ABAARSO TECH UNIVERSITY

COURSE : FINANCIAL INSITUTION AND

MARKETS

Instructor: Abdihakim Tiyari ( BA, MBA)

Credit Hour: 3 hrs.

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 COURSE CONTENTS
1. Chapter One: Introduction to the financial Markets and
Institution.
2. Chapter Two: Types of financial Institutions.
3. Chapter Three: Organization and structure of financial
Markets.
4. Chapter Four: Financial sector regulators
5. Chapter Five: Insurance Companies and microfinance
institutions.

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CHAPTER 1
Introduction to the
Financial Markets and
Institutions

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THE NEW YORK STOCK EXCHANGE

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THE LONDON STOCK EXCHANGE.

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BOMBAY STOCK EXCHANGE

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NASDAQ IN TIMES SQUARE, NEW
YORK CITY

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OPEN OUTCRY IN A STOCK
EXCHANNGE

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THE TOKYO STOCK EXCHANGE

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 CHAPTER PREVIEW

Suppose you want to start a business

manufacturing a household cleaning robot,
but you have no funds.
At the same time, Walter has money he
wishes to invest for his retirement.
If the two of you could get together, perhaps
both of your needs can be met. But how
does that happen?
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 WHY STUDY FINANCIAL MARKETS?

Financial markets, such as bond and stock markets, are

crucial in our economy.
1.These markets channel funds from savers to investors,
thereby promoting economic efficiency.

2.Market activity affects personal wealth, the behavior of

business firms, and economy as a whole

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 Well functioning financial markets, such as the bond market,
stock market, and foreign exchange market, are key factors in
producing high economic growth.

 Debt markets, or bond markets, allow governments, corporations,

and individuals to borrow to finance activities.

 In this market, borrowers issue a security, called a bond, that

promises the timely payment of interest and principal over some
specific time horizon.
 The interest rate is the cost of borrowing

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 There are many different types of market interest
rates, including mortgage rates, car loan rates, credit
card rates, etc.

 The foreign exchange market is where international

currencies trade and exchange rates are set.
 Although most people know little about this market,
it has a daily volume around
$1 trillion!

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 WHY STUDY FINANCIAL
INSTITUTIONS?

We will also spend considerable time discussing financial

institutions—the corporations, organizations, and networks that
operate the so-called “ marketplaces.”

1. Structure of the Financial System

 Helps get funds from savers to investors

2. Financial Crises
 The financial crises of 2007–2009 was the worst financial
crisis since the Great Depression. Why did it happen?

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3. Banks and Other Financial Institutions
─ Includes the role of insurance companies, mutual funds,
pension funds, etc.
4. Financial Innovation
─ Focusing on the improvements in technology and its
impact on how financial products are delivered
5. Managing Risk in Financial Institutions
─ Focusing on risk management in the
financial institution.

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 FINANCIAL SYSTEM

 The word "system", in the term "financial system",

implies a set of complex and closely connected or
interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy.

 A  financial system: is a system that allows the transfer

of money between savers and borrowers. It comprises
of a set of complex and closely interconnected financial
institutions, markets, instruments, services, practices,
and transactions.
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FINANCIAL SYSTEM : HIERARCHY

Firm Specific Level

Regional Level
Financial system

Global Level

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 1. FIRM SPECIFIC LEVEL

 Set of implemented procedures that track the

financial activities of the company. Includes -  
• Accounting measures,
• Revenue and expense schedules,
• Wages and
• Balance sheet verification.

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 2. REGIONAL FINANCIAL SYSTEM

 A system that enables lenders and borrowers to exchange funds.

- Includes banks and other financial institutions, financial markets,

financial services

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 3. GLOBAL FINANCIAL SYSTEM

 Global financial system - Basically a broader regional system

that encompasses all financial institutions, borrowers and
lenders within the global economy
- Includes the International Monetary Fund, Central Banks,
World Bank and Major Banks that practice overseas lending

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FUNCTIONS OF A FINANCIAL
SYSTEM –

 Channels funds from lenders to borrowers

 Creates liquidity and money

 Provides a payments mechanism

 Provides financial services such as insurance and pensions

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BASIC CONSTITUENTS OF A
FINANCIAL SYSTEM

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FINANCIAL MARKETS
A Brief discussion of Financial Markets

 Money Markets
 Capital Markets

 Forex Markets

 Credit Market

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MONEY MARKET
 The money market - wholesale debt market for low-risk,
highly-liquid, short-term instrument. 

