BWFS2083 ISLAMIC FINANCIAL MARKETS, INSTRUMENTS AND INSTITUTIONS

CHAPTER 1 OVERVIEW OF FINANCIAL INSTITUTIONS AND FINANCIAL MARKETS

Chapter Outline
The concept of surplus spending units and deficit spending units Types and functions of financial markets Overview of financial intermediaries Overview of Malaysian financial institutions Regulating the financial services industry

1.1 The concept of surplus spending units and deficit spending units
Surplus spending units: An individual or group that that provide funds to deficit spending units by way of the financial markets. For example, an individual may provide funds to the deficit spending units in exchange for stock ownership.

Deficit spending units:

Any individual, group, or entity (such as a broker or dealer) that obtains funds from surplus spending units by way of the financial markets. One of the most common ways to do so is to sell financial instruments or securities

Explains 'Deficit Spending Unit'

During times of economic hardship, governments and municipalities are likely to run deficits to shield the effects of a recession and to spur economic growth. Although it is very unlikely that an economic unit will operate at a surplus all the time, a prolonged deficit will eventually cause long-term hardship for the economy as debt levels become too high.

NOW
Households (Have money to invest)

Money

Corporations (need money to build etc.)

Now, these households are not going to just give corporations money. They will demand a bit more for the use of their money and risk their money back at some time in the future and s incurred etc.

In the Future
Households Money Corporations

 "financial markets" is often used to refer just to the markets that are used to raise finance:
for long term finance it is the Capital markets for short term finance it is the Money markets. Another common use of the term is as a catchall for all the markets in the financial sector, as examples:-

Cont
Capital markets which consist of:
Stock markets, which provide financing through the issuance of shares or common stock. Bond markets, which provide financing through the issuance of bonds.

Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment.

Cont
Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

FUNCTION FINANCIAL MARKET

Intermediary Functions: The

Transfer of Resources Enhancing income Productive usage Capital Formation Price determination Sale mechanism Information

intermediary functions of a financial markets include the following:

Cont
Financial Functions
Providing the borrower with funds so as to enable them to carry out their investment plans. Providing the lenders with earning assets so as to enable them to earn wealth. Providing liquidity in the market so as to facilitate trading of funds.

1.3 Overview of Financial Intermediaries

Financial Intermediaries

Financial intermediation consists of channeling funds between surplus and deficit agents.

Major Categories of Financial Institutions

Commercial Banks Investment Banks Islamic Banks Insurance Companies Brokerages

Commercial banks vs Investment bank

Commercial banks manage deposit accounts, such as checking and savings accounts, for individuals and businesses. They make loans to the public using the money held on deposit. Malayan Banking Berhad Investment banks facilitate the buying and selling of stocks, bonds and other investments, as well as helping companies to go public with initial public offerings (IPO). OSK Investment Bank Berhad Alliance Investment Bank

CIMB Bank Holdings Berhad

1.4 Overview of Malaysia Financial Institutions

ISLAMIC BANKING
Islamic banks carry out almost similar activities in nature as commercial banks but based on Sharia principles Iran, Saudi Arabia and Malaysia have the biggest shariacompliant assets. Iran holds the world's largest level of Islamic finance assets Seven out of ten top Islamic banks in the world are Iranian

ISLAMIC BANKING IN MALAYSIA

Bank Islam Malaysia Berhad (1983) Bank Muamalat Malaysia Berhad (1999) The 3 major principles that govern the operations of Islamic banks are: I. prohibition of riba (interest) and the sharing of profit and losses, II. the management of Islamic banks based on Islamic acts and practices III. the avoidance of activities contrary to the Muslims interest.

1.5 Regulating the financial services industry

Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system.

History Of Bank Regulation

Pre-1988
1988- BIS Accord (Basel I) 1996 Amendment Basel II

History Of Bank Regulation

Pre-1988
Setting Minimum Levels For The Ratio Of Capital To Total Assets Definitions And Required Ratios Varied From Country And Country. Enforcement Of Regulations Varied From Country To Country. Over-the-counter Derivatives Market For Products Was Growing Fast. Ldc Debt Was A Major Problem

1988: BIS Accord (Basel I)

First Attempt To Set International Riskbased Standards For Capital Adequacy. To Minimum Capital Requirement For Commercial Banks As A Buffer Against Financial Losses. It Only Covered Credit Risk.

1996 Amendment
Sometimes Refers As BIS 98 Implemented In 1998 Incorporate Market Risk Required Banks To Measure And Hold Capital Foe Market Risk For All Instrument In The Trading book.

Basel II
Implemented In 2007. A Comprehensive Revision To Basel Accord Three Pillars:

i. New Minumum Capital Requirement For Certain Risks. ii. Supervisory Review Process iii. Market Discipline

Islamic Banking Act 1983

Came Into Force On 7th April 1983 Provide For The Licensing And Regulation Of Islamic Banking Business In Malaysia Do Not Involve Any Elements Which Is Not Approved By The Religion Of Islam Governed By Central Bank Of Malaysia.

BAFIA 1989
Banking and Financial Act, 1989 Provide a framework for an integrated supervision of the Malaysian financial system and enhanced the regulatory and supervisory powers of the Central Bank (Bank Negara Malaysia, BNM) The BAFIA provides BNM with the powers to regulate and supervise all licensed financial institutions, including representative offices or branches of foreign banks
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Market confidence

Reduction of financial crime

Objective

Financial stability

Consumer protection

Thank You !!!