Financial Institutions

A financial institution is a banking or non-banking institution established

under the certain act to contribute for the economic development by
collecting the funds and investing in various productive sectors.
It acts as a mediator between savers and users of money. It collects funds
from individuals and organization by offering various deposits schemes and
invests it into various profitable sectors.
 Banks

“Bank is an institution which collects money from those who have it

to spare and who are saving it out of their income and lends this
money out to those who require it.”
 Functions of Banks

Capital formation
The bank accepts deposits of spare money from its customers. The deposits are utilized
for formation of capital in the productive sectors like industry, trade and service areas of
the country.

Granting loan
The bank grants loan to individual as well as an organization against the security placed.
It grants the loan in productive sectors like industry, trade and service areas, which
enhances the economic development of the country.

Encouraging saving
The bank provides full security for the money deposited and allows interest on such
deposits. It thus, encourages people to save as much as possible which supports capital
formation.
 Functions of Banks
Issuing notes
The bank issues coins and paper notes which help for exchanging goods and services.
Such coins and notes make easier for measuring the value of goods and services.

Exchanging foreign currencies

The bank exchanges foreign currency as per the direction of the central bank. It fulfills
the requirement of foreign currencies, which promotes foreign trade.

Promoting trade and industry

The bank provides different types of financial as well as technical services to the trader
and manufacturer, which encourage and improve the quality of industry and trade. It
supports the development and expansion of industrial and trading activities.

Assisting the government

The bank provides necessary financial data and information to the government, which
facilitate for preparing monetary, tax and fiscal policies of the country.
 Central Bank

A central bank is an independent national authority that

conducts monetary policy, regulates banks, and provides financial
services including economic research. Its goals are to stabilize the
nation's currency, keep unemployment low, and prevent inflation.
 Commercial Banks

A commercial bank is a type of financial institution that accepts

deposits; offers checking account services; makes business, personal
and mortgage loans; and offers basic financial products
like certificates of deposit (CDs) and savings accounts to individuals
and small businesses.
 Investment Banks
An investment bank is a financial intermediary that specializes
primarily in selling securities and underwriting the issuance of
new equity shares to raise capital funds.
Investment banks operate along two main lines: a "buy" side and a
"sell" side. "Buy" side operations include services such as securities
trading and portfolio management. "Sell" side activities
include underwriting new lines of stock, marketing financial
products, and publishing financial research.
This is different from a commercial bank, which specializes
in deposits and commercial loans.,
 Saving Banks

A savings bank is a financial institution whose primary purpose is

accepting savings deposits. It may also perform some other functions.
Like Post office Banks
 Micro Finance Banks

For the purpose of poverty reduction program, such kind of banks

are working in the different countries.

Examples:
Akhuwat, Dr. Amjad Saqib

Grameen Bank, M. Yunus

 Islamic Banks

Islamic banking refers to a system of banking or banking activity

that is consistent with Islamic law (Sharia) principles and guided by
Islamic economics. In particular, Islamic law prohibits usury, the
collection and payment of interest, also commonly called riba in
Islamic discourse.
 Specialized Banks
1. ZTBL
– The Zarai Taraqiati Bank Limited It is also known as Agricultural
Development Bank of Pakistan (ADBP).
– It is the premier financial institution geared towards the
development of the agricultural sector through the provision of
financial services and technical know-how.
 2. IDBP

Industrial Development Bank of Pakistan is one of Pakistan's oldest

development financing institution created with the primary objective
of extending term finance for investment in the manufacturing sector
and SME Sector of the economy
 3. SME Bank
• Promote the business.
• Financing of projects.
SME finance is the funding of small and medium-sized enterprises,
and represents a major function of the general business finance
market – in which capital for different types of firms are supplied.
 Non-banking financial
Institutions

• Non-bank financial companies (NBFCs) or (NBFIs) also known as

a non-bank, are financial institutions that provide banking services
without meeting the legal definition of a bank, i.e. one that does not
hold a banking license.
Examples: Insurance Co. & Modaraba Co.
 Leasing Companies
• A lease or tenancy is the right to use or occupy personal property
or real property given by a lessor to another person (usually called
the lessee or tenant) for a fixed or indefinite period
of time, whereby the lessee obtains exclusive possession of the
property in return for paying the lessor a fixed or determinable
consideration (payment). Like Operating Lease & Finance Lease
 Insurances Companies

• Insurance companies may be classified as

1. Life insurance companies, which sell life insurance, annuities and
pensions products.
2. Non-life or general insurance companies, which sell other types of
Insurance. Like insurance in transits, fire Insurance
 Mutual Fund

An investment which is comprised of a pool of funds collected from

many investors for the purpose of investing in securities such as
stocks, bonds, money market securities and similar assets.

