MDPM 2053:

FINANCIAL MANAGEMENT

CHAPTER 1:

THE FINANCIAL ENVIRONMENT

Prepared by:
MISS WAN SHAHZLINDA SHAH BINTI SHAHAR & MISS WAN SURAYA WAN HASSIN
FACULTY OF MANAGEMENT & MUAMALAH
1.0 overview

At the end of this chapter you will able to understand:

The concept of finance
The role of finance in business
Relationship Between Finance, Accounting & Economic
Broad Areas Of Finance
Financial Market And Business Organization
Overview Of Islamic Finance
The Goals Of Financial Manager
The Responsibilities Of Financial Manager
Risk & Return Relationship
1.1 INTRODUCTION OF FINANCE.

It is related to the management of money and fund.

Individual should manage well his/her money to
make sure his/her will have sufficient money when
needed.
While organization need to manage well its financial
position for long term survival.
Finance is how businesses evaluate investment and
raise capital to fund them.
The field of finance is closely related to economic
and accounting.
1.2 THE ROLE OF FINANCE IN BUSINESS

Long term investment should the firm undertake?

Capital budgeting: decision making process with respect to

investment in fixed asset

How should the firm raise capital to fund these investment?

Capital structure: decision making process on the choice of

mix long term source of fund.

How can firm best manage its cash flow as they arise in its
day-to-day operation?
Working capital management: management of firms
current asset and short term financing
FINANCE AREAS IN A FIRM
1.3 RELATIONSHIP BETWEEN FINANCE,
ACCOUNTING & ECONOMIC
FINANCE
Concern on the
management of firms
fund

ECONOMIC ACCOUNTING
Give an overview on the Have an effect on the
factors affecting the accounting data
environment which will presented by an
then acountant
1.4 BROAD AREAS OF FINANCE

Finance consist three broad areas:

Financial Insurance and

Investment
Management risk management
Concern on Asset/item Financial protection
creation & purchase with hope against losses.
maintenance of to generate income Internal or external
economic value or in the future. control.
wealth of the firm Investment in the Risk manager need
Focus on planning investment to analyze the
& managing firms portfolios potential losses and
long term take appriates
investment and action.
capital structure.
1.5 FINANCIAL MARKET AND BUSINESS
ORGANIZATION
An organization that is responsible for the distribution of fund to end user

A place which financial asset and securities are traded.

It may or may not have a physical location.

FORMS OF BUSINESS ORGANIZATION

SOLE
PARTNERSHIP ORGANIZATION
PROPRIETORSHIP
 Unincorporated business own by an
individual
Advantages: Lower income taxes,
simple regulation, easy and inexpensive
to form.
Disadvantages: unlimited liabilities,
life of business is limited, difficult to get
large capital.
Between two or more parties
Advantages: easy and inexpensively to
form, Income based on PSR and CCR,
Tax on individual basis avoid corporate
taxes.
Disadvantages: unlimited liabilities.

Sole
Partnership
Proprietorship

Company
Legal entity
Advantages: limited liability
, Easy to get large capital
through shareholder
Disadvantage: Double
taxation
1.6 OVERVIEW OF ISLAMIC FINANCE
Islamic banking refers to a system of banking that complies with Islamic law also known as Shariah
law. The underlying principles that govern Islamic banking are mutual risk and profit sharing
between parties, the assurance of fairness for all.

Islamic finance has grown tremendously since it first emerged in the 1970's. There are over 300
Islamic financial institutions worldwide across 75 countries and Malaysia's Islamic finance industry
has been in existence for over 30 years with the country's first Islamic Bank to be established and
thereafter, with the liberalisation of the Islamic financial system.

Malaysia's long track record of building a successful domestic Islamic financial industry of over 30
years gives the country a solid foundation - financial bedrock of stability that adds to the richness,
diversity and maturity of the financial system.
1.6.1 THE OBJECTIVES OF ISLAMIC
FINANCE

uphold social objectives and promote Islamic values.

For example: towards their staffs, clients and the general
public.

Other factors :
contributing to the social welfare of the community,
promoting sustainable development projects
alleviating poverty
1.6.2 BASIC PROHIBITION IN ISLAMIC FINANCE

Prohibition of Riba

Prohibition of Gharar

Prohibition of Maysir
1.6.3 PROHIBITION BASED ON BUSINESS ETHICS
AND ON NORMS

Justice and fair dealing

Fulflling the covenant and paying liabilities

Mutual cooperation and removal of hardship

Freedom from dharar (detriment/harm)

Prohibition of dealing with prohibited commodities.

