CHAPTER 1:

THE FINANCIAL ENVIRONMENT

Prepared by:
Miss Wan Shahzlinda Shah Binti Shahar

MDPM 2053: FINANCIAL MANAGEMENT

INTRODUCTION TO
FINANCIAL
MANAGEMENT

WHAT IS FINANCE???
It is related to the management of money and

fund.
Individual should manage well his/her money
to make sure his/her will have sufficient
money when needed.
While organization need to manage well its
financial position for long term survival.
Finance is how businesses evaluate
investment and raise capital to fund them.
The field of finance is closely related to
economic and accounting.

RELATIONSHIP BETWEEN
FINANCE, ACCOUNTING &
ECONOMIC

FINANCE AREAS

nance Capital
consist four
broad areas:
Market

FINANCIAL MANAGEMENT
Financial management is principally

concerned with making financial decisions

that influence and affect the worth of a
firm.
It relates to creation and sustenance of the
economic value of the firm.
The goal is to create wealth and economic
value of the firm, including its sustenance
It also covers the use of the best methods
to evaluate various alternatives and make
the best decisions thereon

THE ROLES OF FINANCE IN BUSINESS

Long term investment should the firm undertak

FINANCE AREAS IN A FIRM

FINANCIAL MARKET AND

BUSINESS
ORGANIZATION
A place which financial asset and
securities are traded.
An organization that is responsible for
the distribution of fund to end user
It may or may not have a physical
location.

FINANCIAL SYSTEM STRUCTURE IN MALAYSIA

Financial System
Financial Institutions
Banking System
1.
2.

3.

Bank Negara Malaysia

Banking Institutions

Commercial
Banks

Finance
Companies

Merchant
Banks

Islamic Banks
Others

Discount
Houses

Representative
Offices of
Foreign Banks

Non-Bank Financial
Intermediaries
1.
2.
3.
4.

5.

Provident and
Pension Funds
Insurance/Takaful
Companies
Development Finance
Institutions
Savings Institutions

National
Savings Bank

Co-operative
Societies
Others

Unit Trusts

Pilgrims Fund
Board

Housing Credit
Institutions

Cagamas Bhd

Credit
Guarantee
Corporation

Leasing
Companies

Factoring
Companies

Venture Capital
Companies

Financial Market
Money & Foreign
Exchange Market
1. Money Market
2. Foreign
Exchange
Market
Capital Market
1. Equity Market
2. Bond Market

Public
Debt
Securities

Private
Debt
Securities
Derivatives Market
1. Commodity
Futures
2. KLSE CI
Futures
3. KLIBOR Futures
Offshore Market
1. Labuan
International
Offshore
Financial
Centre

FINANCIAL
SYSTEM IN
MALAYSIA
ISLAMIC
FINANCIAL
SYSTEM
ISLAMIC
FINANCIAL
INSTITUTION
(IFI)

CONVENTIONA
L FINANCIAL
SYSTEM

ISLAMIC
FINANCIAL
MARKET

FINANCIAL
INSTITUTION
(IFI)

FINANCIAL
MARKET

MAIN COMPONENTS IN FINANCIAL

MARKET

MONEY MARKET vs
CAPITAL MARKETS
Money
Short-Term, < 1 Year
Debt Only
Primary Market Focus
Liquidity Market--Low

Returns

Capital
Long-Term, >1Yr
Debt and Equity
Secondary Market Focus
Financing Investment--

Higher Returns

PRIMARY MARKET vs
SECONDARY MARKETS
PRIMARY
New Issue of Securities
Exchange of Funds for

Financial Claim

SECONDARY
Trading Previously Issued
Securities
No New Funds for Issuer

Provides Liquidity for

Seller

Capital
Primary
Market
Market

1ST ASSIGNMENT:
WHAT ARE THE DIFFERENCE
BETWEEN SUKUK AND BOND?

OVERVIEW OF ISLAMIC
FINANCE

THE OBJECTIVES OF ISLAMIC

FINANCE
uphold social objectives and promote

Islamic values.
For example: towards their staffs, clients and

the general public.

