Management of Banking and

Nonbanking Financial
Institutions
Code: FIN 424
Reference Book:
1, Bank Management and Financial services
by Peter S. Rose and Sylvia C. Hudgins
2. Bank Management: A Fund Emphasis
by A. R. Khan
Chapter outline
1. Financial Market
2. Measuring Returns and Risks in banking
3. Measuring and Management of Liquidity
4. Management of Deposits
5. Measuring and Using the Cost of Funds
6. Management of Loans and Advances
7. Contemporary Issues in Banking
8. E-commerce
9. E-Banking
10. Micro Finance
11. Lease Financing
Chapter 1: Introduction to financial
system and Bank Management
 What is Financial Market?
 Assets are entities functioning as stores of value and
over which ownership rights are enforced by institutional
units, individually or collectively, and from
which economic benefits may be derived by their
owners by holding them, or using them, over a period of
time.

Types of Assets: land, property, commodities, or other

tangible or physical assets, Cash, stocks, bonds, mutual
funds, and bank deposits all are examples of financial
assets.

 Financial Market: Financial market is a market where

financial assets are exchanged (traded).
 Different forms of financial markets
1. By the type of financial claim-
a) Debt market
b) Equity market

2. By maturity of the claim-

a) Money market: (one year or less)
b) Capital market: (more than one year)

3. By whether the financial claim are newly issued or

not:
a) Primary market
b) Secondary market
 Contd.

4. By organizational structure:
a) Auction market
b) Over The Counter market
c) Intermediate market

5. By whether the financial asset are security backed or not

a) Mortgage market
b) Consumer credit market

6. By assets delivery period

a) Spot market
b) Future market
 Short notes:
 Organized exchange:
Formal organizations with physical location where auction
markets are conducted in designated (listed) securities. The
major two organized security exchange-
i) Dhaka stock exchange
ii)Chattragram stock exchange
 Over The Counter (OTC) market: A market where listed
and unlisted all kinds of securities are traded among the
institutional investors to avoid the brokerage commission.
This market is combination of third market and fourth market.
 What is Third market?
Third market:
 The over-the-counter dealer market in stock that is listed on organized
exchanges such as the New York Stock Exchange. The third market developed
in the 1960s when institutional investors became dissatisfied with the liquidity
and brokerage commissions for large security trades on the exchanges.
 When a listed securities are traded in over the counter market is called third
market.
 The third market grew as institutional investors used it to avoid fixed minimum
brokerage commission.
 Exchange-listed securities, such as those that are traded on the Dhaka Stock
Exchange (DSE) or the Chittagong Stock Exchange (CSE), may also be bought
and sold off the exchange, or over-the-counter (OTC), in what is known as the
third market
 Typically, third-market transactions are large block trades involving securities
firms and institutional investors, such as investment companies and pension
funds.
 With the growth of electronic communications networks (ECNs), more
institutional investors are buying and selling in this way. Among the appeals of
the third market are speed, reduced trading costs.
 What is Fourth market?
Fourth market: The market where unlisted securities
are traded is called fourth market.

The market for securities in which large investors by pass

exchanges and dealers in order to trade directly among
themselves.

The direct trading of large block of securities between

institutional investors through a computer network, rather
than on an exchange.
 Functions of financial market
There are three main functions performed by
financial markets-----
A) The interactions among the buyers and
sellers to determine the price of the traded
assets or equivalently, the required rate of
return on a financial asset is determined.
B) Financial markets provide a mechanism
for a financial assets holder to sell his assets.
C) Financial markets reduces search and
information cost for transacting assets.
(explicit costs, implicit costs)
 Effects of efficient financial market on the economy

 Gathering scattered small savings from different

surplus agency.
 Transferring funds.
 Transferring funds in such a way as to
redistribute the unavoidable risk associated with
the cash flow generated by tangible assets
among those seeking and those providing the
funds.
 Increase industrial production.
 Increase employment opportunities and income.
 Increase living standard.
 Increase government revenue.
 Financial system of Bangladesh
 The financial system of Bangladesh consists of
‘Bangladesh Bank’ as the central bank.
 Banking system

 29 non-banking financial institutions.

 The financial system also embraces insurance
company, microfinance institutions, stock exchange
and co-operative banks.
 Participants in financial markets
 Investors
 Intermediaries
 Financial institutions
 Issuers
 Different financial institutions
 Specialized Banks
The banks is performed to develop a specific
sector is called specialized bank.
1. Bangladesh Krishi Bank
2. Ansar – VDP development bank
3. Rajshahi Krishi Unnayan Bank
4. Bangladesh Development Bank
5. Kormosogostan bank
 Contd.
 Islamic Banks
 Introduction to Islamic banking: Islamic banking refers to
a system of banking or banking activity that is consistent
with the principles of Islamic law (Shariah) . Shariah
prohibits (Riba, usury) . i.e. interest free business.
 The main objective of Islamic banking is to help in
building development and making welfare of the human
being the ending exploitation from the society through the
directives of the Almighty Allah.
 In Islamic banking interest is strictly prohibited and
consequently all its act invities are operated without
involvement of interest.
 Contd.
 Commercial Banks
 Commercial bank is a bank that is performed
following tasks-
- Accept money from depositors
- Lending money to borrowers
- Provide home and foreign trade services
- Help to economic development and so on.
To earn profit that is distribute to the shareholders.
 Contd.
Investment Corporation of Bangladesh
The ICB was set up in 1976 through an
ordinance. the Investment Corporation of
Bangladesh ordinance 1976 with a view :
To enlarge the scope of investment.
To improve the capital market.
To collect savings.
Expansion of business through formation of
subsidiary companies.
To provide all necessary assistance.
 Non-depository Financial Institutions
 Finance companies: Most finance companies
obtain funds by issuing securities, then lend the
funds to different deficit agencies.
 Mutual Funds: Mutual Funds sell shares to surplus
agencies and use the funds received to purchase a
portfolio of securities. Money market mutual fund
and capital market mutual fund.
 Securities Firms: Securities firm provide a wide
variety of functions in financial markets. Some
securities firm use their information resources to act
as a broker executing securities transaction between
two parties.
 Contd.
 Insurance Companies: Insurance
companies receive premium in exchange for
insurance policies payable upon death,
illness or accidents and use the funds to
purchase a variety of securities.
 Pension Funds: Employees retirement
funds are used as a financing source of
deficit parties.
(reference: Financial markets and institutions
by- Jeff Madura. Page-09)
 Ways of interaction between surplus economic
units and deficit economic units

1. Direct transfer
Securities
Business/ Savers
Firm or
Or Surplus units
Deficit units Taka/Dollar
 Contd.
2. Indirect transfer through investment
bankers

Business Securities Savers

Investment
Or Banking House or
Deficit dollars
Surplus
units units
 Contd.
3. Indirect transfer through Financial
Intermediaries

Business Securities
Savers
Financial
Or Intermediaries or
Deficit Dollars Surplus
units units

Commercial banks, pension fund, life insurance company,

mutual fund, savings and loan associations, credit union
 Bank Management
• Bank management will include management of
financial, personnel, accounting, technical,
commercial and socio-economic aspects of
banking.
• Banking management involves managing the
four most important functions of bank well
viz., the function of mobilizing deposits, the
function of managing portfolio assets, the
function of performing of agency works
quickly and the function of providing the
service-utilities in such a way that all clients
appreciate.