FIN 536

PPT 2
March 2015

OVERVIEW OF FINANCIAL
SYSTEM

(Sources and Uses of Funds)

CHAPTER 1b
Dr. Norliza Che Yahya
Center for Economics and Finance Studies
Faculty of Business and Management
Universiti Teknologi MARA (UiTM),
42300 Puncak Alam Campus,
Office: PFI 04 -032 Office (tel): 03-3258 7077
Email: norliza9911@puncakalam.uitm.edu.my or norlizacheyahya@yahoo.com
LOGO
1
 LOGO
Content of Syllabus

CODE CHAPTER WEEK NOTE

Ppt 1- 4 Introduction and Overview of Financial System 1-3
Ppt 5-6 Interest rates and the role of a central bank 4 Test 1
Ppt 7-8 Money & Foreign Exchange market 5-6 (15%)
Ppt 9-10 Capital market Equity and Bond market 7-8
Ppt 11 Derivatives market 9
Ppt 12 Offshore market 9 - 10
Ppt 13 Financial Legal Framework 10 - 11 Test 2
Ppt 14 Banking products & services 11 - 12 (15%)
Ppt 15-16 Banking regulation and management 12 - 14

2
 LOGO
Chapter Outline

NO. CONTENT
1. Role, functions and sources & uses of funds of
commercial banks and investment banks
2. Role, functions and sources and uses of funds of non-
bank financial institutions (NBFIs)

3
 LOGO
Sources and Uses of Funds

Sources Uses
funds received by how funds are
the financial being used for the
institutions from financial
various sources intermediaries to
including funds maximize its
placed by the return and to meet
surplus units in the regulators
form of deposits requirement

4
 LOGO
FINANCIAL STATEMENT OF BANKING INSTITUTIONS

A typical balance sheet of a bank (common items):

Assets Liabilities
Cash and short-term funds Deposits from customers
Deposits and placement with other banks/ Deposits and placement from other
financial institutions banks/financial institutions
Securities Obligations on securities sold under
REPO
Loans, advances and financing Bills and acceptances payable
Other assets Other liabilities
Statutory deposits with BNM Shareholders Equity
Property, plant and equipment Share capital
Reserves
5
 LOGO

A typical Income Statement of a commercial bank

RM
Interest Income xxx
- Interest Expense xxx
Net Interest Income xxx
+ Other operating income xxx
Net Income xxx
- Overhead Expenses xxx
- Allowances for losses for loans/advances xx
Profit before tax xxx
- Tax xx
Profit/loss xxxx

6
 LOGO
Commercial Bank

an institution that carries on the business of banking

the business of banking is defined as the business of:
Receiving deposits;
Paying or collecting cheques;
Provision of finance; and
Such other business as BNM, with the approval of the
Minister, may prescribe
(BAFIA 1989)

7
 LOGO
Example of Commercial Banks in Malaysia

8
 LOGO
Banking functions of Commercial banks

Retail banking services

Trade finance facilities
Treasury services
Cross border payment services
Custody services

9
 LOGO
Sources of funds of Commercial banks

Deposits
Deposits dominated the sources of funds for banks.
Deposits are in the form of:
i) savings account holders - funds placed by retail customers
ii) fixed deposits - placed by investors/corporates looking for low
risk investment
iii) deposits or placement by other financial intermediaries
Securities
Example Repurchase Agreement (REPO)
Capital and reserves
serves as a safety cushion for depositors.

10
 LOGO
Uses of funds of Commercial Banks

Loans and advances (or For Islamic banks Financing and

advances).
Loan and advances have dominated the uses of funds.
In 1996 loans contribution increased to 60.8%, in 1998 (63%)
As at the end of 2006, loans contributed 54% of the total banking
system uses of funds.
Trend is decreasing but still the main uses of funds because loans and
advances contribute substantially to the profit of banks.

Cash and short term funds

are the liquid portion of the assets.
used for short-term needs of commercial banks such as withdrawals of
depositors and investment in short-terms investments.
Important indicator of level of liquidity of banks.
11
 LOGO
continue
Investment in marketable securities
are the investment portion of the funds to maximize returns for banks,
mainly in safe short-term to medium term instruments.

Deposits and placement with banks and other financial

institutions
Another alternatives of investment, safest, part of inter-bank deposits
transaction.

Statutory reserves with BNM

placement with BNM as part of regulatory requirement such as
Statutory Reserve Requirement (SRR) and Liquidity reserves; for
financial system protection.

12
 LOGO
Investment Banks
Providing services for the corporate sector corporate
advisory, management services and wholesale lending:
Services of investments banks include:
- loan syndication
- management of consortium loans (latin word partnership).
- corporate advisory services
- underwriting services
- portfolio management
- stock-broking services

13
 LOGO
Sources and Uses of funds of Investment banks

Main sources of funds

Deposits from large corporations, banking institutions,
other approved financial institutions, associations, clubs
and foundations.

