Revise Lecture 12

Financial Services

Q1: Define financial services means?

Ans1: All types of activities which are of financial nature, could be brought under the term ‘Financial Services’. The term in a broad sense, means ‘mobilizing and allocating savings’. Thus, it includes all activities involved in the transformation of savings into investment.

Ans 1: The financial services can also be called financial intermediation. Financial intermediation is a process by which funds are mobilized from a large number of savers and make them available to all those who are in need of them, particularly to corporate customers.

Q2: What are the classifications of financial services?

Ans 2: Classification of Financial Services: The financial intermediaries in Pakistan is traditionally classified into two; Capital market intermediaries Money market intermediaries

Q3: What are fund-based and non-fund based activities?

The fund-based activities include; Underwriting or investment in shares, debentures, bonds etc. of new issues (primary market activities) Dealing in secondary market activities. Participating in money market instruments such as commercial papers, certificate of deposits, treasury bills and discounting bills. Dealing in foreign exchange market activities

The non-fund based activities: The non-fund based activities can also be called ‘fee based’ activities. Today, customers, whether individual or corporate are not satisfied with more provisions of finance. They expect more from financial service companies. Hence, a wide variety of services are being provided under this head, which include;

Q4: What are modern activities?

Management the capital issue, i. e Management the capital issue, i.e. management of pre-issue and post-issue activities relating to the capital issue in accordance with the SECP guidelines. Making arrangements for the placement of capital and debt instruments with investment institutions. Arrangement of funds from financial institutions for the client ‘project cost or their working capital requirements’. Assisting in the process of getting all government and other clearances.

Lecture 13 Factoring

Financial services Factoring: The receivables constitute a significant portion of current assets of a firm. But, for investment in receivables, a firm has to incur certain costs such as costs of financing the receivables and costs of collection from the receivables. Further there is a risk of bad debts also.

Financial services Factoring: It is, therefore, very essential to have a proper control and management of receivables. In fact, maintaining receivables poses two types of problems; The problem of raising funds to finance the receivables The problem relating to collection, delays and defaults of the receivables.

Financial services Factoring: A small firm may handle the problem of receviables management of its own, but it may not be possible for a large firm to do so efficiently as it may be exposed to the risk of more and more bad debts. In such a case, a firm may avail the services of specialised institution engaged in receivables management, called factoring firms.

Financial services Factoring: Factoring may broadly be defined as the relationship created by an agreement between the seller of goods / services and a financial institution, called the factor. Factoring may also be defined as a continuous relationship between a financial institution ( the factor) and a business concern selling goods / service (the client) to a trade customer on an open account basis whereby the factor purchases the client’s book debts (account receviables) with or without recourse.

Financial services Factoring: The term factoring has been defined in various countries in different ways due to non-availability of any uniform codified law. Factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factor;

Financial services Factoring: Finance for the supplier including loans and advance payments. Maintenance of accounts, ledgers relating to receivables. Collection of debts. Protection against credit risks in payments by debtors.

Features of Factoring

Financial services Features of Factoring: Factoring is a service of financial nature involving the conversion of credit bills into cash. Accounts receivables, bills recoverables and other credit dues resulting from credit sales appear in the books of account as book credits. The risks associated with credit are taken over by the factor which purchases these credit receivables without recourse and collects them when due.

Financial services Features of Factoring: 3. A factor performs at least two of the following functions; Providing finance Maintaining accounts ledgers Collecting receivables Protecting risk of default in payments

Financial services Features of Factoring: 4. Factor acts as another financial intermediary between the buyer and the seller. 5. Unlike a bank, a factor specializes in handling and collecting receivables in an efficient manner. The factor receives the payments directly since the invoices are assigned in favour of it.