Mutual Funds – Focusing Money Market Funds

What is a Mutual Fund - A mutual fund is an investment vehicle made up of a pool of money collected from many
investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.
Mutual funds are operated by money managers, who allocate the fund's investments and attempt to produce capital
gains or income for the investors.
Mutual funds are created when several people who wish to earn wealth (investors) combine their resources to create a
huge investable amount (corpus). This large corpus is then invested into various companies across industries, operating in
different sectors of the economy - depending on the type of fund chosen. All the investors of a mutual fund share in its
profits, losses, incomes, and expenses in direct proportion to their level of investment.
A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities bonds and other
securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest
in a wide amount of securities, and performance is usually tracked as the change in the total market cap of the fund,
derived by aggregating performance of the underlying investments.
Companies that create mutual fund schemes are called Fund Houses or Asset Management Companies (AMCs). The
professionals who study the markets and pick companies to invest in are called Fund Managers. Fund managers spend a
great deal of time analyzing markets and studying different sectors of the economy to figure out which companies are
most likely to turn a profit - in different time frames - and choose the best option.
Mutual funds allow individuals to make their money work for them - meaning that they do not need to actively perform
tasks for monetary gain. Any amount invested in mutual funds will either grow or shrink depending on market
performance and the skill of the fund manager.
There are many different types of mutual funds available today, and can be categorized based on investment objective,
structure and asset class. Apart from this, there are also specialized mutual funds.
Mutual Funds – Focusing Money Market Funds
a)Asset Class Types :
1-Equity Funds: The primary focus of equity funds is to invest at least 65% of the total corpus into equity (stocks) and
equity related instruments of different companies. Stock market fluctuations affect the performance of these holdings and
determine whether they make a profit or not - as such, equity funds are slightly riskier than other types of funds.
Equity funds are recommended to those willing to wait at least 5 years to see substantial returns.
2-Debt Funds: The primary focus of debt mutual funds is to invest a majority of its corpus into fixed-income investments,
such as treasury bills, money market instruments, corporate bonds and debentures, commercial papers, gilt,, government
securities, and other debt securities.
3-Hybrid Funds -The primary focus of hybrid funds is to invest in a portfolio as balanced as it is diverse, by channeling
investments proportionally into equity and debt instruments. This is done to create long-term capital appreciation at
lower risk/ with lower volatility. Hybrid funds bridge the gap between long-term capital appreciation and short-term
income requirements of investors. As such, they are popular among new investors and experienced conservative
investors.
b)Investment based Types:
1-Growth Funds -These funds invest primarily in equities. Diversified investments in stocks and shares of various
companies usually make up a good Growth Mutual Fund. The primary goal of these funds is to provide as much capital
appreciation as possible during the tenure of the fund.
2-Income Funds - These funds aim to provide investors with regular income, generated through investments in
government securities, stocks with high dividend potential, bonds, debentures, etc. No mutual fund scheme can outright
guarantee results, these funds are actively managed and hence are more likely to successfully generate regular income.
3-3-Liquid Funds -The primary goal of these funds is to provide capital safety and near-instant liquidity to its investors.
These funds primarily invest in debt instruments of a high credit quality and design the portfolio to mature in around
three months’ time. Thus, interest rate fluctuations in the economy do not affect this fund as much as they do for other
funds as the maturity of invested instruments is lined up with the maturity of the scheme itself.
Mutual Funds – Focusing Money Market Funds
4-Tax-Saving Funds or ELSS - ELSS or Equity Linked Savings Schemes are mutual fund schemes whose primary aim is to
generate long-term capital growth through investments in equities, stocks and shares.
5-Capital Protection Funds -The primary aim of capital protection funds is to protect investors’ capital in the event of
economic instability, while also providing the possibility of capital appreciation and growth. These funds invest primarily in
bonds and zero coupon debt although there is a small portion invested in equity as well.
6-Fixed Maturity Funds - Usually compared with fixed deposits, fixed maturity funds are close-ended funds that invest
primarily in debt instruments which have a predetermined maturity date.
