International Banking

International Banking


Introduction to Banking & Financial Systems Session 1

--Hilla Shahpur Maneckji


Introduction (1)

Oscar Wilde wrote that—a cynic knows the price of everything and the

value of nothing. Although that’s certainly worthy of further

reflection, for our purposes —Price and Value refer to the same thing

—How much a security or financial asset is

worth?


Introduction (2)

Financial Markets generate prices whenever securities are bought and sold.

Financial Institutions value financial assets whenever making loans to businesses or consumers.

Banks and other financial intermediaries take funds from one group of investors and re-deploy those funds by investing in financial assets.


Banks


What is a Bank? (1)

A Bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money.

Banks serve as the principal caretaker of the economy’s money supply and with other financial intermediaries provide an important source of funds for consumers and businesses.

The first modern bank was founded in Genoa, Italy in 1406, its name was Banco di San Giorgio (Bank of St. George).

Many other financial activities were added over time.


What is a Bank? (2)

For example banks are important players in financial markets and offer financial services such as investment funds.

In some countries banks are the primary owners of industrial corporations while in other countries banks are prohibited from owning non-financial companies.

In Japan, banks are usually the nexus of cross share holding entity known as Zaibatsu.

In France “Bancassurance” is highly present, as most banks offer insurance services (and now real estate services) to their clients.


Primary Operations of a Bank (1)

The primary operations of banks include:– Keeping money safe while also allowing withdrawals when

needed; – Issuance of cheque-books so that bills can be paid and

other kinds of payments can be delivered by post; – Provide personal loans, commercial loans, and mortgage

loans (typically loans to purchase a home, property or business);

– Issuance of credit cards and processing of credit card transactions and billing;

– Issuance of debit cards for use as a substitute for cheques; – Allow financial transactions at branches or by using

Automatic Teller Machines (ATMs)


Primary Operations of a Bank (2)

– Provide Wire Transfers of funds and Electronic Fund Transfers between banks;

– Facilitation of standing orders and direct debits, so payments for bills can be made automatically;

– Provide overdraft agreements for the temporary advancement of the bank’s own money to meet monthly spending commitments of a customer in their current account;

– Provide Charge Card advances of the bank’s own money for customers wishing to settle credit advances monthly;

– Provide a cheque guaranteed by the bank itself and prepaid by the customer, such as a Cashier’s Cheque or Certified Cheque; and

– Notary service for financial and other documents.


Traditional Banking Activities (1)

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current accounts.

Banks also enable customer payments via other payment methods such as Telegraphic Transfer, EFTPOS (Electronic Funds Transfer at Point Of Sale), and ATM.

Banks borrow money by accepting funds deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds.



Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments.

Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.



Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses.

Non-bank lenders provide a significant and in many cases adequate substitute for bank loans, money market funds, cash management trusts and other non-bank financial institutions as well as in many cases also provide an adequate substitute to banks for lending savings to.


Banking Channels (1)

Banks offer many different channels to access their banking and other services:

– A Branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face-to-face service to its customers.

– ATM is a computerized telecommunications device that provides a financial institution’s customers a method of financial transactions in a public space without the need for a human clerk or bank teller. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. In Hong Kong, most ATMs enable anyone to deposit cash to any customer of the bank’s account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank.


Banking Channels (2)

– Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers.

– Telephone Banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. This normally includes bill payments for bills from major billers (e.g. for electricity).

– Online Banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society’s secure website.


Economic Functions (1)

The economic functions of banks include:1. Issue of Money—in the form of banknotes and cheques or

payment at the customer’s order. These claims on banks can act as money because they are negotiable and repayable on demand, and are valued at par and can effectively be transferable by delivery in the case of banknotes or by drawing a cheque, delivering it to the payee to bank or cash.

2. Netting and Settlement of Payments—banks act both as collection agents and paying agents for customers, and participate in inter-bank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables payment flows between geographical areas to offset, reducing the cost of settling payments between those areas.



3. Credit Intermediation—banks borrow and lend back-to-back on their own account as middle men.

4. Credit Quality Improvement—banks lend money to ordinary commercial and personal borrowers, but are high quality borrowers. The improvement comes from diversification of the bank’s assets and the bank’s own capital which provides a buffer to absorb losses without defaulting on its own obligations. However, since banknotes and deposits are generally unsecured, if the bank gets into difficulty and pledges assets as security to try to get the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.



