It is the first chapter of the subject (Financial Markets and Institutions)

1. FINANCIAL MARKETS AND
INSTITUTIONS
FINANCIAL INSTITUTIONS, FINANCIAL
INTERMEDIARIES AND ASSET MANAGEMENT
FIRMS

2. MOHAMED LUKMAN MOALIM HASSAN
ASSISTANT LECTURER
EMAIL: MLUKMAN.MOALIM@GMAIL.COM
TELL: +252 - 618135555

3. INTRODUCTION
FINANCIAL INTERMEDIARIES INCLUDE COMMERCIAL BANKS, SAVING AND LOAN
ASSOCIATIONS, INVESTMENT COMPANIES, INSURANCE COMPANIES AND PENSION
FUNDS. THE MOST IMPORTANT CONTRIBUTION OF FINANCIAL INTERMEDIARIES IS
A STEADY AND RELATIVELY EXPENSIVE FOLLOW OF FUNDS FROM SAVERS TO FINAL
USERS OR INVESTORS. THIS INVESTORS INCLUDE INDIVIDUALS, HOUSEHOLDS,
CORPORATIONS SMALL AND NEW BUSINESS AND GOVERNMENTS.

4. FINANCIAL INSTITUTIONS
FINANCIAL ENTERPRISES MORE POPULARLY REFERRED TO AS FINANCIAL
INSTITUTIONS PROVIDE SERVICES RELATED TO ONE OR MORE OF THE FOLLOWING:
TRANSFORMING FINANCIAL ASSETS ACQUIRED THROUGH THE MARKET AND
CONSTITUTING THEM IN TO A DIFFERENT AND MORE WIDELY PREFERABLY.
 EXCHANGING OF FINANCIAL ASSETS ON BEHALF OF CUSTOMERS
 EXCHANGE OF FINANCIAL ASSETS FOR THEIR OWN ACCOUNTS
 ASSISTING IN THE CREATION OF FINANCIAL ASSETS FOR THEIR CUSTOMERS
AND THEN SELLING THOSE FINANCIAL ASSETS TO OTHER MARKET
PARTICIPANTS.
 PROVIDING INVESTMENT ADVICE TO OTHER MARKET PARTICIPANTS
 MANAGING THE PORTFOLIOS OF OTHER MARKET PARTICIPANTS

5. DEFINITION OF FINANCIAL INSTITUTION
INSTITUTIONS THAT PERFORM THE ESSENTIAL FUNCTION OF CHANNELING FUNDS
FROM THOSE WITH SURPLUS FUNDS TO THOSE WITH SHORTAGES OF FUNDS (E.G.
BANKS, THRIFTS, INSURANCE COMPANIES, SECURITIES FIRMS AND INVESTMENT
BANKS, FINANCE COMPANIES, MUTUAL FUNDS, PENSION FUNDS). FINANCIAL
INSTITUTION HAVE A VITAL ROLE IN OUR CURRENT MARKET, THEY SOME TIMES
GO INTO SPECIFIC PORTION WHICH IMPLEMENTS OR COMPLETES VIVID FINANCIAL
ROLE, SUCH AS BROKERS, HEDGES, LEVERAGE PAYERS.

6. MOST COMMON FINANANCIAL INSTITUTIONS
COMMERCIAL
BANKS
DEPOSITORY
INSTITUTIONS
WHOSE MAJOR
ASSETS ARE
LOANS AND
MAJOR
LIABILITIES ARE
EVENTS
INSURANCE
COMPANIES
FINANCIAL
INSTITUTIONS
THAT PROTECT
INDIVIDUALS
AND
CORPORATIONS
FROM ADVERSE
EVENTS
THRIFTS
DEPOSITORY
INSTITUTIONS
IN THE FORM
OF SAVINGS
AND LOANS,
CREDIT
UNIONS

7. MOST COMMON FINANANCIAL INSTITUTIONS
 SECURITIES FIRMS AND INVESTMENT BANKS FINANCIAL
INSTITUTIONS THAT UNDERWRITE SECURITIES AND ENGAGE IN SECURITIES
BROKERAGE AND TRADING
 FINANCE COMPANIES FINANCIAL INSTITUTIONS THAT MAKE LOANS TO
INDIVIDUALS AND BUSINESSES
 MUTUAL FUNDS FINANCIAL INSTITUTIONS THAT POOL FINANCIAL
RESOURCES AND INVEST IN DIVERSIFIED PORTFOLIOS
 PENSION FUNDS FINANCIAL INSTITUTIONS THAT OFFER SAVINGS PLANS FOR
RETIREMENT