C )Risk Factor Based Types:
1-Ultra low-risk mutual funds - Mutual funds like ultra-short-term funds and liquid funds, etc. do not present a lot of risk
but generate returns above bank fixed deposits/ savings bank account.
2-Low-risk mutual funds: Funds like arbitrage funds and low duration funds favour investors with a low risk appetite.
3-Medium-risk mutual funds -Funds in this category generally have balanced investment portfolios. They divide the
corpus between equity and debt instruments. Thus, the fund can provide long term capital gains, as well as stability.
4-High-risk funds - These are funds that offer the highest potential rewards and as such carry the highest amount of risk.
The primary focus of these funds is to maximize potential returns through investments in equities, which are volatile.
d)Specialized Mutual Funds:
Index Funds - These funds invest their corpus into the stocks that comprise a particular index. Index funds aren’t actively
managed, which means they simply replicate the index. The fund returns are generally close to index returns. But, in the
case of a market downturn, the index fund will also lose its market value.
Fund of Funds - These funds invest in other mutual funds instead of directly investing in equity and debt instruments. This
kind of investment management is often referred to as multi-manager investment management.
International Funds or Foreign Funds -The primary aim of these funds is to maximize returns and minimize losses caused
by domestic market fluctuations. Funds can fully or partly invest in foreign companies, and partly in domestic companies.
Mutual Funds – Focusing Money Market Funds
Global Funds - These funds aim to generate maximum returns through investments in funds all over the world. These
global funds invest in the best funds, worldwide, and in the investor’s home country as well.
Emerging Market Funds - These funds aim to take advantage of the higher growth rate displayed by emerging and
developing economies of smaller nations in order to generate higher returns.
Sector Funds - The primary aim of these equity-based funds is to generate returns from investments in one specific sector
((for example pharmaceuticals or financial services). These funds are basically the opposite of diversified equity funds, as
they focus on one specific sector rather than many.
Thematic Funds or Theme-Based Funds - Similar to sector funds, these funds focus their investments into companies that
revolve around a particular theme.
Asset Allocation Funds - The primary aim of these funds is to maximize returns through the perfect allocation of
investments in various asset classes - like equity, debt, fixed assets, bonds, real estate, gold, etc.
Exchange Traded Funds (ETFs) - These funds are slightly different than other mutual funds. ETFs own stocks, bonds,
commodities, etc. and ownership of the fund is held in the form of shares by shareholders. This is because ETFs are traded
just like stocks in stock exchanges.
e)Funds based on structure:
1-Open-Ended Mutual Funds - As the name suggests, open-ended mutual funds allow investors to buy and sell units of
the fund as per their convenience and feelings about the market.
2-Closed-Ended Mutual Funds - With closed-ended funds, the total unit capital, fund tenure, investment avenues, etc. are
all decided in advance of the fund units being offered for purchase. Once the purchase window has closed, investors
remain invested until the completion of the fund’s tenure. Units cannot be bought or sold during this time.
3-Interval Funds - These funds allow investors to enter or exit the fund at predetermined intervals, decided by the fund
house. While these funds have a certain amount of liquidity, they should not be considered a liquid investment, as they
cannot be redeemed at any time, only during specific intervals.
Mutual Funds – Focusing Money Market Funds
• How do mutual funds work?
Different types of mutual funds operate slightly differently from one another, but they all have some basic principles on
which they operate that define them as mutual funds. The most basic way in which mutual funds operate is as below:
1. An asset management company (AMC)/fund house identifies a potential earning possibility in the market and calculates
the risk and potential reward involved in this particular investment.
2. The AMC studies other related investment opportunities that could boost the value or ensure of the main opportunity.
3. The fund manager working for AMC picks and chooses different investments and balance out the risk and total earning
potential - balancing the right high risk-high reward equities with high safety-relatively consistent income securities.
4. All the details about the fund including risk factors are well documented and presented to the industry body SEBI for
regulatory approval and to the public for consideration.
5. The fund scheme is made available to the public, who then buy into the fund by purchasing fund units. The more fund
units are purchased, the larger the investment, and thus the greater the proportion of potential income.
