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Financial Services & Records


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Financial Services & Records

  1. 1. Chapter 5 Financial Services & Records
  2. 2. Financial Services <ul><li>Financial Institutions </li></ul><ul><li>Type of sources </li></ul><ul><li>Commercial banks </li></ul><ul><li>Consumer finance companies </li></ul><ul><li>Credit unions </li></ul><ul><li>Savings and loan associations </li></ul><ul><li>Others </li></ul><ul><ul><li>Insurance companies </li></ul></ul><ul><ul><li>Credit card companies </li></ul></ul><ul><ul><li>Pawn-brokers </li></ul></ul>
  3. 3. Commercial Bank <ul><li>Often referred to as full-service institution </li></ul><ul><li>Offer broad range of services – checking account, savings account, trust facilities, almost all types of loan </li></ul><ul><li>Banks are examined by the Bank Negara </li></ul><ul><li>Also examined by their own internal auditors & by outside auditors on orders from the bank’s board of director </li></ul>
  4. 4. Consumer Finance Companies <ul><li>Often referred as small loan companies, personal finance companies, licensed lenders </li></ul><ul><li>Following the mergers among financial institution in Malaysia, the finance companies are absorbed under the commercial banks </li></ul><ul><li>Principal distinguishing features: </li></ul><ul><ul><li>Characteristics of the loans </li></ul></ul><ul><ul><li>Their customers </li></ul></ul><ul><ul><li>Their method of operation </li></ul></ul>
  5. 5. Consumer Finance Companies (cont.) <ul><li>a) Principal types of loan </li></ul><ul><ul><li>Installment loan of small loan (less than commercial bank) </li></ul></ul><ul><ul><li>Through sales finance companies (their subsidiary), they buy installment contract from local retailers </li></ul></ul><ul><ul><li>With small loan offered, the risk is higher, thus charging higher interest rate </li></ul></ul><ul><ul><li>Since the loan amount is small, the operational cost & other expenses are almost fixed, hence, the cost in terms of percentage from the loan is higher </li></ul></ul>
  6. 6. Consumer Finance Companies (cont.) <ul><li>b) Customers </li></ul><ul><li>different occupational group from commercial bank </li></ul><ul><li>offered to less income stability or less occupational stability group </li></ul><ul><li>customers represent higher risk </li></ul><ul><li>security accepted for loan is often of lesser value or difficult to appraise (eg. household goods) </li></ul>
  7. 7. Consumer Finance Companies (cont.) <ul><li>c) Service & method of operation </li></ul><ul><li>Usually located for the customer’s convenience, & are likely to have many small branches in one city </li></ul><ul><li>Do not accept deposits, or have safe-deposit boxes </li></ul><ul><li>Offices relatively small, few workers, often located in malls & convenient location </li></ul>
  8. 8. Credit Union <ul><li>Is a cooperative financial institution </li></ul><ul><li>An association of people who save money together & make loans to each other at relatively low interest rate </li></ul><ul><li>Later offer loan for non-members with higher interest rate </li></ul><ul><li>Organised by people who share a common bond – eg. Employee working for the same employer </li></ul><ul><li>They participate in the ownership & control of the credit union </li></ul>
  9. 9. Credit Union (cont.) <ul><li>Characteristics of Credit Union </li></ul><ul><ul><li>Adhere to basic principals as other cooperative institutions </li></ul></ul><ul><ul><li>Savings & loans are their main function </li></ul></ul><ul><ul><li>Acquire capital from membership savings that are invested as the credit union shares </li></ul></ul><ul><ul><li>Each member, irrespective of amount of shares, is entitled to one vote in the election of its board of directors </li></ul></ul><ul><ul><li>Additional dividends may be declared after expenses are paid & legal reserves set aside </li></ul></ul><ul><ul><li>Are operated mainly for the benefit of their membership </li></ul></ul>
  10. 10. Savings & Loan Association <ul><li>Are depository institution </li></ul><ul><li>Originally organised to accept savings deposits & provide mortgage financing </li></ul><ul><li>Later provide commercial loan & consumer loan, competing with commercial bank </li></ul><ul><li>The most common loan involves mortgage lending, even though they offer wide variety of loans </li></ul><ul><li>Active in second mortgage & home equity lending </li></ul><ul><li>Is also a cooperative bank </li></ul>