5. Maturity Transformation—banks borrow more on demand debt and short term debt, but provide more long term loans. In other words; banks borrow short and lend long. Bank can do this because they can aggregate issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain reserves of cash, invest in marketable securities that can be readily converted to cash if needed, and raise replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets) because they have a high and more well known credit quality than most other borrowers.


Types of Banks

Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits.

Banks’ activities can be divided into—– Central Banks are normally government owned banks, often

charged with quasi-regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis.

– Retail Banking, dealing directly with individuals and small businesses;

– Business Banking, providing services to mid-market business; – Corporate Banking, directed at large business entities; – Private Banking, providing wealth management services to high

net worth individuals and families; and – Investment Banking, relating to activities on the financial

markets.


Profitability of Banks (1)

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities.

This difference is referred to as the spread between the cost of funds and the loan interest rate.

Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers.

In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on an array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.).

Lending activities, however, still provide the bulk of a commercial bank’s income.



Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for “one-stop shopping” by enabling cross-selling of products.

They have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans.

This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise been denied credit.

They have sought to increase the methods of payment processing available to the general public and business clients.



These products include debit cards, pre-paid cards, smart cards, and credit cards.

They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home).

However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt.

Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the cards.


Challenges Within the Banking Industry (1)

The banking industry is a highly regulated industry with detailed and focused regulators.

Each regulatory agency has their own set of rules and regulations to which banks must adhere.

While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks.

The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures.



The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations.

It has been a challenge for banks to effectively set their growth strategies with the recent economic market.

A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders.

The management of the banks’ asset portfolios also remains a challenge in today’s economic environment.



Loans are a bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core.

While always an issue for banks, declining asset quality has become a big problem for financial institutions.

There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.”

The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management.

Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized.

In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs.



Banks also face a host of other challenges such as aging ownership groups.

Many banks’ management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and

private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various

categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher

with the entrance of such players as insurance agencies, credit unions, cheque cashing services, credit card companies, etc.

As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and trading and become big players in such activities.


Bank Crisis

Banks are susceptible to many forms of risk which have triggered occasional systemic crises.

Risks include Liquidity Risk (the risk that many depositors will request withdrawals beyond available funds), Credit Risk (the risk that those who owe money to the bank will not repay), and Interest Rate Risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others.

Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole.

Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, the bank run that occurred during the Great Depression, and the recent liquidation by the Central Bank of Nigeria, where about 25 banks were liquidated.


Banking In Pakistan


Banking In Pakistan

Banking in Pakistan first formally started in Pakistan during the period of British colonialization in the Asian subcontinent.

After independence from British Raj and India in 1947, and the emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been increasing and expanding continuously.

Pakistan’s oldest bank is the State Bank of Pakistan, which is also the Central Bank of the nation, formally the Reserve Bank of India, founded in 1935.

After Independence, Muhammad Ali Jinnah took actions to establish a central bank in Pakistan which resulted in the new founding of the State Bank of Pakistan, with its headquarters in Karachi.

Habib Bank Limited is Pakistan’s oldest commercial bank, founded in 1941.


List of Banks in Pakistan (1)

Central Bank—– State Bank of Pakistan

Nationalized Scheduled Banks—– National Bank of Pakistan– First Women Bank Limited

Specialized Banks—– Industrial Development Bank – Punjab Provincial Cooperative Bank – SME Bank – Zarai Taraqiati Bank



Private Scheduled Banks—– Allied Bank of Pakistan– Arif Habib Bank Limited (formerly Arif Habib Rupali

Bank) – Askari Bank Limited– Atlas Bank Limited– Bank Al-Habib Limited– Bank Alfalah Limited– BankIslami Pakistan Limited– Bank of America (acquired by JS Bank Limited)– Bank of Punjab– Barclays Bank



Private Scheduled Banks (Cont.)—– Citibank Limited – Crescent Commercial Bank Limited– Faysal Bank Limited– Habib Bank AG Zurich (now Habib Metropolitan Bank