6. The investments are made and, depending on the fund’s structure, the fund will be managed by a fund manager.
7. Under the dividend option, declared dividends are proportionally distributed amongst investors. Under the growth
option, dividends are reinvested for capital appreciation.
8. At the end of the fund’s tenure, capital gains are paid out to the investors.
• Common approaches to investing
Top-down approach – Looks at big economic picture, finds industries or countries that look like they are going to do well.
Bottom-up approach – Focuses on selecting specific companies that are doing well.
Combination of top-down and bottom-up approaches – A portfolio manager managing a global portfolio can decide
which countries to favor based on a top-down analysis but build the portfolio of stocks within each country based on a
bottom-up analysis.
Technical analysis – Attempts to forecast the direction of investment prices by studying past market data.
Pakistani Banking Sector – Credit Rating by
Agencies
Credit Rating Agencies and Financial market stability - Credit rating agencies (CRA‟s) issue credit
worthiness estimation that assist to triumph over the information asymmetry flanked by those who are issuing debt
instruments such as bonds, and those who are investing their money in these instruments. Credit rating agencies have a
foremost impact on the financial markets. Ratings issued by CRA‟s are closely tracked by investors, borrowers, issuers and
governments. It is indispensable that they time and again provide top-quality, sovereign, and objective credit ratings.
Credit rating market is dominated by three agencies operating globally: namely they are Standard & Poor's, Moody's
Investors Service and Fitch Ratings. These three leading CRAs have a collective market share over90%. Rating agencies
credit ratings are used by investors, borrowers, issuers and governments as part of making informed investment and
financing decisions. Therefore, ratings different from the accounting ratios which mainly provide information about the
back-looking indicators, provide information about the financial stability based on standard measures and principles.
Rating agencies play the role to mitigate the adverse selection problem arises between debt issuers and investors.
Banking Sector of Pakistan - Economic prosperity is a symbol of success of a country. Soundness of an economy is
achieved through positive macro economic indicators that become possible via bringing together and proper utilization of
country resources such as financial, informational, physical and human resources etc. Banking sector of an economy is an
important constituent of financial sector of a country that facilitates proper utilization of financial resources
Since independence of Islamic Republic of Pakistan in 1947, banking industry of the country has undergone trough several
fundamental changes. Central bank of the country that is named as State Bank of Pakistan (SBP) was established on 1st
July 1948. In year 1974 Government decided to take control of all of the existing banks in the economy and they were
nationalized. After nationalization of all these banks, their performance was very much affected and worsened. Their
performance was deteriorated to the alarming point in last years of 80‟s decade, this cause privatization of banking sector
in early 1990s. Deregulation and financial liberalization initiatives taken by SBP encouraged foreign banks investment and
motivated local investors within the country. State Bank of Pakistan has also played a pivotal role in establishment of
Islamic banking system in the country that strictly follows Sharia’h principles.
Pakistani Banking Sector – Credit Rating by
Agencies
Newspaper Report – Pakistan Economy – Rating by International Credit Rating Agencies – Dawn -Tribune -18.03.2019
Moody’s Investors Service has downgraded the outlook on Pakistan’s rating to negative from stable and affirmed the ‘B3’
local and foreign currency long-term issuer and senior unsecured debt ratings.
“Foreign exchange reserves have fallen to low levels and, absent significant capital inflows, will not be replenished over
the next 12-18 months,” stated Moody’s. “Low reserve adequacy threatens continued access to external financing at
moderate costs, in turn potentially raising government liquidity risks.”
A rating is Moody’s opinion of the credit quality of individual obligations or of an issuer’s general creditworthiness.
Investors use ratings to help price the credit risk of fixed-income securities they may buy or sell. The development comes
as a blow to Pakistan where economic managers are facing a headache in taming a bulging import bill that is eating away
at the country’s foreign exchange reserves. From almost $19.46 billion held by the State Bank of Pakistan (SBP) in October
2016, foreign exchange reserves dropped 48.3% to $10.07 billion on June 8, 2018. The decline comes at a time when the
import bill peaked to a record high of $5.8 bn in May, increasing the already swelling trade and current account deficits.
