2 Introduction Functions and characteristics of money Services provided by various types of banking institutionsRoles and responsibilities of banksImpacts of strong banking infrastructure
3 What is Money? Characteristics of Money What are the functions of money?Credit cards
4 Characteristics of Money It must be easily visible in units that are easy to be calculatedIt must be portableIt must be physically stable and durableIt must not be easily counterfeitedIt’s perceived value must be stable
5 Functions of Money 3 main functions As a mean in which we can measure the value of all goods and servicesAs a medium for exchange of goods and services to take placeA money system that is stable will be a medium for the storage of value
6 Credit CardsIssued by commercial banks which provide a reliable and convenient way for users to pay for purchases.Credit cards also allow users to carry less cash when making purchases and thereby reducing the risks for the users.The institutions received revenue from 2 sources:From the merchant that accept the credit card paymentFrom interest charged to card holders for outstanding balances
7 Banking Institutions Commercial Bank 2 main forms of servicesServices offered by the diversified commercial banksSaving and Loan Associations and Mutual Saving BanksFinance companies, Merchant banks and other Financial InstitutionsCentral BankRoles of Central Bank
8 Commercial BanksImportant role: facilitating the flow of money from those surplus to those with a need of money.2 main forms of services:In receiving and holding the surplus money from depositors who are individuals, businesses and other organizations in the form of deposit (saving accounts) or current accountsIn making available the fund received and held for the depositors to individuals and businesses in the form of loans.
9 Depositors Bank Borrowers Put money into bank Receive interests or cheque issuing facilities (or both) from bank)BankReceive money from depositorsLoan money to borrowers.Provide saving and current accounts services to both depositors and borrowers.BorrowersReceive money from bank in the form of loansRepayment to bank for capital and interest.
10 Other services Following are the services available: Credit cards and charge cardsSafe deposit boxesTime deposit accountForeign exchangeWired transfer of funds (domestics & international)Mortgage and termed loan for residential and commercial properties.Overdraft facilities for individual and businessesStock brokerage servicesPersonal financial planning servicesInsurance and mutual funds transactionsAutomatic teller machineCash & cheque deposit machinesOn-line banking services
11 Saving and Loan Associations and Mutual Saving Banks SLA : commonly provide home mortgage loans to its borrowers from the money deposited by its depositors. They provide the depositors with saving and current account.Operations are restricted to the long term mortgage loan at fixed-rate while taking in short term deposits.
12 Finance Companies, Merchants and Other Financial Institution Finance companies provide loans to individuals and businesses for the purchase of equipment, cars and even properties.E.g. insurance companies utilize large amount of money that they collect from their policyholder’s premium and provide mortgage loan to publicMerchant BankProvide clients : advise, consultancy, arrangement for finance, placement of shares, ensuring their clients adhere to regulations relating to listing and requirements, ensuring there are sufficient takers for the new issues of shares.Derived profits by purchasing and selling clients shares.Investment BankTrade stocks, share and bonds on stock exchangesTrade on their own stocks and bonds to achieve profit.
13 The Central BanksTo regulate the activities of the various banking institutions and implement the fiscal policies of the country.The central bank’s main roles are:Influencing money supplyRegulate the availability of creditSupplying currency and processing of cheque
14 Influencing Money Supply The most crucial role played by the central bank in the regulation of the supply of credit and money to ensure that economic growth is promoted and the stability of the country’s currency is maintained.The central bank influence money by:Regulating the reserve requirement for commercial bankConducting open-market operation where the central bank either buys or sells government bondsRegulating the discount rate, which is the interest rate the central bank charges on loans to commercial banks
15 Regulate the availability of credit The central bank regulates the availability of credit by setting margin requirements on various activities of commercial banks and credit rules for consumer spending.They controlled by:Setting the terms of credits for different types of loans, including percentage of money that investor should pay when investing in stocks or sharesSetting the credit rules for consumer spending by regulating the amount of minimum payment to be settled by consumers with their credit card companies.
16 Supplying currency and processing cheque Central Bank is the sole custodian of a nation’s supply of currency.Supplied currency in form of coins and bills, to ensure that there is sufficient supply of currency to fuel healthy economic activities.Plays the role of a clearing house for cheque which is not very apparent to the public but serves as an indispensable function of the central bank
17 International Services Commercial banks are providing international financial services to companies and individuals in dealing cross border trades and financial transactions.Several options to pay the transactions, e.g.Good faith : direct bank transferLetter of Credit (LOC): a guarantee from the bank that bank will the seller if the conditions of payment is fulfilledCost of LOC is higher than direct transfer
18 ‘Fountain Pen’ MoneyMoney that is not physically produced but rather created by the banking system into the economyAssumption:You have deposited 1,000 into your bank and the bank has reserve requirement of 10%. This means the bank can lend 90% of your 1,000 (= 900) to another personAfter 5 rounds of lending 1,000, in fact created ‘fountain pen money worth 4,685.59Round 1Round 2Round 3Round 4Round 5Money deposited by depositor1,000900810729656.10Money kept in reserve by bank (10%)100908172.965.61Money lent to borrowers590.49Total Amount of money surplus (assumption deposits + money lent)1,9002,7103,439
19 Importance of good banking structure In order for a country’s economic development to achieve stability and growth, 3 fundamental requirements must exist:A politically stable governmentA stable currencyA solid banking infrastructureA solid banking infrastructure with an effective central bank will be able to bring stability to a country’s currencyAsian Financial CrisisShorter period of recovery e.g. Malaysia, Singapore & South KoreaArgentina 2002Collapse of confidence and banking system had resulted economic and social turmoilLost of FDI & instable currency fluctuation
20 IMF & World Bank International Monetary Fund (IMF) World Bank Set up in 1947 by United NationPossessed a fund comprises of currrencies of various countries as well as international reserveTo loan money to any countries that not able to meet their international debt repayment obligationsWorld BankCarries out another role in establishing economic stability and growth in the world by obtaining funds from developed nations to provide economic assistance and soft loans to developing countries.