Limited)– Habib Bank Limited– Habib Metropolitan Bank Limited– HSBC Bank Limited– JS Bank Limited– KASB Bank Limited– MCB Bank Limited (formerly Muslim Commercial Bank)– Mybank Limited



Private Scheduled Banks (Cont.)—– NIB Bank Limited– PICIC Commercial Bank Limited (acquired by NIB Bank

Limited)– Royal Bank of Scotland (RBS) (formally ABN Amro Bank

Limited )– Samba Bank Limited– Saudi Pak Non-Commercial Bank – Standard Chartered Bank Limited– Soneri Bank Limited– Silkbank Limited (formally Saudi Pak Commercial Bank)– Union Bank Limited (acquired by Standard Chartered Bank) – United Bank Limited


Investment Banks—– Al-Towfeek Investment Bank Limited – AMZ Securities – Atlas Investment Bank Limited – Crescent Investment Bank Limited – Escorts Investment Bank Limited – First Credit and Investment Bank Limited– First International Investment Bank Limited – Fidelity Investment Bank Limited – Invest Capital Investment Bank Limited – Islamic Investment Bank Limited – Jahangir Siddiqui Investment Bank Limited




Investment Banks (Cont.)—– Orix Investment Bank (Pakistan) Limited – Prudential Investment Bank Limited – Trust Investment Bank Limited

Islamic Banks—– Dawood Islamic Bank Limited (formerly First Dawood

Islamic Bank Limited) – Dubai Islamic Bank Pakistan Limited – Meezan Bank Limited– AlBaraka Islamic Bank – BankIslami Pakistan Limited – Emirates Global Islamic Bank Limited



Venture Capital Companies—– AMZ Ventures – Pakistan Emerging Ventures Limited – Pakistan Venture Capital Limited

Micro Finance Banks—– The First Micro Finance Bank Limited – Khushali Bank – Karakuram Bank – Network Micro Finance Bank – Pak Oman Micro Finance Bank – Rozgar Micro Finance Bank– Tameer Microfinance Bank Limited – Kashf Foundation Limited


Development Financial Institutions—– Investment Corporation of Pakistan– Pak Brunaei Investment Company Limited– Pak China Investment Company Limited – Pakistan Industrial Credit and Investment Corporation

Limited (PICIC)– Pak Kuwait Investment Company Limited– Pak Libya Holding Company Limited– Pak-Oman Investment Company Limited– Saudi Pak Industrial & Agricultural Investment

Company Limited (SAPICO)– House Building Finance Corporation (HBFC)




Discount & Guarantee Houses—– First Credit & Discount Corporation Limited – Prudential Discount & Guarantee House Limited – National Discounting Services Limited – Speedway Fordmetall (Pakistan) Limited

Housing Finance Companies—– Asian Housing Finance Limited – Citibank Housing Finance Company Limited – House Building Finance Corporation (HBFC)– International Housing Finance Limited


International Banks


What is an International Bank? (1)

An International Bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients.

These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business.

International banks tend to offer their services to companies and to fairly wealthy individuals.

But plenty of international banks, particularly Swiss banks, open their doors to customers of any income bracket.


What is an International Bank? (2)

Companies do business with international banks to help facilitate international business, the complexities of which can be quite costly.

Individuals work with international banks for a number of reasons, including tax avoidance, probably the term you’ve heard the most in relation to offshore banking.

Tax avoidance isn’t necessarily illegal. But there are plenty of other hazards in

international banking.


Additional Services Offered by International Banks (1)

International Banks also offer the following value-added trade products and services such as: – Prepayment and Structured Pre-Export Facilities:

these services finance pre-export fabrication and provide export financing for a country’s key exports.

– Export Receivables Financing. – Programs offered by Regional Development

Banks and Institutions: the International Finance Corporation, Asian Development Bank, World Bank, and other institutions support international sales by providing guarantees as credit support or enhancement.



– Linked Exports and Import Financing: In some countries the export contract can act as security for essential imports. For example, in some countries that export value-added products (Asia has many), if imports (generally but not always raw materials) do not flow into the country then value-added exports stop. An international bank can credit-enhance the deal by using the export contract as security thus allowing country imports to continue.

– Global Trade Management: This allows you to out-source the trade documentation preparation to others who are more familiar with it and who work with these forms daily.



