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MONEY, BANKING AND THE FINANCIAL SYSTEM (ISLAMIC BANKING PRODUCTS (Al-Bai…
MONEY, BANKING AND THE FINANCIAL SYSTEM
CENTRAL BANK AND ITS MONETARY POLICY
FINANCIAL SYSTEM IN MALAYSIA
NON-BANK FINANCIAL INSTITUTIONS
Finance Companies
Islamic Banks
Merchant Banks
Discount Houses
NON-BANK FINANCIAL INTERMEDIARIES
Development Financial Institutions
Employees Provident Fund
BANKING INSTITUTIONS
Central Bank
Commercial Banks
CENTRAL BANK FUNCTIONS
Overseeing monetary policy
Holder of the country's stock of gold and foreign currency reserves
Acting as a banker and financial adviser to the government
Banker to the banks
Issuing and managing the country's currency to ensure currency stability
Lender of last resort to commercial banks and the government
MONETARY POLICY
PRINCIPLE OBJECTIVES
Maintain price stability
Achieve higher rates of economic growth
Achieve full employment
Achieve balance of payments equilibrium
TWO TYPES OF MONETARY POLICY
Expansionary Monetary Policy
Contractionary Monetary Policy
MONETARY POLICY TOOLS
QUANTITATIVE
Open market operations
Variation in the required reserve ratio upon the bank
Bank rate policy or discount rate
QUALITATIVE
Fixing margin requirements
Direct credit controls on bank lending
COMMERCIAL BANKS AND CREDIT CREATION
COMMERCIAL BANKS
Accept deposits and lend money to earn profit
FUNCTIONS
Providing loans and advances
Providing other banking services and facilities
Credit creation
Accepting deposits
CREDIT CREATION PROCESS
Credit creation is a process where a small given deposit will lead to a greater increase in the money supply of the economy
IN THE PROCESS, ASSUMES THAT:
There are many banks in the banking system and each customer deposits money in different banks
Bank have only two types of assets- cash and loans
Commercial banks do not keep excess cash reserves
All transactions are made by cheques
Cash reserve ratio is fixed by the central bank
Public must keep their money in the banks and all deposits are only kept in the form of current accounts using only cheques
Leakages does not exist
Banks have only one liability
LIMITATIONS OF CREDIT CREATION
Business conditions
Cash reserve ratio
Availability of borrowers
Availability of collateral securities
Banking habits of the people
Excess reserves
Amount of cash
Central bank monetary control
ISLAMIC BANKING PRODUCTS
Al-Bai Bithaman Ajil
Al-Musyarakah
Al-Mudharabah
Al-Ijarah
Al-Wadiah