World Bank sees Pakistan’s economy slowing next year
Moody’s acknowledged Pakistan’s robust growth potential, but pointed out that these strengths balance the country’s
fragile external payments position as well as the “very weak” government debt affordability.
“The decision to affirm the B3 rating reflects Pakistan’s robust growth potential, supported by ongoing improvements in
energy supply and physical infrastructure, which are likely to raise economic competitiveness over time.
“These credit strengths balance Pakistan’s fragile external payments position and very weak government debt
affordability owing to low revenue generation capacity.”
The ratings agency also expects Pakistan’s external account to remain under significant pressure. “The coverage by foreign
exchange reserves of imports will likely fall further from already low levels, while coverage of external debt payments due
will weaken from currently adequate levels.
“In turn, higher foreign currency borrowing needs, in combination with the low levels of foreign exchange buffers, risks
weighing on the ability of the government to access external financing at moderate costs.”
 Pakistani Banking Sector – Credit Rating by
Agencies
Moody’s changes its outlook for Pakistan’s banking system from stable to negative - 11-Feb-2019
The American credit rating agency Moody’s Investors Service has changed its outlook for the banking system in Pakistan
(B3 negative) to negative from stable on Monday. As Moody says “Over the next 12-18 months, banks in Pakistan will see
their credit profiles challenged by their high exposure to the country’s low-rated sovereign debt and a slowing economy,”
by Constantinos Kypreos, Moody’s Senior Vice President.
According to report, the banks’ operating conditions will be difficult, with Pakistan’s real GDP growth slowing to 4.3% in
the fiscal year ending June 2019, down from 5.8% in 2018. The Pakistani rupee has depreciated 30% versus the US dollar,
interest rates rose by 450 basis points between December 2017 and February 2019, and inflation is rising; all factors which
affect business and consumer confidence and the private sector’s debt repayment capacities.
The agency also pointed out that Pakistan’s banks face the risk of macroeconomic contagion through a range of channels,
including:
1) their large holdings of government securities, which caps their credit profiles to the sovereign, and
2) from the authorities’ weakening capacity to support the banks in case of need, as evidenced by the negative outlook
on the sovereign rating.
“On a more positive note, the banks will continue to benefit from stable customer deposits and high liquidity,”
The negative outlook is based on Moody’s assessment of six drivers: operating environment (deteriorating); asset risk
(deteriorating), capital (stable); profitability and efficiency (stable); funding and liquidity (stable); and government support
(deteriorating). Moody’s rates the five largest banks in Pakistan by assets. Together, these banks account for around 50%
of system deposits.
However, as per daily newspaper DAWN – March 17, 2019, Moody’s Investors Service has maintained its stable outlook
on Pakistan’s banking system, reflecting the rating agency’s expectation that the country’s banks will continue to benefit
from a stable deposit base, high liquidity buffers and an accelerating economic growth under the International Monetary
Fund (IMF) program, which will create lending opportunities over the next 12-18 months.