No oppression towards others

1.6.4 FINANCIAL SYSTEM STRUCTURE IN MALAYSIA

Financial System

Financial Institutions Financial Market

Banking System Non-Bank Financial Money & Foreign

Intermediaries Exchange Market
1. Bank Negara Malaysia
2. Banking Institutions 1. Provident and 1. Money Market
Commercial Pension Funds 2. Foreign Exchange
Banks 2. Insurance/Takaful Market
Finance Companies
Companies 3. Development Finance Capital Market
Merchant Institutions 1. Equity Market
Banks 4. Savings Institutions 2. Bond Market
Islamic Banks National Public Debt
3. Others Savings Bank Securities
Discount Co-operative Private Debt
Houses Societies Securities
Representative 5. Others
Offices of Unit Trusts
Foreign Banks Pilgrims Fund
Board Derivatives Market
Housing Credit 1. Commodity Futures
Institutions 2. KLSE CI Futures
Cagamas Bhd 3. KLIBOR Futures
Credit
Guarantee
Corporation Offshore Market
Leasing 1. Labuan
Companies International
Factoring Offshore Financial
Companies Centre
Venture
Capital
Companies
 FINANCIAL
SYSTEM IN
MALAYSIA

ISLAMIC CONVENTIONAL
FINANCIAL FINANCIAL
SYSTEM SYSTEM

ISLAMIC FINANCIAL ISLAMIC FINANCIAL

INSTITUTION (IFI) MARKET

FINANCIAL FINANCIAL
INSTITUTION (IFI) MARKET
1.6.5 MAIN COMPONENT IN FINANCIAL MARKET

Money
Market

Secondary Capital
Market Market

Primary
Market
 MONEY MARKET vs
CAPITAL MARKETS
Money Capital
Short-Term, < 1 Year Long-Term, >1Yr

Debt Only Debt and Equity

Primary Market Focus Secondary Market Focus

Liquidity Market--Low Returns Financing Investment--Higher

Returns
 Capital Market

Secondary
Primary Market
Market

Debt

Equity
 PRIMARY MARKET vs
SECONDARY MARKETS

PRIMARY SECONDARY

New Issue of Securities Trading Previously Issued

Securities

Raise capital for the firms

Provides Liquidity for Seller
 THE DIFFERENCE BETWEEN SUKUK
AND BOND?
Sukuk Conventional Bonds
Asset ownership Bonds dont give the Sukuk give the investor
investor a share of partial ownership in the
ownership in the asset, asset on which the
project, business, or sukuk are based.
joint venture they
support. Theyre a debt
obligation from the
issuer to the bond
holder.

Investment criteria Generally, bonds can be The asset on which

used to finance any sukuk are based must
asset, project, business, be sharia-compliant.
or joint venture that
complies with local
legislation.
Issue price The face value of a bond The face value of sukuk
price is based on the is based on the market
issuers credit worthiness value of the underlying
(including its rating). asset.

Investment rewards and Bond holders receive Sukuk holders receive a

risks regularly scheduled (and share of profits from the
often fixed rate) interest underlying asset (and
payments for the life of accept a share of any
the bond, and their loss incurred).
principal is guaranteed to
be returned at the bonds
maturity date.

Issue unit Each bond represents a Each sukuk represents a

share of debt. share of the underlying
asset.
1.7 THE GOALS OF FINANCIAL MANAGER

to get as much profit as possible

To make decision that will lead to the achievement of
the firms goal by maximizing their shareholders
wealth
Making decision to increase the companys stock value.
Observe firms day-to-day operation and decide the best
method of financing and investment.
1.8 THE RESPONSIBILITIES OF FINANCIAL
MANAGER
FORECASTING AND PLANNING
Planning for financial policy of the firm

MAJOR INVESTMENT AND FINANCING DECISION

Help determine the optional sales growth rate, help descide what specific
asset to acquire & choose the best way to finance the asset.

COORDINATION AND CONTROL

To ensure the firm is operated efficiently

DEALING WITH FINANCIAL MARKET

Deal with money and capital market where funds are raised and firms
securities are traded. etc

RISK MANAGEMENT
Identifying the risk that should be managed efficiently
1.9 RISK & RETURN RELATIONSHIP
Risk = the chance that some unfavorable event will occur
Return = the gain or loss of a security in a particular period.

Positive relationship:
High risk, high return
Low risk, low return

RETURN

RISK FREE

RISK
 RISK FROM ISLAMIC PERSPECTIVE
AL GHUNM BIL GHURM ???
In one of his sayings, the Prophet asserted that entitlement to the
return on an asset relates to the risk of ownership
Based on this hadith, Muslim jurists developed a legal maxim al-
ghurm bi al-ghunm or gain is justified with risk.
Indirectly, it also entails that in the absence of risk in business it
might give rise to interest-based transactions, which is strictly
prohibited in Islam (Quran, 2:275-279).
Nowadays, the notion of no risk, no gain is widely applied by
Islamic finance and banking institutions through the concepts
of mudarabah and musyarakah.
Al-ghunm bil ghurm is similar to the notion of risk-return tradeoff in
conventional.
 To acquire knowledge, one must study;
but to acquire wisdom, one must observe.

ALLAH KNOWS BEST