FMI

Overview of Market Participants &

Financial innovation
Chap 2
Financial institutions
Financial institutions are businesses which
offer multiple services in banking and
finance. The services, that customers receive
may include savings and checking
accounts, loans, investments, and financial
counseling. The benefits consumers gain
by using financial institutions includes
convenience, cost savings, safety, and
security.
Characteristics of Financial institutions:
Accept deposits
Transfer funds
 Lend money
Storing valuables
Provide financial advice and investment services
Manage trusts
Types of Financial Institutions
1. Depository institutions: Those that accept deposits from customers
— include commercial banks, savings banks, and credit unions
2. Non depository institutions: Those that don’t accept deposits from
customers —include finance companies, insurance companies, and
brokerage firms.

The banking sectors is regulated by the central bank, State Bank of
Pakistan.
While rest of the market (lease, stock exchanges, modarba, mutual
funds and insurance) is regulated by Securities and Exchange
Commission of Pakistan.
Types of Depository Financial Institutions
Commercial Banks
Savings and Loans
Credit Unions

Take deposits and make loans

Depository institutions
Banks
A bank is a commercial or state institution that
provides financial services, including issuing money in
various forms, receiving deposits of money, lending
money and processing transactions and the creating of
credit.
Central Bank
A central bank, reserve bank or monetary authority, is an
entity responsible for the monetary policy of its country or
of a group of member states, such as Pakistan State Bank
Primary responsibilities
Maintain the stability of the national currency and money
supply,
 Control subsidized-loan interest rates,
Act as a “lender of last resort” to the banking sector during
times of financial crisis.
Commercial Banks
Commercial banks are the most important source of
funds for business firms in aggregate.
Banks acquire deposits from individuals, companies
and government and in turn makes loan and
investments.
 Besides performing a banking function, commercial
banks also invest in corporate bonds and stocks
Savings and Loans
Savings and loans’ primary purpose is to take in
deposits from households and to lend funds for home
and consumer loans.
Saving Banks
A saving bank is a financial institution whose primary
purpose is accepting savings deposits. It may also
perform
some other functions
Credit Unions
Credit Unions are owned by depositors (actually share
owners) who are individuals, not businesses. Credit
Unions take in funds and primarily make personal
loans.
Services of Financial Institutions
Transforming Financial Assets
Exchanging Financial Assets on Behalf of
Customers
Exchanging Financial Assets for Own Account
Assisting in the Creation of Financial Assets
Providing Investment Advice
Managing Portfolios
Financial non depository
institutions
Financial non depository institutions
are financial intermediaries that do not
accept deposits but do pool the payments of
many people in the form of premiums or
contributions and either invest it or provide
credit to others.
Investment banks
Investment banks help companies and governments
and their agencies to raise money by issuing and
selling securities in the primary market.
They assist public and private corporations in raising
funds in the capital markets (both equity and debt),
providing strategic advisory services for mergers,
acquisitions and other types of financial transactions.
Islamic Banks
Islamic banking refers to a system of banking or
banking activity that is consistent with Islamic law
(Sharia) principles and guided by Islamic economics.
In particular, Islamic law prohibits usury, the
collection and payment of interest, also commonly
called riba in Islamic discourse.
Specialized Banks
ZTBL
– The Zarai Taraqiati Bank Limited It is also known as
Agricultural Development Bank of Pakistan (ADBP).
– It is the premier financial institution geared towards
the development of the agricultural sector through the
provision of financial services and technical know-
how.
DEVELOPMENT BANKS
These banks provide guidance in selection of industrial units and
extend direct financial assistance to partly cover their financial
requirements,
Responsible for speeding up the pace of economic growth in the
country in conformity with the national objectives, plans and
priorities.

Their core functions are:

• Direct financial assistance
• Mobilization of domestic savings
• Expanding entrepreneurial base by encourage new comers
Micro Finance Banks
For the purpose of poverty reduction program, such
kind of banks are working in the different countries
with the contribution of World Bank.
The main aim of microfinance institutions is
alleviation of poverty through helping poor persons to
earn some money especially the women.
Insurances Companies
Insurance is a hedge against the risk of a contingent and
uncertain loss.
 In other words, it is the equitable transfer of the risk of a loss,
from one entity to another, in exchange for payment.
 For this service, the insurer charges a fee called premium
depending upon the risk involved.

Insurance companies may be classified as:-

1. Life insurance companies, which sell life insurance,
annuities and pensions products.
2. Non-life or general insurance companies, which sell other
types of insurance.
Pawnshops
pawnshops that make loans based on the value of
property such as jewelry, electronics, or other valuable
items.
 Pawnshops charge much higher fees than other
lending institutions.
Pension Funds
Workers and/or employers contribute funds for the
pension fund to invest. The accumulated funds are
used to pay benefits at retirement.
Because of the long nature of the liabilities pension
funds are able to invest in long term securities. As a
result they invest heavily in corporate bonds and stock.
MODARBA
If is a form of partnership which has two distinct
parties:
(i) the financier
(ii) the manager.

The financer takes no part of management of the

business. The profits are distributed among the
subscriber while the manager is paid the usual salary.
Modarba is one the modes of Islamic finance. It is like
mutual fund minus its un-Islamic features
Non-banking financial company
Non-bank financial companies (NBFCs) also known as
a non-bank or a non-bank bank, are financial
institutions that provide banking services without
meeting the legal definition of a bank, i.e. one that does
not hold a banking license.
Acts as suppliers of loans and credit facilities,
supporting investments in property,
Providing services relating to events within peoples
lives such as funding private education, wealth
management and retirement planning
DISCOUNT HOUSES
These are firms which buys and discounts bills of
exchange, banker‘ acceptance, commercial paper, etc.
Discount houses also tender for treasury bills, deal in
short-dated government bonds, and are an important
part of the short-term money markets.
Leasing Companies
It is a contract where owner of an asset agrees to allow
someone to use it for a fixed rental. It can be for fixed
or indefinite period of time. It is a binding contract
which sets out terms of lease agreement between the
owner(lessor) and the user(Lessee)
Finance Companies
Non-bank firms that borrow funds to make short and
medium term loans to higher risk borrowers. These
companies raise capital through stock issues as well as
through borrowing some of which are long term but
most of it comes from commercial banks, in turn
financial companies makes loans.
Mutual Fund
An investment which is comprised of a pool of funds
collected from many investors for the purpose of
investing in
securities such as stocks, bonds, money market
securities and similar assets

Closed-end fund has a fixed number of shares offered

by an investment company through an initial public
offering.
Open-end funds are offered through a investment
company that sells shares directly to investors.
Brokerage Houses
Stock brokers assist people in investing, online only
companies are called 'discount brokerages', companies
with a branch presence are called 'full service
brokerages' or 'private client services.
Investment company
Generally, an "investment company" is a company that
issues securities and is primarily engaged in the
business of investing in securities.