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CHAPTER 1: OVERVIEW OF FINANCIAL SYSTEM (Non-Bank Financial Institutions…
CHAPTER 1: OVERVIEW OF FINANCIAL SYSTEM
ISLAMIC BANKING
Banking activities based on syariah principles:
Same products line
operates in accordance with fiqh muamalat
:PEN: not allowing payment and receiving interest
:PEN: promote profit sharing
Syariah Concepts in Islamic Banking
Mudharabah - profit sharing
Musyarakah - joint venture
Wadiah - safekeeping
Murabahah – cost plus
Bai’ Bithaman Ajil – deferred payment sale
Wakalah - agency
Qardhul Hassan – benevolent loan
Bai’ al-inah – sell and buy back agreement
Ijarah Thumma Al bai’ – hire purchase
Hibah - gift
Examples of the application of the concepts on products and services
a) Investment deposits – under al-mudharabah (profit sharing)
b) Financing facilities – working capital financing under al-murabahah (cost-plus); house financing under bai’bithaman ajil (deferred payment sale); leasing under al-ijarah; project financing under al-musyarakah (profit-loss sharing)
Deposits-taking
c) Deposits-taking products – current and savings deposits under al-wadiah (guaranteed custody)
The banking system
BNM acts as regulator and supervisor
Objectives
:PEN: Issue currency/keep reserves
:PEN: Banker and adviser
:PEN: Promote monetary stability
:PEN: Influence credit situation
Financial stability
:pencil2: a condition where financial intermediation process functions smoothly and there is confidence in the operation of financial institutions and financial markets
Importance of financial stability
:star: To support efficient allocation of resources and distribution of risks across the economy
:star: Instability of a financial system - a costly spillover effects to the economy and lead to financial crisis with adverse economic consequences
:star: BNM’s - to promote a sound and efficient financial system by preserving the soundness of financial institutions and strong financial infrastructure
Banking Institutions
-provide banking facilities and services to meet financial needs of participants
-main contributors of assets in the financial system
Islamic banks
Investment Banks
Providing services for the corporate sector – corporate advisory, management services and ’wholesale’ lending:
:STAR: loan syndication
:star:management of consortium loans
:star:corporate advisory services
:star:underwriting services
:star:stock-broking services
Commercial bank (Conventional)
An institution that carries on the business of banking
The business of banking is defined as ‘the business of:
:star: Receiving deposits
:star: Paying or collecting cheques
:star:Provision of finance
:star: Such other business as BNM, with the approval of the Minister, may prescribe
Non-Bank Financial Institutions (NBFis)
Their roles are specialized in nature such as pension fund, providing insurance business, promoting economic activities for economic development, credit institution, and others
Cagamas Berhad
Housing Credit Institutions
Insurance Companies
:fountain_pen: Institutions that provide financial coverage to policyholders in the event of death or loss of property
:fountain_pen: Main source of fund: a sum of money (or premium) paid by policyholders
:fountain_pen:Main use: invest in securities, claims, financing to corporations
Pilgrims Fund Board (Lembaga Tabung Haji)
Provident and Pension Funds (EPF)
:fountain_pen: An institution to safeguard savings of members and provide future benefits upon retirement, death or disabilities
:fountain_pen: Main source of fund: deductions from employees/employers; return on investment
:fountain_pen: Main use: investment in securities, withdrawals
Unit Trust Funds
The money market
A market for the movement of short term funds
To meet the liquidity requirements of market participants
Participants BNM, commercial banks, investment banks and offshore banks
2 categories:
(i) direct placement of funds
(ii) the sale and purchase of securities (financial instruments)
Foreign Exchange market
A market for the buying and selling of foreign currencies to meet the foreign currency requirements of corporations which can either be exporters and/or importers
Participants BNM, commercial banks, Islamic banks, multinational corporations and money brokers (as the intermediaries)
Capital market
Consist of (i) equity market and (ii) bond market where the focus is more on the long term basis of trading of instruments
Equity market
provide means of raising of funds by corporations by issuing stocks and shares (Initial Public Offerings - IPOs) and also the trading of shares in the secondary markets
Bond Market
is a place where private and public sectors can raise funds by issuing private and government debt securities
Offshore market
Provides a wide range of offshore products in foreign currencies such as banking, insurance, trust business, fund management, Islamic financing and company management services
Deals in currencies other than Malaysian ringgit
Derivatives market
The trading of instruments such as futures, options, swaps and forwards
Instruments that derived its value from the movement of price/rate of some underlying assets such as interest rates, foreign exchange, commodity and index
Use to hedge against price and interest rates volatility and for speculative purposes
Dev. Fin. Institutions (DFIs)
Institutions that provide capital for industrial, agriculture, commercial or other economic development (specialized in nature)
To support development in strategic and new growth area, complement the financial service in meeting the national policies
SME Bank
Bank Rakyat
Bank Pembangunan
Agrobank
FINANCIAL INTERMEDIARIES
:STAR:The ‘middlemen’ in the exchange of financial assets
:STAR: To facilitate the movement of funds among users and demanders of funds
:STAR:Basic function – obtain funds from surplus unit and allocate to deficit units
BENEFITS
Reliable information of instruments - such as level of safeties or liquidity
Act as advisor to participants to utilize the instruments
More options of borrowing, financing or advances at lowest possible prices
Offer products/services through virtual banking or internet banking
Well diversified portfolio of depository
Identify the actual provider and users of funds through effective banking network
Sources of funds
Comprised of borrowings and shareholders funds
Borrowings include deposits from public, government, BNM, foreign institutions; specific funds from government to finance shipping industry (Bk Industri) or funds for ECR scheme
Uses of funds
Loans and investment
Loans increased due to active participation in government policy to finance the priority sectors