– Government-Backed Insurance and Guarantee Programs: These are available from government bodies such as Exim Bank or private insurers and can help your company spread the risk.

– Option-Linked Financings for Commodities: Again, these are risk spreading options. Examples are trade finance solutions that have interest rate, foreign exchange, and commodity-hedging options. These can be made part of the transaction if desired.

– Counter-Trade Transactions: commodities, durable and other goods are essentially bartered.



– Forfeiting: This is a provision of medium-term trade finance where trade contracts are sold into the secondary market.

– Multinational Inter-Company Structured Trade / Tax Facilities.


FINANCIAL INSTITUTIONS


What is a Financial Institution?

A Financial Institution acts as an agent that provides financial services for its clients or members.

Financial Institutions generally fall under financial regulation from a government authority.

Common types of Financial Institutions include—– Commercial Banks; — Saving Banks;– Insurance Companies; — Building Societies; – Credit Unions; — Mutual Funds; – Stock Brokerages; — Finance Companies;– Pension & Retirement Funds; and – Asset Management Companies.


Functions of a Financial Institution

Financial Institutions provide a service as intermediaries of the capital and debt markets.

They are responsible for transferring funds from investors to companies, in need of those funds.

The presence of Financial Institutions facilitates the flow of monies through the economy.

To do so, savings are pooled to mitigate the risk brought to provide funds for loans.


What is a DFI?

A DFI or Development Financial Institution is generic term used to refer to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds.

Common types of DFIs in Pakistan include—– Pakistan Industrial Credit & Development Corporation

(PICIC); – Industrial Development Bank of Pakistan (IDBP); – Agricultural Development Bank of Pakistan (ADBP); – House Building Finance Corporation (HBFC); – National development Finance Corporation (NDFC); – Small & Medium Business Corporation; and – Bankers Equity Limited.


International Financial Institutions


What is an IFI? (1)

International Financial Institutions, or IFIs, refers to financial institutions that have been established (or chartered) by more than one country, and hence are subjects of international law.

Their owners or shareholders are generally national governments, although other international institutions and other organizations occasionally figure as shareholders.

The most prominent IFIs are creations of multiple nations, although some bilateral financial institutions (created by two countries) exist and are technically IFIs.


What is an IFI? (2)

Many of these are multilateral development banks.

The best-known IFIs are—1. The World Bank2. International Monetary Fund3. Regional Development Banks

Some of the IFIs are considered UN agencies.


Types of IFI (1)

Types of IFIs are—1. Bretton Woods Institutions2. Regional Development Banks3. Bilateral Development Banks4. Other Regional Financial

Institutions


Types—Bretton Woods Institutions (2)

1. Bretton Woods InstitutionsThe best-known IFIs were established after World War II to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system. They include the World Bank, the IMF, the International Finance Corporation, and other members of the World Bank Group.


Types—Regional Development Banks (3)

2. Regional Development BanksThe regional development banks consist of several regional institutions that have functions similar to the World Bank group’s activities, but with particular focus on a specific region. Shareholders usually consist of the regional countries plus the major donor countries. The best-known of these regional banks cover regions that roughly correspond to United Nations regional groupings; the Asian Development Bank; the African Development Bank; and the European Bank for Reconstruction and Development.


Types—Bilateral Development Banks (4)

3. Bilateral Development BanksBilateral development banks are financial institutions set up by individual countries to finance development projects in developing countries and emerging markets. Examples include the Netherlands Development Finance Company (FMO) and the German Development Bank (DEG).


Types—Other Regional Financial Institutions (5)

4. Other Regional Financial InstitutionsSeveral regional groupings of countries have established international financial institutions to finance various projects or activities in areas of mutual interest.

The largest and most important of these is the European Investment Bank, an institution established by the members of the European Union.

Other examples include the Black Sea Development Bank, the International Investment Bank (established by the countries of the former Soviet Union and Eastern Europe), the Islamic Development Bank and the Nordic Investment Bank.


FINANCIAL MARKETS


What is a Financial Market? (1)

A Financial Market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis.

Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.

Markets work by placing many interested buyers and sellers in one “place”, thus making it easier for them to find each other.

An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.