Pakistani Banking Sector – Credit Rating by Agencies
•Public Sector Banks
• First Women Bank Limited PACRA A2 A- April, 2017 Rating Outlook – Stable
• National Bank of Pakistan JCR-VIS A-1+ AAA 2016 Rating Outlook – Stable
• Sindh Bank Limited JCR-VIS A-1+ AA Jun, 2016 Rating Outlook – Stable
• The Bank of Khyber JCR-VIS A-1 A June, 2016 Rating Outlook - Stable
• The Bank of Punjab PACRA A1+ AA Sept, 2016 Rating Outlook - Stable
• Specialized Banks
• SME Bank Limited PACRA B B April, 2017 Rating Outlook - Developing
• Zarai Taraqiati Bank Ltd JCR-VIS A-1+ AAA, 2016 Rating Outlook – Stable
• Private Sector Banks
• Allied Bank Limited PACRA A1+ AA+ June, 2016 Rating Outlook - Stable
• Askari Bank Limited PACRA A1+ AA+ June, 2016 Rating Outlook - Stable
• Bank Alfalah Limited JCR-VIS A-1+ AA+ Fb, 2017 Rating Outlook - Stable
• Private Sector Banks
• Bank Al-Habib Limited PACRA A1+ AA+ June, 2016 Rating Outlook – Stable
• Faysal Bank Limited JCR-VIS A-1+ AA Jun,2016 Rating Outlook – Stable
• Habib Bank Limited JCR-VIS A-1+ AAA , 2016 Rating Outlook - Stable
• Habib Metropolitan Bank Ltd PACRA A1+ AA+ Jun, 2016 Rating Outlook - Stable
• JS Bank Limited PACRA A1+ AA- Oct, 2016 Rating Outlook – Stable
• MCB Bank Limited PACRA A1+ AAA Jun, 2016 Rating Outlook - Stable
•NIB Bank Limited PACRA A1+ AA- Dec, 2016 Rating Outlook - Stable
•Samba Bank Limited JCR-VIS A-1 AA June, 2016 Rating Outlook - Stable
•SilkBank Limited JCR-VIS A-2 A- June, 2016 Rating Outlook - Stable
•Stan Chart Bank Pak Ltd PACRA A1+ AAA Jun, 2016 Rating Outlook - Stable
Pakistani Banking Sector – Credit Rating by Agencies
•Private Sector Banks
•Stan Chart Bank Pak Ltd PACRA A1+ AAA Jun, 2016 Rating Outlook - Stable
•Summit Bank Limited JCR-VIS A-1 A- June, 2016 Rating Outlook - Stable
•United Bank Limited JCR-VIS A-1+ AAA J, 2016 Rating Outlook – Stable
•Foreign Banks operating in Pakistan
•Citibank N.A. Moody’s P-1 A1 Dec, 2016
•Douche Bank AG Stan & Poor’s A-2 BBB+15 Rating Outlook - Stable
•Douche Bank AG Moody’s P-2 Baa2 , 2016 Rating Outlook - Stable
•Douche Bank AG Fitch F1 A- March, 2017 Rating Outlook - Negative
•Industrial & Com Bank of China Moody’s P-1 A1 March, 2016 Rating Outlook - Negative
•The Bank of Tokyo -Mitsu-UFJ, Ltd Moody’s P-1* A1 Deposit Rating Only
•Islamic Banks
•Albaraka Bank (Pak) Ltd JCR-VIS A-1 A June, 2016 Rating Watch - Developing
•BankIslami Pak Ltd PACRA A1 A+ October, 2016 Rating Watch – Developing
•Dubai Islamic Bank Ltd JCR-VIS A-1 A+ June, 2016 Rating Outlook - Stable
•Meezan Bank Limited JCR-VIS A-1+ AA Jun, 2016 Rating Outlook - Stable
•MCB Islamic Bank Limited PACRA A1 A Feb, 2017 Rating Outlook – Stable
• Albaraka Bank (Pak) Ltd JCR-VIS A-1 A June, 2016 Rating Watch - Developing
• BankIslami Pak Ltd PACRA A1 A+ October, 2016 Rating Watch – Developing
• Dubai Islamic Bank Ltd JCR-VIS A-1 A+ June, 2016 Rating Outlook - Stable
• Meezan Bank Limited JCR-VIS A-1+ AA Jun, 2016 Rating Outlook - Stable
• MCB Islamic Bank Limited PACRA A1 A Feb, 2017 Rating Outlook – Stable
Pakistani Banking Sector – Credit Rating by Agencies
•Development Finance Institutions
•House Building Fin Corp
•Pak Brunei Inv Co Ltd PACRA A1+ AA+ Jun, 2016 Rating Outlook - Stable
•Pak China Inv Co Ltd JCR-VIS A-1+ AAA Ju, 2016 Rating Outlook - Stable
•Pak Kuwait Inv Company PACRA A1+ AAA May, 2016 Rating Outlook - Stable
•Pak Libya Hol Co Pvt. Ltd PACRA A1+ AA- Jun, 2016 Rating Outlook - Negative
•Pak Oman Inv Company JCR-VIS A-1+ AA+Jun, 2016 Rating Outlook - Stable
•PAIR Investment Company PACRA A1+ AA Jun, 2016 Rating Outlook - Stable
•Saudi Pak Ind & Agri Inv Co JCR-VIS A-1+ AA+Jun 2016 Rating Outlook – Stable
•Microfinance Banks
•Adv Micro Bank Limited JCR-VIS A-3 BBB+ , 2017 Rating Outlook - Stable
•Apna Micro Bank Limited PACRA A3 BBB+ Apr, 2016 Rating Outlook - Positive
•FINCA Micro Bank Limited JCR-VIS A-1 A Jan, 2017 Rating Outlook - Stable
•Khushhali Bank Limited JCR-VIS A-1 A+ April, 2016 Rating Outlook - Stable