8. FOLLOW OF FUNDS THROUGH FINANCIAL
INSTITUTION

9. FINANCIAL MARKET
FINANCIAL MARKETS, MARKETS IN WHICH FUNDS ARE TRANSFERRED FROM PEOPLE
WHO HAVE AN EXCESS OF AVAILABLE FUNDS TO PEOPLE WHO HAVE A SHORTAGE.
FINANCIAL MARKETS, SUCH AS BOND AND STOCK MARKETS, ARE CRUCIAL TO
PROMOTING GREATER ECONOMIC EFFICIENCY BY CHANNELING FUNDS FROM PEOPLE
WHO DO NOT HAVE A PRODUCTIVE USE FOR THEM TO THOSE WHO DO. INDEED,
WELL-FUNCTIONING FINANCIAL MARKETS ARE A KEY FACTOR IN PRODUCING HIGH
ECONOMIC GROWTH, AND POORLY PERFORMING FINANCIAL MARKETS ARE ONE
REASON THAT MANY COUNTRIES IN THE WORLD REMAIN DESPERATELY POOR.

10. FINANCIAL MARKETS CLASSIFICATION
• PRIMARY MARKET:
• MARKETS IN WHICH USERS
OF FUNDS (E.G.
CORPORATIONS,
GOVERNMENTS) RAISE
FUNDS BY ISSUING
FINANCIAL INSTRUMENTS
• (E.G. STOCKS AND BONDS)
• SECONDARY MARKET:
MARKETS WHERE
FINANCIAL INSTRUMENTS
ARE TRADED AMONG
INVESTORS
• (E.G. NYSE, NASDAQ)

11. FINANCIAL MARKETS CLASSIFICATION
MONEY MARKETS:
MARKETS THAT TRADE
DEBT SECURITIES WITH
MATURITIES OF ONE YEAR
OR LESS
(E.G. CD’S, U.S.
TREASURY BILLS)
CAPITAL MARKETS:
MARKETS THAT TRADE
DEBT (BONDS) AND
EQUITY (STOCK)
INSTRUMENTS WITH
MATURITIES OF MORE
THAN ONE YEAR

12. FOREIGN EXCHANGE MARKETS (FOREX)
 FOREX MARKETS DEAL IN TRADING ONE
CURRENCY FOR ANOTHER (E.G. DOLLAR FOR
YEN)
 THE “SPOT” FX TRANSACTION INVOLVES THE
IMMEDIATE EXCHANGE OF CURRENCIES AT
THE CURRENT EXCHANGE RATE
THE “FORWARD” FX TRANSACTION INVOLVES
THE EXCHANGE OF CURRENCIES AT A
SPECIFIED DATE IN THE FUTURE AND AT A
SPECIFIED EXCHANGE RATE

13. DERIVATIVE MARKETS
 THE MARKETS IN WHICH DERIVATIVE SECURITIES
TRADE.
 DERIVATIVE SECURITY: AN AGREEMENT BETWEEN
TWO PARTIES TO EXCHANGE A STANDARD
QUANTITY OF AN ASSET AT A PREDETERMINED
PRICE ON A SPECIFIED DATE IN THE FUTURE.
 THE DERIVATIVE MARKETS AGREEMENTS
COMPRISES THREE MAIN FINANCIAL AGREEMENTS:
FUTURES. FORWARDS AND OPTIONS

14. FINANCIAL ASSETS
FINANCIAL ASSETS ARE THE INSTRUMENTS AND THE OBJECTS EXCHANGED IN THE FINANCIAL
MARKETS, ALTHOUGH THE EXISTENCE OF FINANCIAL MARKET IS NOT NECESSARY FOR THE
CREATION AND EXCHANGE OF THE FINANCIAL ASSETS, IN MOST ECONOMIES FINANCIAL ASSETS
ARE CREATED AND TRADED SUBSEQUENTLY IN SOME TYPE OF FINANCIAL MARKET.
THE TWO PRIMARY FUNCTIONS OF FINANCIAL ASSETS ARE:
1. TRANSFER FUNDS FROM THOSE HAVE SURPLUS TO INVEST TO THOSE WHO NEED TO INVEST
IN TANGIBLE ASSETS
2. TO TRANSFER FUNDS IN SUCH AWAY AS TO REDISTRIBUTE THE UN AVOIDABLE RISK WITH
THE CASH FOLLOW GENERATED BY THE TANGIBLE ASSETS AMONG THOSE SEEKING AND
THOSE PROVIDING THE FUNDS.

