markets
– Primary market
– Secondary market

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 Central Banks
• Central Banks are large financial
institutions that handle government
finances, they regulate the supply of money,
and they serve as banks to commercial
banks.

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 Structure of Financial Market
Financial markets comprise five key
components

– Foreign-exchange market
– The mortgage market
– Derivative market
– Debt market
– Equity market

https://www.encyclopedia.com/social-sciences/applied-and-social-sciences- 21
magazines/financial-markets#A
 Foreign-exchange markets
• Foreign-exchange markets are where
currencies are converted so that funds can
be moved from one country to another.

– Activities in the foreign-exchange market

determine the foreign-exchange rate, the price
of one currency in terms of another.

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 Mortgage Market
• A mortgage is a long-term loan secured by a
pledge of real estate. Mortgage-backed
securities (also called securitized
mortgages) are securities issued to sell
mortgages directly to investors.

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 Financial derivatives
• Financial derivatives are contracts that
derive their values from the underlying
financial assets.

– These instruments allow market players to

achieve financial goals and manage financial
risks more efficiently.

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 Debt Market
• Debt instruments are traded in the debt
market, also often referred to as the bond
market. The debt market is important to
economic activities because it provides an
important channel for corporations and
governments to finance their operations.
Interactions between investors and
borrowers in the bond market determine
interest rates.
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 Equity Instruments
• Equity instruments are traded in the equity
market, also known as the stock market.

– Primary Market
– Initial Public Offering (IPO)
– Secondary Market
• Stock Exchange
– Trading

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Conclusion

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