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Chapter-01

This document outlines a course on financial institutions and services. The goal is to introduce students to the financial services sector and its component institutions. The course will enable students to understand the roles, characteristics, and operations of financial institutions. It will cover terminology related to finance, the roles of bank and non-bank financial institutions, how financial markets function within the context of flows of funds, and the roles of various financial instruments and the central bank. Students will be assessed on their understanding of these topics through a final exam with a passing grade of C- or higher.

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53 views30 pages

Chapter-01

This document outlines a course on financial institutions and services. The goal is to introduce students to the financial services sector and its component institutions. The course will enable students to understand the roles, characteristics, and operations of financial institutions. It will cover terminology related to finance, the roles of bank and non-bank financial institutions, how financial markets function within the context of flows of funds, and the roles of various financial instruments and the central bank. Students will be assessed on their understanding of these topics through a final exam with a passing grade of C- or higher.

Uploaded by

Kogo Vick
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1

University of Technology and Applied Sciences


Business Studies Department
Sultanate of Oman

FINANCIAL INSTITUTIONS AND


SERVICES
Semester 1
AY 2021 - 2022
Goal:

To introduce the students to the wider


financial services sector and its component
institutions. Also, it will equip students with
knowledge of the wide range of financial
institutions currently available and their main
functions
Objective:

At the end of the semester, the course


will enable students to understand the
roles, characteristics, and operations of
financial institutions. The course
Course Learning Outcomes:
1. Recognize the terminology of finance and the financial
matters
2. Identify the role of non-bank and bank institutions in
money and capital markets
3. Analyze the financial markets within a framework of
flow of funds accounts.
4. Recognize the functions of the financial markets in
providing the link between saving and investments.
5. Analyze these functions within the context of the
suppliers of loanable funds and the demanders for
loanable funds.
6. Identify the role of non-bank financial intermediaries
and their financial instruments.
Course Requirements:
■ FINANCIAL INSTITUTIONS AND
SERVICES( BAFI2210)
■ Pre-requisite :Financial Management
(BAFI 2109)
■ Passing Grade: C- (60 Marks)
CHAPTER -1
FINANCE AND FINANCIAL MATTERS

Course: Financial Institutions and Services


Course Code: BAFI 2210
Specialization: Departmental Course
Department of Business Studies
Outcome : 1
Recognize the terminology of Finance and Financial Matters

■ Contents
- Meaning of Finance
- Core Principles of Finance
- Types of Finance
- Financial System and its 5 components
o 1. Money
o 2. Financial Institutions
o 3. Financial Markets
o 4. Financial Instruments
o 5. Central Bank
- 5 Core principles of Money and Banking
- Other Terms of Finance:
• Credit
• 5 Cs of Credit
7
I. Definition of Finance: Money and
funds
It is the art and science of managing
money. ( Khan and Jain)
“The Science on study of the
management of funds’ which includes:
circulation of money, granting of credit,
making of investments, and the provision
of banking facilities” (Webster’s Ninth
New Collegiate Dictionary)

8
II. Core Principles of Finance:
1. The Investment Principle:
determines where
businesses invest their
resources. Invest in assets
and projects that yield a
return greater than the
minimum acceptable
hurdle rate.
9
Core Principles of Finance:

2. The Financing Principle:


Choose a financing mix
(debt and equity) that
maximizes the value of
the investments made and
match the financing to
nature of the assets being
financed.
10
3. The Dividend Principle: Core Principles of Finance:
■ It answers the questions: How much are the earnings of
how much earnings should investment?
be reinvested back into the
business? and how much
returned to the owners of
the business?
■ If there are not enough
investments that earn the
hurdle rate, return the cash
to the owners of the business
in the form of dividends. 11
III. Types of Finance:

12
Types of Finance:
■ 1. Private Finance - includes the Individual,
Firms, Business or Corporate Financial
activities to meet the requirements.
■ 2. Public Finance - which concerns with
revenue and disbursement of Government
such as Central Government, State
Government and Semi-Government Financial
matters. 13
IV. Definition of Financial System:
• channels household savings to the corporate
sector and allocate investment funds among
firms;
• allows inter-temporal smoothing of
consumption by households and
expenditures by firms;
• enables households and firms to share risks.
14
Flow of Funds in Financial System

