insurance companies pension funds building societies

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Lenard Poole
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2 1. Depository institutions - BANKS commercial banks credit unions savings and loan associations 2. Contractual savings institutions insurance companies pension funds building societies

3 3. Investment intermediaries investment companies mutual funds money market mutual funds 4. Other financial institutions mortgage banks leasing companies factoring companies financial advisers or brokers

6 commercial banks credit unions savings and loan associations

7 Depository Institutions (Banks): accept deposits and make loans. These include commercial banks and thrifts. Commercial banks Raise funds primarily by issuing checkable, savings, and time deposits which are used to make commercial, consumer and mortgage loans Collectively, these banks comprise the largest financial intermediary and have the most diversified asset portfolios

8 Credit unions are cooperative, self-help associations of individuals, and savings deposits and loans are offered only to members of each association. Their long-run survival stems mainly from their being able to offer low loan rates and high deposit interest rates and from their relatively low operating costs.

9 Savings and loan associations (S&Ls) are among the largest of all thrift institutions, accepting deposits and extending loans and other services primarily to household customers. S&Ls emphasize longer-term loans, especially mortgage loans.

10 Savings banks began in Scotland in the early 19 th century. They are more diversified in their investments, purchasing corporate bonds and common stock, making consumer loans, and investing in commercial mortgages. The distinction among S&Ls, savings banks, and commercial banks is becoming blurred, especially because they are readily convertible from one form to another.

11 Micro Finance Banks For the purpose of poverty reduction program, such kind of banks are working in the different countries with the contribution of UNO or World Bank. Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse.

12 insurance companies pension funds building societies

13 Life insurance companies offer their customers a hedge against the risk of earnings losses that often follow death, disability, or retirement. Many policies combine financial protection against death, disability, and retirement with savings plans to help the policyholder prepare for some important future financial need.

14 The insurance business is founded upon the law of large numbers a risk that is not predictable for one person can be forecast accurately for a sufficiently large group.

15 Property-casualty (P/C) insurers offer protection against events like fire, theft, bad weather, and negligence that result in injury to persons or property. Traditional P/C insurance covers automobile, fire, marine, personal liability, and property. Many P/C insurers have also branched into health and medical insurance, clashing headon with life insurers.

16 P/C insurance is a riskier business than life insurance P/C claims are less predictable and inflation has a potent impact.

17 Pension funds protect individuals and families against loss of income in their retirement years by allowing workers to set aside and invest a portion of their current income. They are closely regulated in all their activities.

18 Defined benefit plans promise a specific monthly or annual payment to workers when they retire based upon the size of their salary during their working years and their length of employment. Such programs have the advantage of guaranteed income, but an employee who leaves early or is dismissed before retirement may get little or nothing.

19 Defined contribution plans specify how much must be contributed each year in the name of each worker, but the amount to be received when retirement is reached will vary depending upon the amount saved and the returns earned on accumulated savings. The funds saved belong to the employee, and are portable.

20 investment companies mutual funds money market mutual funds

21 Finance companies grant credit to businesses and consumers for a wide variety of purposes, including the purchase of business equipment, automobiles, vacations, and home appliances. As such, they are sometimes called department stores of consumer and business credit.

22 Consumer finance companies make personal cash loans to individuals, such as home equity loans and loans to support the purchase of passenger cars and home appliances. Sales finance companies make indirect loans to consumers by purchasing installment paper from dealers selling consumer durables. Commercial finance companies focus mainly on extending credit to business firms.

23 Mutual funds, or investment companies, direct the savings of individual investors into bonds, stocks, and money market securities. A small saver who buys mutual fund shares gains opportunities for capital gains and indirect access to higher yielding securities that can be purchased only in large blocks, and yet still enjoys price stability, low risk, and high liquidity.

24 Not only traditionally stock-investing industry many innovations like bond funds, money market funds, index funds, global funds, vulture funds, small/mid/large-cap investment companies, and hedge funds.

25 Open-end investment companies, or mutual funds, buy back (redeem) their shares any time the investor wishes, and sell shares in any quantity demanded. Closed-end investment companies sell only a specific number of ownership shares, which usually trade on an exchange.

26 Investment companies adopt many goals. Growth funds invest mainly in common stocks offering strong growth potential to achieve longterm capital appreciation. Income funds typically purchase stocks and bonds paying high dividends and interest to gain current income. Balanced funds acquire bonds, preferred stock, and common stock that offer both capital gains (growth) and current income.

27 In 1972, the first money market mutual fund a financial intermediary pooling the savings of individuals and businesses and investing those monies in short-term, high-quality money market instruments opened for business. The short maturity of the assets results in a highly liquid security portfolio that can be adjusted quickly to suit changing market conditions.

28 Today, money market funds serve as cash-management vehicles where market rates can be earned on funds used for daily transactions; tax-sheltering vehicles (when tax-exempt funds are chosen); a temporary repository for liquid funds; and a safety haven for savings.

29 Security dealers take a position of risk in securities. They trade in securities with the expectation of earning a profitable spread. Investment bankers assist businesses and governments in issuing debt and stock. Venture capital firms provide long-term capital financing for new businesses and rapidly emerging companies.

30 Mortgage banks work with other businesses on real estate development projects and sell the resulting loan instruments to other investors. Real estate investment trusts (REITs) fund commercial and residential real estate projects.

31 is a contract between the leasing company, the lessor, and the customer (the lessee). The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset. There are two types of leases: Finance Leases - An agreement where the lessor receives lease payments to cover its ownership costs. The lessee is responsible for maintenance, insurance, and taxes. Some finance leases are conditional sales or hire purchase agreements. Operating Leases - The lease will not run for the full life of the asset and the lessee will not be liable for its full value. The lessor or the original manufacturer or supplier will assume the residual risk. This type of lease is normally only used when the asset has a probable resale value, for instance, aircraft or vehicles. 31

32 The selling of receivables to a financial institution, the factor, usually without recourse. Normally, the Factor makes a part payment (usually up to 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client. Factor is often a subsidiary of a bank holding company. Factor maintains a credit department and performs credit checks on accounts. Allows firm to eliminate their credit department and the associated costs. Contracts are usually for 1 year, but are renewable. CLIENT CUSTOMER FACTOR

33 Forfait is derived from French word A Forfait which means surrender of fights. Forefaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him. It is different from International Factoring in as much as it deals with receivables relating to deferred payment exports, while Factoring deals with short term receivables. Finance available upto 100% of value (unlike in Factoring)

Financial Intermediaries

Financial Intermediaries L E A R N I N G O B J E C T I V E 1. In what ways can financial intermediaries be classified? Like financial markets, financial intermediaries are highly specialized. Sometimes