University of Bamenda Professional Degree

First Semester Examination January 2025

Department: BANKING AND FINANCE
Course Title: COMPARATIVE FINANCIAL SYSTEMS
Course Code:
Credit Value:
Semester: First Semester
Time allowed: 2:30 MINS
Course Status: Compulsory
Exam Date:
Course Instructor: Dr. ATINGWA N, SET 2
Total Marks: 70 Marks

Set 2 mark guide:

Section A: Case Study Question: 40 marks

1. Advantages and Disadvantages of a Centralized Banking System (Country A)

Advantages:

- Stability: A centralized banking system, with the central bank having significant control over
monetary policy, can help maintain stability in the financial system by implementing measures
to prevent excessive risk-taking and ensuring the overall health of the banking sector.

- Effective Regulation: The centralized regulatory framework allows for stricter oversight and
regulation of commercial banks, ensuring compliance with capital requirements, lending
practices, and risk management protocols.
- Consistent Monetary Policy: The central bank can efficiently implement monetary policy
measures to control inflation, stabilize interest rates, and manage the overall money supply.

Disadvantages:

- Lack of Competition: The dominance of a few large banks in Country A may result in reduced
competition, limiting choices for consumers and potentially leading to higher costs and lower
quality of services.

- Slow Innovation: Due to the centralized nature of the banking system, decision-making and
implementation of new technologies or innovative practices may be slower, hindering the pace
of innovation and development in the banking sector.

- Limited Flexibility: Centralized control can lead to a lack of flexibility in responding to market
changes, as decision-making processes may be slower and more bureaucratic.

2. Advantages and Disadvantages of a Decentralized Banking System (Country B)

Advantages:

- Competition and Innovation: A decentralized banking system fosters competition among a

larger number of banks, leading to greater innovation, better services, and more competitive
interest rates and fees for customers.

- Flexibility: The decentralized nature allows for quicker decision-making and adaptability to
changing market conditions, enabling banks to respond more swiftly to customer needs and
emerging trends.

- Diverse Service Offerings: With a wide range of banks and financial institutions operating in
Country B, customers have access to a variety of banking services, including traditional offerings
as well as digital banking solutions and partnerships with fintech companies.

Disadvantages:
- Risk of Regulatory Fragmentation: Multiple regulatory bodies overseeing the banking sector in
a decentralized system can result in fragmented regulations and potentially uneven
enforcement, which may increase the risk of regulatory arbitrage or inconsistent standards.

- Potential for Weaker Risk Management: The focus on competition and innovation may lead to
looser regulations on capital requirements and lending practices, potentially increasing the risk
of financial instability and non-performing loans if not properly managed.

- Lack of Systemic Coordination: In a decentralized system, coordination among regulatory

bodies and banks may be more challenging, making it harder to address systemic risks and
coordinate responses during times of crisis.

3. Recommendations to the MNC (Based on Characteristics of Banking Systems)

Based on the characteristics of the banking systems in Country A and Country B, the MNC
should consider the following recommendations:

Considering Country A:

- If the MNC prioritizes stability and regulatory oversight, Country A's centralized banking
system may be more suitable. It provides a stable and well-regulated environment, ensuring
compliance with regulations and minimizing risks.

- Country A's centralized system may be advantageous for the MNC if it requires access to a few
large banks that dominate the market and can provide comprehensive services.

Considering Country B:

- If the MNC values competition, innovation, and flexibility, Country B's decentralized banking
system may be a better fit. It offers a more diverse range of banking services and fosters
competition, potentially leading to better pricing and more customized solutions.

- Country B's decentralized system may be beneficial for the MNC if it seeks a more agile and
adaptable banking environment, with the potential for faster decision-making and access to
emerging banking technologies.
Ultimately, the MNC's choice should align with its specific business needs, risk appetite, and
growth objectives.

Section B: Essay Type Questions: 30 marks

Question 1
(a) Use the flow diagram to show how funds move from the surplus unit (household) to the
deficit unit (manufacturing companies and the government). Either passing through financial
intermediaries such as banks, institutional investors such as mutual funds, pension funds, and
insurance companies or markets such as money, bonds, stocks and derivatives. (Well
illustrated diagram)

(b) The direct financing channel is financing through financing through financial intermediaries
and institutional investors which is more liquid than indirect financing which is financing
through markets such as the money and capital markets which are less liquid.
(c)
- no financial leakage
- enough regulation must be put in place
- the market must be well established
- the system should have its own currency
- the system should be technologically adapted
- limited Government intervention

(d) Advantages of the market based system over the market based system 10 marks
_____________________________________________________________________________

Question 2
(a) Islamic banking refers to a system of banking activities that are consistent with Islamic laws
(Shariah), principles and guided by Islamic economics. In particular, Islamic laws prohibit usury
which the collection and payment of interest also commonly known in Islamic banking as riba.
(b)
 In conventional banks, money is a product and a medium of exchange and store of value
while in Islamic banking; money is not product but just a medium of exchange.
 In conventional banks, time value is the basis for charging interest on capital while in
Islamic banking, profits on goods and services is the basis for earning profits.
 In conventional banks, government can easily obtain loans but this is difficult in the
Islamic banking system.
(c)
 Accumulated profits or retained earnings.
 Capital reserves
 Savings accounts
 Investment accounts
 Revenue reserves and
 Qard-Hassan Deposits (10 mks)
______________________________________________________________________________
____
Question 3

Similarities and differences should be given based on the following criteria;

1. Regulatory structure
2. Banking structure
3. Deposit insurance
4. Payment system and technology
5. International influence
6. Cultural differences
Etc 10 mks

Question 4
i) Maturity intermediation: Financial intermediaries provide maturity intermediation when
depositors make short term loans but borrowers want long-term loans. Without financial
intermediation bearing the risk of maturity mismatch, there might not even be a market for long-
term mortgages.

ii) Denomination intermediation: Financial intermediaries provide denomination intermediation

by buying securities in amounts beyond the reach of an average investor. They do so by grouping
investments for investors by buying government securities on behalf of their customers.
iii) Moral hazards: Is a problem of information asymmetry which takes place after the transaction
occurs. For example, the risk that the borrower may engage in activities that are undesirable or
immoral from the lenders view.
(iv) Adverse selection: Is a problem of information asymmetry which takes place before the
transaction occurs. For example, least credit worthy borrowers are the ones most actively looking
for credit. (10 mks)
______________________________________________________________________________
____
Question 5
a) - The state creates a framework that regulates the production and distribution of goods
and services.
- It modifies and supplements the functioning of the price system.
- It redistributes income.
- Promotes economic stability.
- Promotes economic growth.
- Ameliorate the BOP

b) - Sole currency issue authority

- Banker to other banks
- Governments bank
- Lender of last resort
- Managing the national debts
- Facilitating and promoting the rate of economic growth and development
(10 mks)
______________________________________________________________________________
____
Question 6
(a) Core purposes of the Bank of England:
- Monetary stability
- Financial stability

(b) -Successes
i) BEAC has been able to achieve its main objectives of price stability
ii) BEAC has been able to reduce inflation within the CEMAC zone
iii) BEAC has helped fight the worldwide current financial crisis
iv) BEAC has successfully supervised most financial institutions within its system with respect
to liquidity ratios.
v) BEAC has adopted a programmatic approach based on analysis of development in monetary
aggregates and international economic environment.

-Failures
i) BEAC doesn’t have autonomy in functioning
ii) BEAC governors are still appointed by head of states
iii) Mismanagement of funds is still observed in BEAC
iv) BEAC has failed in centralising the poor government balances
(10 mks)