15
IV. Five Components of Financial System:

1. Money
2. Banking and Financial Institutions
3. Financial Instruments
4. Financial Markets
5. Central Banks

16
1. Money Flow of Funds in
Financial System

■ Money - is defined as anything


that is generally accepted in
payment for goods and services
or in the repayment of debt.
■ Primary Functions of Money:
– 1.1 Medium of exchange
– 1.1 Measure of value
17
Money and its uses
1. Money
1. Primary Functions of Money:
• 1. 1 . Medium of exchange
• 1. 2. Measure of value
2. Secondary Functions of Money:
• 2. 1. Standard Deferred Payment
• 2. 2. Transfer of Value
• 2. 3. Store of Value
3. Contingency Functions of Money:
• 3. 1. Measurement and distribution of National Income
• 3. 2. Equalization of Marginal Utilities
• 3. 3. Basis of Credit System
• 3. 4. Transformation of Savings into Investments
• 3. 5. Encouragement of division of labor
• 3. 6. Perfectly liquid of all Assets 18
2. Banking and Financial Institutions
• channel funds from individuals with surplus funds
to those desiring funds but have shortage of it.
• allow individuals to earn a decent return on their
money while at the same time avoiding risk;
• Examples are: banks, insurance companies,
finance companies, investment banks, mutual
funds, brokerage houses.
19
3. Financial Instruments
• “Securities” - financial instruments that
are traded on financial markets.
• a formal obligation that entitles one
party to receive payments and/or a
share of assets from another party; e.g.,
loans, stocks, bonds.
20
4. Financial Markets
- It is a market in which financial assets
(securities) such as stocks and bonds can be
purchased or sold.
- Funds are transferred here when one party
purchases financial assets previously held by
another party.
- It facilitates the flow of funds and thereby
allow financing and investing by households,
firms and government agencies. 21
5. Central Banks
• It is a governmental body that regulates
financial institutions, controls the supply of
money and credit in the economy, handles the
government's finances, and serves as the bank
to commercial banks.
• It is the "lender of last resort" to
commercial banks in times of crisis.
Commercial banks deposit to the central
bank as part of Legal Reserve Requirement. 22
Central Bank

23
Two (2) Main Policies of Central Banks:
■ 1. Monetary policy is the management of the
money supply and interest rates.
■ 2. Fiscal policy- involves decisions about
government spending and taxation.
- Budget deficit is the excess of expenditures
over revenues for a particular year
- Budget surplus is the excess of revenues
over expenditures for a particular year
24
V. Five Principles of Money and Banking:
■ 1. Time has value.
■ 2. Risk requires compensation. (the
higher the risk, the higher the return)
■ 3. Information is the basis for
decisions
■ 4. Markets set prices and allocate
resources
■ 5. Stability improves welfare (i.e.,
well-being). Money and Banking
25
Five Principles of Money and Banking:
1. Time has value
■ For Example: A client applied for a car loan and bank
offered an interest rate of 5% for a loan of O.R. 9,000
to be paid in 5 years (60 monthly equal installment)
■ Interest = Prt (9000 x .05x5 = 2,250 + 9000 = 11, 250/
60 months = 187. 50
■ Total Amount borrowed: 9,000
■ Total Amount paid: 11, 250
■ Total Interest: 2, 250 (compensation of the lender for
the time the borrower is using the funds)
26
VI. Other Terms in Finance:
1. What is Credit ?
It is a contractual
agreement in which the
borrower receives
something of value now
and agrees to pay the
lender at some date in
the future with an
interest. 27
Five C’s of credit:

28
Five C’s of credit:

29
Essential Readings
Agarwal, Prateek , “The Financial System, The Five Parts to the Financial System.
https://www.intelligenteconomist.com/financial-system/ , and “ The Five Principles of Money
and Banking” https://www.intelligenteconomist.com/principles-of-money-and-banking/

Recommended Readings
ProQuest Resources:
Andoh, Samuel K.. Essentials of Money, Banking and Financial Institutions : With Applications
to the Developing World, Lexington Books, 2014.ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/momp/detail.action?docID=1832599.. (Money and
Interest)

2. Paramasivan, C.. Financial Management, New Age International, 2009. ProQuest Ebook
Central, https://ebookcentral.proquest.com/lib/momp/detail.action?docID=437705. (Finance
and Types of Finance, Financial System)

Open Educational Resources:


http://pages.stern.nyu.edu/~adamodar/New_Home_Page/background/cfin.htm ( 3 Core Principles of Finance)
https://www.intelligenteconomist.com/financial-system/ (Financial system)
https://www.intelligenteconomist.com/principles-of-money-and-banking/ (5 Components of Money and Banking)

30

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