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CHAPTER ONE PART B

Financial Institutions and Markets

Financial system
Funds Deposits/Shares
Financial Institutions

Funds Loans Securities

Funds

Suppliers of Funds

Funds

Private Placement

Demanders of Funds Securities

Funds Securities

Financial Markets

Funds Securities

Financial Management (FIN670) - Dr. Jaafar Pyeman

Effective financial system


An effective financial system must possess three characteristics:
Facilitate capital formation (excess capital from savers is made available to borrowers) Efficient financial markets which provide : * Transfer of financial assets (such as stocks and bonds) * Conversion of such assets into cash

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial system landscape


Commercial Banks Islamic Banks Development Finance Institutions Investment Banks Insurance Companies Takaful Operators Insurance Intermediaries Money Brokers Dealers / Brokers Unit Trust Companies Fund Management Companies Stock Broking Companies

Financial Institutions

Non-Bank Financial Intermediaries Money Market FOREX market Derivatives Market Capital Market Equities Market Bond Market

Financial Markets

A dual financial system with conventional and Islamic finance operating in parallel

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial institutions


Accept savings and transfers them to those needing funds. Play a role as intermediaries that channel savings of individuals, businesses, and governments into loan or investments.
Net suppliers of fund

Net demander of fund

Example of financial intermediaries in Malaysia:


Banking System =Bank intermediaries (commercial bank, investment bank, merchant bank, etc.)
The banking system is the largest component of the financial system, accounting for about 67% of the total assets of the financial system.

Nonbank intermediaries =NBFI (provident and pension fund, insurance companies, unit trust, cagamas berhad, etc.)

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial markets


FINANCIAL MARKETS

Money Market

Capital Market

Marketable securities

Foreign Exchange

Cash Market

Derivative Market

Short term Instrument

Foreign Currencies

Primary Market

Secondary Market

Options

Futures

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial markets


A public offering is the nonexclusive sale of securities to the general public. Public offerings are normally executed with the help of a securities firm that provides investment banking services. The securities firm may underwrite the offering, which means that it guarantees the amount to be received by the issuing firm.

Public offering VS Private placement

A private placement is the sale of new securities directly to an investor or a group of investors. Only institutional investors such as pension funds or insurance companies can afford to invest in private placements.

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial market


1. MONEY MARKET Short term funds with maturities of less than 1 year The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend in short term period. Categories of money market operations: Placement of deposits-interbank loans, T-bills, NCDs Purchase and sale of short term securities
Marketable securities Very liquid securities that can be converted into cash quickly. Eg: T-bills, commercial paper, bankers acceptance. The rate at which the securities be bought / sold has little effect on prices. Foreign exchange Trading of foreign currencies against ringgit or ringgit against other foreign currencies.

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial market


2. CAPITAL MARKET

Is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds (for periods longer than a year). Include components such as stock market, commodities exchanges, bond market, and any physical or virtual facility or medium where debt and equity securities can be bought or sold.
Cash market Derivative market

Is the market for a cash commodity or actual, as opposed to the market for its futures contract. Immediate satisfaction and transfer of ownership. May be classified as primary markets and secondary markets.

Is the market for securities/instruments, that get their value, or at least part of their value, from the value of another security. The underlier can come in many forms including, commodities, stocks, bonds, Interest rate or currency.

Financial Management (FIN670) - Dr. Jaafar Pyeman

Malaysia financial markets


Capital market can be categorized according to whether they trade in the primary market or the secondary market. Primary markets new stock or bond issues are sold to investors via a mechanism known as underwriting or initial public offering. Secondary markets are where securities are bought and sold after initially issued in the primary markets. Usually on a securities exchange. In addition, financial assets may be money market instruments or capital market instruments.

Primary market VS Secondary market

Financial Management (FIN670) - Dr. Jaafar Pyeman

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Conventional Vs. Islamic financial system


Dual financial system (Conventional and Islamic) Incorporation of Bank Islam Malaysia (1983) & Syarikat Takaful Malaysia (1984) become a milestone for Islamic Banking & Takaful in Malaysia Formation of Islamic Capital Market (1997) served as an alternative market for capital seekers & providers Broadening and deepening of Islamic financial system: three pillars (banking, insurance, capital market)
Financial Management (FIN670) - Dr. Jaafar Pyeman 11

Conventional Vs. Islamic financial system Islamic financial system operates strictly under Syariah principles. National Syariah Advisory Council was established (May 1997): Advising BNM pertaining to Islamic banking & insurance & Securities Commission on Islamic capital market

Financial Management (FIN670) - Dr. Jaafar Pyeman

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