Course No# 205: Business Finance

Lecture No: 01

Dated: 03 January, 2013

Finance

Finance is the provision or mobilization of funds from surplus economic units to deficit
economic units. The core function of financial institutions is to transfer fund from savers to
borrowers.

Modes of Financing

• Direct Finance: This flow of fund without any intermediary or middleman.

• Indirect Finance: In this case fund from surplus units is transferred to deficit units
through intermediary. In bank financing this mode is used to flow the funds. Following is
a diagram of

Financial System

Financial system is a set of institutional arrangements through which financial surpluses in the
economy are mobilized from surplus units and transferred to deficit spenders.

Financial Institution- Definition:

InvestorWords.com

Institution which collects funds from the public and places them in financial assets, such as
deposits, loans, and bonds, rather than tangible property.

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Wikipedia:

In financial economics, a financial institution is an institution that provides financial services

for its clients or members.

Business Dictionary:

Private (shareholder-owned) or public (government-owned) organizations that, broadly speaking,

act as a channel between savers and borrowers of funds (suppliers and consumers of capital).

Components of financial system are -

• Financial Institutions/Intermediaries
• Financial Instruments

• Financial Markets

Financial Institutions/Intermediaries

• Banking financial institutions

• Non-banking financial institutions (NBFIs)

Banks:

A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly by loaning or indirectly through capital
markets. A bank is the connection between customers that have capital deficits and customers
with capital surpluses.

Banks in Bangladesh are primarily of two types:

1. Scheduled Banks: The banks which get license to operate under Bank Company Act,
1991 (Amended in 2003) are termed as Scheduled Banks.

47 scheduled banks

2. Non-Scheduled Banks: The banks which are established for special and definite
objective and operate under the acts that are enacted for meeting up those objectives, are
termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled
banks.

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There are now 4 non-scheduled banks in Bangladesh which are:
 Ansar VDP Unnayan Bank,
 Karmashangosthan Bank,

 Probashi Kollyan Bank,

 Jubilee Bank

Non-banking financial institutions

Non Bank Financial Institutions (NBFIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank.

Difference between Banks & NBFIs:

The major difference between banks and FIs are as follows:

• NBFIs cannot issue cheques, pay-orders or demand drafts.

• NBFIs cannot receive demand deposits,

• NBFIs cannot be involved in foreign exchange financing,

• NBFIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments, private
placement of equity etc

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