Main Uses of funds

Loans and advances
Purchase of Treasury Bills (TBs) and other government
securities.

14
 LOGO
NON-BANK FINANCIAL INSTITUTIONS (NBFIS)

NBFIs are part of the financial institutions in

the intermediation process; the movement of
funds from the surplus to the deficits units.

Their roles are specialized in nature such as

pension fund, providing insurance business,
promoting economic activities for economic
development, credit institution, and others.

15
 LOGO
Examples of NBFIs

Development Finance Institutions (DFIs)

Savings Institutions (Bank Simpanan Nasional)
Provident and Pension Funds (EPF)
Insurance Companies
Housing Credit Institutions
Cagamas Berhad (Mortgage Housings)
Pilgrims Fund Board (Lembaga Tabung Haji)
Leasing, Factoring and Venture Capital Companies
Unit trust funds

16
 LOGO
Sources and Uses of funds of Development Financial Institutions

Development Financial Institutions (DFIs) are specialized

financial institutions having specific or unique role for economic
development. Example: SMEs, Bank Pembangunan Malaysia.

SME Bank - formed to provide medium and long-term financing

to small and medium scales companies.
Main sources of funds
Terms loan from government
Share capital
Main uses of funds
Loans and advances
Cash & short-term funds
Deposits with other fin. Institutions
Securities portfolio

17
 LOGO

Bank Pembangunan Malaysia Berhad - formed to provide

medium and long-term financing to capital-intensive industry
such as infrastructure projects, maritime and high technology
sectors.

Main sources of funds

term loans from the government, term loans for EPF, deposits from
customers, share capital and reserves
Main uses of funds
loans, advances and financing forming 68 % of total assets in 2008 in
transport, storage and communications; construction; electricity, gas
and water supply and manufacturing sector
Other uses cash and short-term deposits and securities

18
 LOGO

Bank Kerjasama Rakyat Malaysia Berhad

is a full-fledged Islamic cooperative bank currently under the Ministry
of Domestic Trade, Co-operatives and Consumerism and under the
supervision of Bank Negara Malaysia under the Development of
Financial Institution Act.
offers savings and investment facilities, business and personal
financing (including Islamic pawn-broking) and card services.
Main source of funds
Deposits from customers and deposits from other banks and financial
institutions
Main uses of funds
Loans, financing and advances, cash and short-term funds and
securities portfolio.

19
 LOGO
Sources & Uses of funds of Savings Institutions

Bank Simpanan Nasional (BSN)

a savings institution formed to encourage saving habit and
investment among small savers and provide financing to
small businesses.
Main sources of funds
Deposits from customers and deposits from other banks/financial
institutions which formed 94 % of its total liabilities in 2009.
Reserves
Main uses of funds
Loans, financing and advances (e.g., 48 % of total assets in 2009), cash
and short-term funds and securities portfolio.
Example of financing: home financing, personal financing and micro-
credit financing.

20
 LOGO
Sources and Uses of funds of Provident and Pension Funds

Main role:
to provide financial stability to members upon retirement or for specific
limited authorized withdrawal.
Example: Employees Provident Funds (EPF), SOCSO.

Main source of funds

Contributions made by members throughout their working life; e.g., 8
% members salary deduction and 12 % employers contribution, may
change from time to time.
Main use of funds
to invest in various classes of investment instruments - 68 % and 69 %
for 2007 and 2008 respectively, of the total assets of EPF.
assets classes of investment (i) MGS (ii) loans and bonds (iii) equity
(iv) money market instruments and (v) properties
21
 LOGO
Sources and Uses funds of Insurance Companies

Are institutions that provide financial coverage to

policyholders/participants in the event of death or loss of
property.
Receive funds from the public for protection and savings
and invests these funds to generate returns.

Sources of funds
Premiums (payment by policy holders), share capital and reserves.
Uses of funds
Claims from policy holders or participants;
Investments in medium to long-term fixed-income instruments, equities
and unit trust and property trust.

22
 LOGO
References

Saunders A, and Cornett M.M., Financial Markets and Institutions,

McGraw-Hill Irvin, International Edition, 2009

Mishkin F.S. and Eakins S.G., Financial Markets and Institutions,

Pearson Prentice Hall, 2009

Rohani Abdul Ghani and Ibrahim Abdul Rahman, Financial Markets

and Institutions (FIN 536) Modul, Institute of Education Development
(InED), UiTM 2008

Rohani Abdul Ghani and Ibrahim Abdul Rahman, The Development

of Malaysian Financial Institutions. Penerbit Press UiTM (2014)

Ruziah A. Lattif, Tay Bee Hoong and Yuslizawati Mohd Yusoff.

Financial Institutions in Malaysia. An Introduction (2012)

23
Dr. Norliza Che Yahya, FIN 536

www.designfreebies.org

LOGO
24