(2)financial institution & market (modified)

Financial Institutions and Markets

CHAPTER ONE – PART B

Financial system

2Financial Management (FIN670) - Dr. Jaafar Pyeman

Funds Funds

Funds Funds

Fund

s

Deposits/Shares Loans

Securities Securities

SecuritiesFunds

Securities

PrivatePlacement

FinancialInstitutions

FinancialMarkets

Suppliers ofFunds

Demanders ofFunds

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


Malaysia financial system landscape


Financial Markets

• 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

• Money Market• FOREX market• Derivatives Market

• Capital Market Equities Market Bond Market

Non-Bank Financial Intermediaries

Financial Institutions

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

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.

• Example of financial intermediaries in Malaysia:– Banking System =Bank intermediaries (commercial bank, investment bank, merchant

bank, etc.)

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


Net suppliers of fund

Net demander

of fund

The banking system is the largest component of the financial system, accounting for about 67% of the total assets of the financial system.

Malaysia financial markets

FINANCIAL MARKETS

Money Market

Marketable securities

Short term Instrument

Foreign Exchange

Foreign Currencies

Capital Market

Cash Market

Primary Market

Secondary Market

Derivative Market

Options Futures



– 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.

– 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.


Publ

ic o

fferin

g VS

Pr

ivat

e pl

acem

ent

Malaysia financial market

Marketable securities

• Very liquid securities that can be converted into cash quickly. Eg: T-bills, commercial paper, banker’s 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.

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

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

• 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.

Derivative market

• 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.


– 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.


Prim

ary

mar

ket

VS

Seco

ndar

y m

arke

t

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

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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

(2)financial institution & market (modified)

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