15. CLASSIFICATION OF GLOBAL FINANCIAL
MARKET
ALTHOUGH THERE IS NO A UNIFORM SYSTEM FOR CLASSIFYING THE GLOBAL
FINANCIAL MARKET, BUT FROM THE PERSPECTIVE OF A GIVEN COUNTRY,
FINANCIAL MARKETS CAN BE CLASSIFIED:
 THE INTERNAL MARKET ALSO CALLED THE NATIONAL MARKET, IT COMPRISES
1. DOMESTIC MARKET: IS WHERE ISSUERS DOMICILED IN THE COUNTRY ISSUES
SECURITIES AND WHERE THOSE SECURITIES ARE SUBSEQUENTLY TRADED
2. FOREIGN MARKET: IN ANY COUNTRY IS WHERE THE SECURITIES OF ISSUERS
NOT DOMICILED IN THE COUNTRY ARE SOLD AND TRADED DO

16. THE EXTERNAL MARKET
THE EXTERNAL MARKET IS ALSO CALLED THE INTERNATIONAL MARKET, ALLOWS
TRADING OF SECURITIES WITH TWO DISTINGUISHING FEATURES:
1. AT ISSUANCE SECURITIES ARE OFFERED SIMULTANEOUSLY TO INVESTORS IN A
NUMBER OF COUNTRIES, AND
2. THEY ARE ISSUED OUTSIDE THE JURISDICTION OF ANY SINGLE COUNTRY.
THE EXTERNAL MARKET IS COMMONLY REFERRED TO AS THE OFFSHORE MARKET

17. THE ROLE OF THE GOVERNMENT IN THE
FINANCIAL MARKET
GOVERNMENT IN MOST DEVELOPED ECONOMIES HAVE CREATED ELABORATE
SYSTEMS OF REGULATION FOR THE FINANCIAL MARKET BECAUSE MARKET
THEMSELVES ARE COMPLEX. THE MOST IMPORTANT ROLE CAN BE SUMMARIZED
THE PROTECT THE MARKET FAILURE,
THE MARKET IS SAID TO BE FAILED IF IT CANNOT, BY ITS SELF ALL THE
REQUIREMENTS FOR THE A COMPETITIVE SITUATION

18. GOVERNMENT REGULATIONS
 DISCLOSURE REGULATIONS: DISSEMINATION OF THE INFORMATION TO ALL MARKET
PARTICIPANTS AT THE MOMENT OF THE EVENTS, MARKET HEALTH, TRENDS AND
CHANGES, INVESTORS AND PARTICIPANTS
 FINANCIAL ACTIVITY REGULATIONS: THE SET RULES AND APPLICATION FOR THE
MARKET PARTICIPANTS AND CORPORATIONS, INSIDERS AND OUTSIDERS.
 REGULATIONS OF FINANCIAL INSTITUTION: IS THE FORM OF GOVERNMENTAL
MONITORING THAT RESTRICTS THESE INSTITUTIONS’ ACTIVITIES IN THE VITAL
AREAS OF LENDING, BORROWING AND FUNDING.
 REGULATIONS OF FOREIGN PARTICIPANTS: IS THE FORM OF GOVERNMENTAL
ACTIVITIES THAT LIMITS THE ROLE OF FOREIGN FIRMS CAN HAVE IN DOMESTIC
MARKETS AND THEIR OWNERSHIP OR CONTROL OF FINANCIAL INSTITUTIONS

19. ROLE OF FINANCIAL INTERMEDIARIES
FINANCIAL INTERMEDIARIES OBTAIN FUNDS BY ISSUING FINANCIAL CLAIMS
AGAINST THEM SELVES TO MARKET PARTICIPANTS AND THEN INVESTING THOSE
FUNDS, THE INVESTMENT MADE BY FINANCIAL INTERMEDIARIES CAN BE IN LOANS
OR SECURITIES, THIS TYPE OF INVESTMENT IS CALLED DIRECT INVESTMENT.
INVESTMENT COMPANY WHICH POOLS THE FUNDS OF THE MARKET PARTICIPANTS
AND ISSUE THOSE FUNDS TO BUY PORTFOLIO OF SECURITIES SUCH AS STOCKS
AND BONDS, THIS TYPE OF INVESTMENT COMPANY MOSTLY REFERRED AS
MUTUAL FUNDS

20. REGULATIONS
 MATURITY INTERMEDIATION: CERTAIN TYPES OF DEPOSITS ARE PAYABLE UPON
DEMAND.
 REDUCING RISK VIA DIVERSIFICATION: TRANSFORMATION OF MORE RISKY
ASSETS IN TO LESS RISKY ONES, BUT INDIVIDUAL INVESTORS CAN DO THEIR
OWN BUT THEY MAY NOT DO IT AS COST EFFECTIVELY.
 REDUCING THE COST OF CONTRACTING AND INFORMATION PROCESSING