•NRSP Micro Bank Limited JCR-VIS A-1 A Oct, 2016 Rating Outlook - Stable
•Pak Oman Micro Bank Ltd JCR-VIS A-3 BBB+ Ap,2016 Rating Outlook – Stable
•Telenor Micro Bank Limited JCR-VIS A-1 A+ April, 2016 Rating Outlook – Stable
•Telenor Micro Bank Limited PACRA A-1 A+ April, 2016 Rating Watch
•The First Micro Bank Ltd JCR-VIS A-1 A+ April, 2016 Rating Outlook - Stable
•Mobilink Micro Bank Ltd PACRA A1 A August, 2016 Rating Outlook - Stable
•U Micro Bank Limited JCR-VIS A-2 A- April, 2016 Rating Watch - Stable
• Credit Ratings of Banks, DFIs and MFBs updated as of April 27, 2017
• Contact Person: Tahir Naeem E-mail: tahir.naeem@sbp.org.pk
International banking – Future of financial
system
Globalization has rendered international expanding activities increasingly important for the survival, growth and success
of modern firms. Simultaneously, the banking industry has been undergoing major consolidation in recent years, with a
number of global players emerging through successive mergers and acquisitions. Competition is generally considered a
positive force in most industries; it is supposed to have a positive impact on an industry’s efficiency, quality of provision,
innovation and international competitiveness. However, this issue has always been controversial in banking, as the
perceived benefits derived from increased competition have to be weighted against the risks of potential instability.
The industry was transformed in the 1970s. Until then most banks concentrated on their home markets, considering
themselves as domestic institutions that handled foreign business. With the rapid expansion of international networks,
the banking sector occupies a pivotal position in the global economy now, as it has access to the capital, the technological
capabilities, and the international network to facilitate these activities. Banks monitor the business sector through the
evaluation, pricing, and credit-granting functions. In this context, the operations of an international trade of services, that
have as a consequence either the creation and management of financial means, or the transport of capital from surplus
units of country in an other, or the mediation in the frame of national financier system are called “International Banking
activity”. When studies refer to “the internationalization of banks”, they are concerned with two different aspects of
internationalization.
The first aspect refers to the exchange in terms of import and export of banking services and transactions in foreign
currency. The second aspect, however, is related to the strategy of banks when internationalizing.
The basic motive for the achievement of cross-border banking activities is the redistribution of international fluidity and
international capital between the various countries. Moreover, the international extension of financier Institutions is
always in relation to their size, their international experience, the sufficiency both in human potential and in capital.
The operation of the international banking is achieved through the services in the banking market of foreign country with
either in direct or indirect way. More specifically, the direct way for the transport of capital from the savers to those who
use lent money, mainly, by the investment banks and the Stock Exchange companies; while the indirect way is used by the
commercial banks.
International banking – Future of financial
system
BENEFITS OF INTERNATIONAL BANKING –
Globalization is the universal trend in economic markets and the focal point in the twenty-first century. Banking
organizations shifted from highly centralized domestic organizations to dispersed global organizations. The main profit of
the internationalization of banking work is the increase of the surplus of consumers. For the banking services the surplus
of consumer is increased when the interest rate of sponsoring is decreased, while the interest-rate of deposits increases.