Mutual funds are operated by money mangers, who invest the fund's
capital and attempt to produce capital gains and income for the
fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its
prospectus
 Brokerage Houses

Brokerage is a FI that facilitates the buying and selling of financial

securities between Buyer and the Seller.

Like Stock Exchange Brokers

 MONEY
Money is any good that is widely used and accepted in transactions
involving the transfer of goods and services from one person to
another.

Anything that is generally accepted in payment for goods or

services or in the repayment of debts.

It acts like a medium of exchange

 Evolution of Money
 Barter System
 Commodity Money: (Stones, Precious metals – Gold & Silver etc.)
 Coins
 Currency notes – Fiat Money
 Plastic Money – Debit & Credit Cards
 Electronic Money – (E-valet), Transfer wire other than banks –
Western Union, Moneygram
 Digital Currency – Crypto Currency – Bit coin
 Em-cash – Cash less Society / Economy, DUBAI - 2020
 Characteristics of Money
i. Durability
ii. Divisibility
iii. Transportability
iv. Non counterfeit ability
v. Limited supply
vi. Acceptability
1. DURABILITY
• Item retains the same shape, form, and substance over an extended period
of time
• It does not easily decompose, deteriorate, degrade, or otherwise change
form.
• Durability also extends beyond the physical realm to include social and
institutional durability.

2. DIVISIBILITY
• Means money can be divided into small increments that can be used in
exchange for goods of varying values.

• For an item to function as the medium of exchange, which can be used to

purchase a wide range of different goods with a wide range of different
values, then it must be divisible. The smaller the divisions, the better.
3. TRANSPORTABILITY
• Means that money can be easily moved from one location to another when
such movement is needed to complete exchanges.
• The money must be transportable. Money that is NOT transportable is not
transported, so it is not used.

4. NON COUNTERFEIT ABILITY

• Means that money cannot be easily duplicated.
• A given item cannot function as a medium of exchange if everyone is able
to "print up," or "make up" a batch of money any time that they want.
5. LIMITED SUPPLY
• Means that restriction on the amount of money in circulation
• Respective country’s Government has the responsibility to
control/maintain an adequate money supply to the market based on their
monetary policies.

6. ACCEPTABILITY
• Acceptability means that everyone must be able to use the money for
transactions.
• Money is universally accepted anywhere in the world as a universal mean
for transaction.

7. UNIFORMITY
• Able to count and measure money Accurately.
 Functions of Money
• Money as a Medium of Exchange

• Money as a Measure of Value

• Money as a Store of Value

• Money as a Standard of Deferred Payments

 Types of Money
 Commodity Money – cattle, skin, leather & grains
 Metallic Money – Gold, Silver & Brass
 Paper Money – Fiat Money
 Bank Deposits – DD, Checks, credit & debit cards
 Motives of the Money Requirement
 Transaction Motives – Income, Business other activities
The transactions motive for demanding money arises from the fact that most transactions
involve an exchange of money. Because it is necessary to have money available for transactions,
money will be demanded.

 Precautionary Motives – Contingencies

People often demand money as a precaution against an uncertain future. The need to have
money available in such situations is referred to as the precautionary motive for demanding money.