 Funds available in this market for periods ranging from

a single day up to a year. 

 Market dominated mostly by government, banks and

financial institutions.

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CAPITAL MARKET

Capital market is designed to finance the long-term

investments;

The transactions taking place in this market will be for

periods over a year.

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FOREX MARKET
- Deals with the multicurrency requirements, which are
met by the exchange of currencies. 

- Depending on the exchange rate that is applicable, the

transfer of funds takes place in this market. 

- One of the most developed and integrated market

across the globe.

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FINANCIAL INSTRUMENTS
 Money Market Instruments-
 Capital Market Instruments

 Hybrid Instruments

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MONEY MARKET INSTRUMENTS
1. Call/Notice Money 
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

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CALL /NOTICE-MONEY MARKET

 Call/Notice money is the money borrowed or lent on demand for

a very short period.
When money is borrowed or lent for a day, it is known
as Call (Overnight) Money.
When money is borrowed or lent for more than a day
and up to 14 days, it is "Notice Money".
No collateral security is required to cover these transactions.

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INTER-BANK TERM MONEY

 Inter-bank market for deposits of maturity beyond 14

days is referred to as the term money market.

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CERTIFICATE OF DEPOSITS

 Certificates of Deposit (CDs) is a negotiable money

market instrument and issued in dematerialised form for
funds deposited at a bank or other eligible financial
institution for a specified time period.

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COMMERCIAL PAPER

 CP is thus an unsecured promissory note privately placed

with investors at a discount rate to face value determined
by market forces by a company.

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2. CAPITAL MARKET INSTRUMENTS
 Equity segment - Equity shares, preference shares,
convertible preference shares, non-convertible
preference shares etc
 Debt segment - debentures, zero coupon bonds, deep
discount bonds etc.

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FINANCIAL INTERMEDIATION
 There should be a proper channel within the financial
system to ensure such transfer. To serve this
purpose, Financial intermediaries came into existence.

 Financial intermediation in the organized sector is

conducted by a wide range of institutions functioning
under the overall surveillance of the Central Bank.

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 In the initial stages, the role of the intermediary was mostly
related to ensure transfer of funds from the lender to the
borrower.  This service was offered by banks, FIs, brokers,
and dealers. 

 However, as the financial system widened along with the

developments taking place in the financial markets, the scope
of its operations also widened.

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FINANCIAL INSTITUTIONS AS
FIRMS AND INTERMEDIARIES –
 A financial institution is an institution  that provides financial
services for its clients or members. Probably the most
important financial service provided by financial institutions is
acting as financial intermediaries.

 Financial institutions provide service as intermediaries of the

capital and debt markets.

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 Financial institutions in most countries operate in a
heavily regulated environment .

 Some countries have one consolidated agency that

regulates all financial institutions while other have
separate agencies for different types of institutions such
as banks, insurance companies and brokers.

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Some examples of key governing bodies are
 The Federal Financial Institutions Examination
Council (FDIC), Office of the Comptroller of the Currency in the US
 United Kingdom - The Financial Services Authority,

 Norway - The Financial Supervisory Authority of Norway,

 Russia - The Central Bank of Russia.

 Ethiopia - The National Bank of Ethiopia ( NBE)

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 CLASS ACTIVITY

1. DISCUSS THE ROLE OF FINANCAIL MARKET

TOWARDS:
TOWARDS
PERSONAL WEALTH

Behavior of business firms, and

Economy as a whole

2. From Somaliland Perspective, there is a lack of a financial

Market, how does this affect society's wealth; we heard many
times that our business firms face debt challenges, and go out
for bankruptcy.
bankruptcy

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