WBB1013

FOUNDATIONS OF BANKING

TOPIC 1:
INTRODUCTION TO MONEY,
FINANCIAL MARKETS AND
FINANCIAL INSTITUTIONS
 OBJECTIVES
 Introduction to Money
 The Financial System in Malaysia

 The Structure of Financial Institutions

& Financial Market in Malaysia
 The Role & Importance of Financial
Market & Financial Institutions in
Malaysian Economy
 Introduction to Money

 What is Money?
 Anything that is generally accepted in payment
for goods or services or in the repayment of
debts
 Any asset that serves as a unit of account and
can be used as a medium of exchange for
economic transactions, and have a high
degree of liquidity
 Money, Wealth and Income

 Money
 Assets which people hold because they have
certain properties
 Stock of assets which exhibits certain
characteristics and is measured at a given point in
time
 Wealth
 A stock concept measured at a given time
 Encompasses the money stock as well as many
other financial and real assets
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Cont…
 The money stock – currency and demand
deposits, normally constitutes less than 2% of the
nation’s total wealth; broader definitions of money
– normally make up less than 10% of wealth

 Wealth normally is made up of homes, autos,

furniture, common stocks and bonds and life
insurance

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Cont…
 Income
 A flow of dollars per unit of time
 Is made up of payments in the form of wages and
salaries, dividends, rent, profits and transfer payments

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 Money performs three primary functions:
 Medium of exchange

 Can be easily exchanged to buy goods or services

or pay of debts in a country’s economy
 Store of value

 Can be used to store purchasing power between

the time it is earned and the time it is spent
 Unit of account

 Can be used to compare cost of production with

prices received and to determine if a firm makes a
profit when it sells goods
 It can also be used to track changes in the value of
assets, sales, or profits over time
 Money performs it functions most effectively when
prices are stable
 Inflation
 Prices of goods rise

 Money loses purchasing power over time, as a

fixed quantity of money can purchase fewer
goods when prices a higher
 Thus, inflation;

 reduces the value of money as a store of value

 Reduces the value of money as a unit of

account
 Inflation will make the same goods cost more
than before

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Types of money
 M1

 The narrowest definition of money

 Also defined as any asset that is a generally

acceptable medium of exchange
 Consists the most highly liquid assets

 Includes all forms of assets that are easily

exchangeable as payment for goods and services
 Consists of coin and currency in circulation,
traveler’s check, demand deposits and other
checkable deposits
 In circulation means that has to be outside of
banks, in people’s and business wallets and
purses and cash registers
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  Travelers checks
 Is a preprinted, fixed amount check design to
allow the person signing it to make an
unconditional payment to someone else as a
result of having paid the issuer for that privilege
 Often used by people on vacation in place of
cash
 Have a form of insurance, can be replace in the
case of lost or stolen

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  Demand deposits
 Checking accounts balances in banks

 Consists of individual and businesses money

that deposited into an account in which check
can be written to pay for goods and services
 No interests for balances in bank account

 Other checkable deposits

 Consists of 2 items:

 NOW Accounts (Negotiable Orders of

Withdrawal)
 Exactly like a checking account except that
it can earn interest

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  ATS accounts
 Automatic Transfer Service
 ATS accounts are savings accounts (also
called time deposits)
 Can be drawn upon automatically to cover
overdrafts from one’s checking account
 Thus, if an individual has a checking account
with “overdraft protection” tied to their savings
account, then the savings account is an ATS
account

M1 = currency + traveler’s checks + Demand deposits

+ other checkable deposits
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M2
 Is a broader measure of money than M1

 Emphasizes the role that money plays as a “store of

value”
 Generally refers to smaller accounts that are typically
held as a store of value by consumers and small
businesses
 Includes all of M1, the most liquid assets, and a
collection of additional assets that are slightly less
liquid
 The additional assets include saving accounts,
money market deposit accounts, small time deposits
(less than RM100,000) and retail money market
mutual funds
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 M2 = M1
+ small denomination time deposits
+ savings deposits and money market deposit
accounts
+ money market mutual fund shares
(non-institutional)
+ overnight Ringgit
+ consolidation adjustment (an adjustment to
avoid double counting)

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M3
 Broader definition of money supply

 Include large deposit balances and other accounts

held by large businesses in addition to everything
included in M2
 M3 = M2

+ large denomination time deposits

+ money market mutual funds shares
(institutional)
+ term repurchase agreements
+ consolidation adjustment

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 L
 Not a measure of money al all but rather a
measure of highly liquid assets
 L = M3
+ short-term treasury securities
+ commercial paper
+ savings bonds
+ banker’s acceptances

SEM II 08/09 16
Characteristics of Money

1. Acceptability – acceptable as a means of payments

between people.
2. Homogeneity – every unit of money must be uniform
or identical in every respect (homogenous) to all other
units of money.
3. Divisibility – Must be divisible into different units to
cater for transactions of different value.
4. Durability – durable, can last for centuries with normal
use.
Characteristics of Money

5. Portability – small and easily carried about.

6. Recognisability – must be easily recognisable
by all who use it.