 Speculative Motives – Money Market

The speculative motive for demanding money arises in situations where holding money is
perceived to be less risky than the alternative of lending the money or investing it in some other
asset.
 Money Supply
The money supply is the total amount of money present in a
country’s economy – all its money. There are several ways of
measuring this, from the narrow definition (narrow money), which is
classified as M1, to the broad definition (broad money), which may
be classified as M2 & M3.
 Measurement of Money
M1, M2, M3
• M1, M2, M3 are all measures of money supply, the amount of money in
circulation at a
given time.
M1, also called narrow money, normally include coins and notes in
circulation and other money equivalents that are easily convertible into
cash. Includes currency, personal chequing accounts, and current
accounts etc.
M2 is somewhat broader measure of the supply of money, which
includes all of M1 plus savings and time deposits held at banks. Like
small-denomination time deposits and savings deposits and money
market mutual fund shares etc.
M3 is an even broader measure of the money supply, which includes
all of M2 plus large denomination. Like large-denomination time
deposits etc.
 Near Monies
Near money, also known as quasi-money, refers to highly liquid
assets that can rapidly be converted into cash such as short-
term money market instruments and bank deposits. ... Near
money means non-cash assets that are very liquid but cannot be
used directly for transactions.
 Difference between Money & Near Money
Unit of Account – money is a unit or account, it is a common measure
of value. Prices in shops, for example, are expressed in terms of
money. Near money has no such function. In fact, near money’s own
value is expressed in terms of money.
Making Transactions – we use money directly for making transactions,
while near money is an indirect medium of exchange – we need to
convert it into money first before it can be used for transactions.
Liquidity – money is 100% liquid, near money is not. Converting
near-money involves time, and sometimes a fee (exchanging
currency, or paying a penalty for taking your money out before the
agreed date).
 Types of Near Money
1. Savings accounts.
2. Money funds.
3. Bank time deposits (certificates of deposit)
4. Government treasury securities (such as T-bills)
5. Bonds near their redemption date.
6. Foreign currencies, especially widely traded ones such as the US
dollar, euro or yen.
 Types of Near Money
1 Savings accounts.
 A savings account is a deposit account held at a retail bank that
pays interest but cannot be used directly as money in the narrow
sense of a medium of exchange (for example, by writing
a cheque). These accounts let customers set aside a portion of their
liquid assets while earning a monetary return.
 Types of Near Money
2 Money funds.
 A money market fund (also called a money market mutual fund)
is an open-ended mutual fund that invests in short-term
debt securities such as Treasury bills. Money market funds are
widely (though not necessarily accurately) regarded as being as
safe as bank deposits yet providing a higher yield.
 Types of Near Money
3 Bank time deposits (certificates of deposit)
 A time deposit or term deposit (also known as a certificate of
deposit in the United States) is a deposit with a specified period of
maturity and earns interest. It is a money deposit at a banking
institution that cannot be withdrawn for a specific term or period
of time (unless a penalty is paid)
 Types of Near Money
4 Government treasury securities (such as T-bills)
 A United States Treasury security is an IOU from the US
Government. It is a government debt instrument issued by
the United States Department of the Treasury to finance
government spending as an alternative to taxation.
 Types of marketable treasury securities

 Treasury bills (or T-bills) mature in one year or less. Like zero-
coupon bonds, they do not pay interest prior to maturity; instead
they are sold at a discount of the par value to create a
positive yield to maturity
 Treasury bonds (T-Bonds, or the long bond) have the
longest maturity, from twenty years to thirty years. They have
a coupon payment every six months like T-Notes, and are
commonly issued with maturity of thirty years.
 Types of Near Money
5 Bonds near their redemption date.
In finance, a bond is an instrument of indebtedness of the bond
issuer to the holders. The most common types of bonds
include municipal bonds and corporate bonds.
The bond is a debt security, under which the issuer owes the holders
a debt and (depending on the terms of the bond) is obliged to pay
them interest (the coupon) or to repay the principal at a later date,
termed the maturity date. Interest is usually payable at fixed
intervals (semiannual, annual, sometimes monthly).
 Types of Near Money
6 Foreign currencies, especially widely traded ones such as
the US dollar, euro or yen.
 Shares & Preference Shares
Equity shares are the ordinary shares of the company. The holder of
the equity shares are the real owners of the company, i.e. the amount
of shares held by them is the portion of their ownership in the
company.
Equity shareholders have some privileges like they get voting rights
at the general meeting, they can appoint or remove the directors and
auditors of the company. Apart from that, they have the right to get
the profits of the company, i.e. the more the profit, the more is their
dividend and vice versa. Therefore, the amount of dividends is not
fixed. This does not mean that they will get the whole profit, but the
residual profit, which remains after paying all expenses and
liabilities on the company.
 Shares & Preference Shares
Preference Shares, as its name suggests, gets precedence over equity
shares on the matters like distribution of dividend at a fixed rate and
repayment of capital in the event of liquidation of the company.
The preference shareholders are also the part owners of the company
like equity shareholders, but in general, they do not have voting
rights. However, they get right to vote on the matters which directly
affect their rights like the resolution of winding up of the company,
or in the case of the reduction of capital.
 Key Differences
•
Equity shares cannot be converted into preference shares. However,
Preference shares could be converted into equity shares.
 Equity shares are irredeemable, but preference shares are redeemable.
 The next major difference is the ‘right to vote’. In general, equity
shares carry the right to vote, although preference shares do not carry
voting rights.
 If in a financial year, dividend on equity shares is not declared and
paid, then the dividend for that year lapses. On the other hand, in the
same situation, the preference shares dividend gets accumulated
which is paid in the next financial year except in the case of non-
cumulative preference shares.
 The rate of dividend is consistent for preference shares, while the rate
of equity dividend depends on the amount of profit earned by the
company in the financial year. Thus it goes on changing.