A second profit from the internationalization of banking work is that the international banking extension increases the
effectiveness of international capital by improving and their flow. This means that, the effectiveness of distribution of
capital brings in economic contact lenders and borrowers from different countries.
Another profit from the internationalization of financier markets, is the increasing degree of convergence of interest-rates
of domestic market with those that exist in the Euromarkets. At the same time, the internationalization of financier
markets leads to the weakening of the phenomenon of expulsion of private investment in the public sector, as in an
environment of free market of capital, the prevention of the private investments from the state, is compensated,
relatively easily, with the foreigner saving capital.
RISKS OF INTERNATIONAL BANKING -
The “risk of not efficiency of loans” comes from the big fluctuations of interest, which is the difference (spread), between
the interest-rates of sponsoring and the interest-rates of deposits. This threat that in essence is crisis of confidence for the
future, puts in test the basic operation of Bank, that is the transformation of short-term resources in longer-term
financing.
The efficiency of investment or loan, runs through the danger from changes, to the worse, of a legislative regulation of
terms of operation of banks that imposes the Central bank of country, in a change of the monetary policy. The biggest
danger from such a development is the increase of obligatory reserve funds that will have an additional cost, which will
lead to the reduction of profit from a lending. At the same time, there is the danger, during a mediatory process, of the
transformation of currency in other, which is known as risk of exchange.
International banking – Future of financial
system
International
Description •
Banking

•Cross border cross country facet of banking business

•May not necessarily own or hold a physical presence offshore
• Traditional foreign banking
– Transactions with nonresidents in domestic currency – International trade finance – Other international transactions
• Eurocurrency banking
– Bank participation in foreign exchange transactions – Transactions with residents and non-residents
Multinational Bank
• Owns and controls activities in different countries
– Own and control branches – Affiliated banks in other countries – Foreign direct investment – Multi retail banking
– Banking services to overseas corporate firms – Multinational wholesale banking
Evolution of International Banks
• Offer international products
– Letter of credit – Bills of exchange
• Establishment of subsidiaries in foreign jurisdiction
• Establishment of branches in foreign jurisdiction
– Colonialism – Overseas banks – Financing of economic development in other countries
Need for International Banking
• Growth and profit opportunities
• Client activities
• Risk management
• Impact of regulation
• Exchange rate movements , • Distance from the domestic market
International banking – Future of financial
system
Organizational Forms
• Foreign correspondent
• Foreign agencies
• Foreign subsidiaries
• Foreign branch
Benefits of Branch Structure
• Greater capital flexibility
• Lower cost of functioning
• Access to the world capital base
• Increased freedom of operations
• Lower transaction costs
Choice of Structure
• Type of foreign business
• Volume of foreign business
• Resource requirements
• Host country legal structure
• Host country regulatory structure
Establishment of a Multinational Bank
• Acquisition
– Integration of two entities – Retraining of employees
• Growth
– Market segmentation within foreign economies – Consumer banking business – Greenfield foreign office
– Extension of technology – Extension of systems – Extension of business practices – Extension of business processes
International banking – Future of financial
system
Moving from Multinational Banking to Global Banking
• Global banks requires integration of multinational operations to global network
– Changes in communication – Changes in technology – Globalization of financial markets
• Multinational banks have independent subsidiaries in different countries
Advantages of Global Banking
• Realization of global scale economies
• Reduction of duplication of banking operations
• Benefits from global best practices
• Benefits from identification in the international financial markets
• Efficient business divisions
• Group expertise and knowledge
Future of International Banking
• Better financial markets
• Competent financial markets
• Market openness
• Emergence of non banking financial institutions
• Deregulation of national financial markets
• Increased participation of banks in off-balance sheet transactions
• Monitoring of market transactions
• Optimal risk management of banks
• Risk management services to customers
• Multinational financial service providers to customers across countries
International banking – Future of financial
system