Other factors :
contributing to the social welfare of the

community,
promoting sustainable development projects
alleviating poverty

BASIC PROHIBITION IN
ISLAMIC FINANCE

PROHIBITION BASED ON
BUSINESS ETHICS AND NORMS
Justice and fair dealing

RISK FROM ISLAMIC

PERSPECTIVE
AL GHUNM BIL GHURM ???
In one of his sayings, the Prophet asserted that
entitlement to the return on an asset relates to
the risk of ownership
Based on this hadith, Muslim jurists developed
a legal maximal-ghurm bi al-ghunmor gain is
justified with risk.
Indirectly, it also entails that in the absence of
risk in business it might give rise to interestbased transactions, which is strictly prohibited
in Islam (Quran, 2:275-279).
Nowadays, the notion of no risk, no gain is
widely applied by Islamic finance and banking
institutions through the concepts

FORMS OF
BUSINESS
ORGANIZATION

 Unincorporated business own by

an individual
Between two or more parties
Advantages: Lower income
Advantages: easy and
taxes, simple regulation, easy
inexpensively to form, Income
and inexpensive to form.
based on PSR and CCR, Tax on
Disadvantages: unlimited
individual basis avoid corporate
liabilities, life of business is
taxes.
limited, difficult to get large
Disadvantages: unlimited
Sole Proprietorship
Company
Partnership
capital.
liabilities.

Legal entity
Advantages: limited
liability , Easy to get
large capital through
shareholder

FINANCIAL
MANAGEMENT GOALS

FUNCTIONS OF FINANCIAL
MANAGER
to get as much profit as possible
To make decision that will lead to the

achievement of the firms goal by maximizing

their shareholders wealth
Making decision to increase the companys
stock value.
Observe firms day-to-day operation and
decide the best method of financing and
investment.
Undertake capital budgeting and make capital
expenditure decisionsemploy appraisal
techniques such as payback, internal rate of
return and net present value to examine the
viability and attractiveness of proposed

Perform financial planningcontribute in corporate

planning and development of financial policy for the

firm
Source and raise fundsplan and raise financing
from various financial institutions (e.g. term loans)
or raising equity finance
Perform cash and credit managementlook after
the firms cash needs, banking and maintenance of
security systems of cash
Manage flow of foreign currencies into and out of
the firm
Perform risk management exercisesundertake
appropriate risk management in firm; for e.g. price
risks faced by firms may be managed by using
financial derivatives such as forwards, futures,
options and swaps

IMPORTANCE OF FINANCE
MANAGER
Finance manager acts as an intermediary between the firms

operations and the financial markets.

Some roles include capital budgeting & expenditures; corporate
strategic & financial planning; sourcing and raising funds; cash
management; credit management; management of foreign
currencies

GOAL OF THE FIRM

Question: In whose interests does the firm run?
Logically, the interest of all stakeholders should be looked

after.
However, each stakeholder has his/her own objective/goal
that conflicts with those of other stakeholders.
Traditional objective:
To maximize the wealth of shareholders
Legal reason
Shareholders are the owners of the firm. Firms come into
being due to the contributions and risks taken on by the
shareholders.
Finance managers owe some kind of commitment to the
owners of the firm.

OTHER POSSIBLE GOALS

Maximize sales and/or market share
Minimize costs
Maximize profits
Achieve adequate profits
Ensure continued earnings growth (with

minimum % growth targets)

Catch up and overtake competitors
Avoid financial distress and bankruptcy
Survive

SHAREHOLDER WEALTH

AGENCY PROBLEM
For larger firms, there usually exists a large

spread of ownership over huge number of

shareholders with varying backgrounds.
Difficult to expect every shareholder to
participate in the management and running
of the business.
Management team is engaged to manage
the firm on behalf of the shareholders.

PrincipalAgent Relationship or the Agency

Relationship
Exists when one party, known as the principal,
engages another party, know as the agent, to
act in the formers interest.
Separation of ownership and control

Ownership of the firm lies in the hands of the

shareholders (principal).
Control (management of the firmstrategic and
operational decisions) lies in the management

AGENCY COSTS
Agency costs are incurred by the firm, when:
i) Managers do not attempt to maximize firm value
ii) Shareholders incur costs to monitor the managers and
influence their actions
Shareholders impose organizational checks and revamp

the firm to keep everyone on their toes.

Shareholders monitor managements behaviour through
use of audit committee or establishing management
audit procedures, reporting requirements or obtain
assurances from management about shareholders
interest.
Stock market quotationcontrol device whereby a firms
relative share price performance to other companies acts
as a signal about managerial effort and ability

SATISFICING PRINCIPLE
Management would do just sufficient to

keep shareholders satisfied

(dividends/capital gains) while
concentrating on the pursuit of their
objectives.
Managements performance is based on
short-term results and on accounting rather
than on economic results.

SUGGESTED SOLUTIONS
TO THE AGENCY PROBLEM
Provisions in the Companies Act, 1965
Selling shares and threat of takeover
Information flow
Linking management payment to

improvements to shareholder wealth

RISK & RETURN TRADE OFF

Positive relationship:
High risk, high return
Low risk, low return
RETURN

RISK FREE

RISK

FIRMS FINANCIAL
STATEMENT AND CASH
FLOW STATEMENT

Remember! that Allah swt never

forbade anything except that there are
some harmful effects to it.

ALLAH KNOWS BEST