In finance, Financial Markets facilitates—– The Raising of Capital (in the Capital Markets &

Money Markets); – The Transfer of Risk (in the Derivatives Markets); – International Trade (in the Currency Markets)

— and are used to match those who want capital to those who have it.

Through Capital Markets companies raise finance for long term primarily for Capital Expenditure.

For short term financing, companies issues short term securities from the Money Market.



Derivative market, though not fully developed in Pakistan, deals in trading of derivatives, values of which depend upon other assets.

Typically a borrower issues a receipt to the lender promising to pay back the capital.

These receipts are securities which may be freely bought or sold.

In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.


Definition of Financial Markets

The term Financial Markets can be a cause of much confusion.

Financial Markets could mean:1. Organizations that facilitate the trade in financial products. Like: Stock exchanges facilitate the trade in stocks, bonds and warrants.2. The coming together of buyers and sellers to trade financial products. Like: stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc.

Financial markets can be domestic or they can be international.


Types of Financial Markets (1)

The Financial Markets can be divided into different subtypes:– Capital Markets which consists of:

Stock Markets, which provides financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

Bond Markets, which provides financing through the issuance of Bonds, and enable the subsequent trading thereof.

– Commodity Markets, which facilitates the trading of commodities.

– Money Markets, which provides short term debt financing and investment.



– Derivatives Markets, which provides instruments for the management of financial risk. Futures Markets, which provides

standardized forward contracts for trading products at some future date; see also forward market.

– Insurance Markets, which facilitates the redistribution of various risks.

– Foreign Exchange Markets, which facilitates the trading of foreign exchange.



The Capital Markets consists of primary markets and secondary markets.

Newly formed (issued) securities are bought or sold in primary markets.

Secondary markets allow investors to sell securities that they hold or buy existing securities.


Raising Capital


Raising Capital (1)

To understand Financial Markets, let us look at what they are used for, that is, what is their purpose?

Without financial markets, borrowers would have difficulty finding lenders themselves.

Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.

More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.


Raising Capital (2)

Relationship between Lenders and Borrowers

Lenders Financial Intermediarie

s

Financial Markets

Borrowers

• Individua

ls•

Companies

• Banks• Insurance Companies • Pension Funds• Mutual Funds

• Interbank• Stock Exchange• Money Market • Bond Market • Foreign Exchange

• Individuals• Companies• Central Government• Municipalities• Public Corporations


Raising Capital—Lenders-1 (3)

Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways.

A person lends money when he or she:– puts money in a savings account at a

bank; – contributes to a pension plan; – pays premiums to an insurance company; – invests in government bonds; or – invests in company shares.


Raising Capital—Lenders-2 (4)

Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets.

There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (example—via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (example—investing in bonds and stocks).


Raising Capital—Borrowers-1 (5)

Individuals borrow money via bankers’ loans for short term needs or longer term mortgages to help finance a house purchase.

Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernization or future business expansion.

Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalized industries, municipalities, local authorities and other public sector bodies.


Raising Capital—Borrowers-2 (6)

Governments borrow by issuing bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation.

Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments.

Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies.

Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign Exchange Markets.


Stock Market


A Stock Market, or (equity market), is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of stocks and securities together.

What is a Stock Market?


The stock market is one of the most important sources for companies to raise money.

This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market.

The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities.

This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.

Function & Purpose of a Stock Market (1)


Rising share prices, for instance, tend to be associated with increased business investment and vice versa.

Share prices also affect the wealth of households and their consumption.

Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions.

Financial stability is the raison d'être of central banks. Exchanges also act as the clearinghouse for each

transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security.

This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.



The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment.

In this way the financial system contributes to increased prosperity.



Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry.

This type of auction is used in stock exchanges and commodity exchanges where traders may enter “verbal” bids and offers simultaneously.

The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock.

Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.

When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.

Trading


The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real).

The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

Purpose of Stock Exchanges


One of the many things people always want to know about the stock market is, “How do I make money investing?”

There are many different approaches; two basic methods are classified as—– Fundamental Analysis; and – Technical Analysis.

Investment Strategies (1)


Fundamental Analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc.

Technical Analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company’s financial prospects.

Investment Strategies (2)


The End

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International Banking

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