  11. 11. Others <ul><ul><li>Insurance Companies </li></ul></ul><ul><ul><li>The main purpose insurance policy is to provide financial security for dependents, but it also contain savings & investment features such as for retirement planning </li></ul></ul><ul><ul><li>It is a nondeposit institution </li></ul></ul><ul><ul><li>Credit card company </li></ul></ul><ul><ul><li>Companies offering credit card for general purpose (purchasing & cash-loan) </li></ul></ul><ul><ul><li>Usually offered through banks or private agencies (eg. Petronas-VISA) </li></ul></ul><ul><ul><li>Made arrangement with businesses to accept the credit card instead of cash </li></ul></ul>
  12. 12. Others (cont.) <ul><ul><li>Pawnshops </li></ul></ul><ul><ul><li>Make loans based on the value of tangible possessions eg. jewellery </li></ul></ul><ul><ul><li>Obtaining cash-loan quickly by low & middle income families </li></ul></ul><ul><ul><li>A non-deposit institution </li></ul></ul><ul><ul><li>Higher fees charged than other financial institutions </li></ul></ul>
  13. 13. Financial Services <ul><ul><li>Some common services </li></ul></ul><ul><ul><li>Checking & savings accounts </li></ul></ul><ul><ul><li>Safe deposit facilities </li></ul></ul><ul><ul><li>Trust services </li></ul></ul><ul><ul><li>Loan & credit cards </li></ul></ul><ul><ul><li>Mortgages </li></ul></ul><ul><ul><li>Electronic banking </li></ul></ul><ul><ul><li>Investment department </li></ul></ul><ul><ul><li>Commercial bank offered most of the services compared to other financial institutions </li></ul></ul>
  14. 14. Financial Services (cont.) <ul><ul><li>Checking account </li></ul></ul><ul><ul><li>Checks acts as a substitute for cash in financial transactions </li></ul></ul><ul><ul><li>More convenient & less risk of loss </li></ul></ul><ul><ul><li>Savings account </li></ul></ul><ul><ul><li>Accounts where person deposits money </li></ul></ul><ul><ul><li>Flexibility in withdrawal at the convenience of the depositor </li></ul></ul><ul><ul><li>Benefits in terms of security of money deposited & interest incurred </li></ul></ul>
  15. 15. Financial Services (cont.) <ul><ul><li>Safe deposit facilities </li></ul></ul><ul><ul><li>Safe deposit boxes provide the best security for valuable items & documents, on a yearly rental basis </li></ul></ul><ul><ul><li>At the time the box is rented, the person signed a signature card & got a key to the box </li></ul></ul><ul><ul><li>Access to the box is permitted to those signed the card & who has the key. The bank will have another key. To allow entry to a box needs a combination of two keys </li></ul></ul><ul><ul><li>Trust services </li></ul></ul><ul><ul><li>Offer a trusted custodian of money or property services </li></ul></ul>
  16. 16. Financial Services (cont.) <ul><ul><li>Loan & Credit card </li></ul></ul><ul><ul><li>Credit offered to individuals </li></ul></ul><ul><ul><li>Cash-loan: personal loans, advance from credit card taken from the bank issuing the credit card </li></ul></ul><ul><ul><li>Credit-purchase: hire-purchase loan, purchasing using credit card </li></ul></ul><ul><ul><li>The credit card companies make arrangement with the banks for the banks to offer their credit card to bank‘s clients </li></ul></ul><ul><ul><li>Mortgages </li></ul></ul><ul><ul><li>Loan for obtaining property or real estate (home, land) </li></ul></ul><ul><ul><li>Need collateral of the property </li></ul></ul>
  17. 17. Financial Services (cont.) <ul><ul><li>Electronic banking </li></ul></ul><ul><ul><li>Automated teller machine (ATM) – withdrawal, deposit, loan repayment, transfer of money using a plastic card. Fee would be charged if the card is used at a different bank than the issuer bank </li></ul></ul><ul><ul><li>Internet banking </li></ul></ul><ul><ul><li>Investment department </li></ul></ul><ul><ul><li>Banks also invest part of their money in hig-quality government & corporate bonds </li></ul></ul><ul><ul><li>Securities offered through banks are more convenient & less costly than through stock brokerage firms </li></ul></ul>
  18. 18. Financial Services (cont.) <ul><ul><li>Islamic Banking </li></ul></ul><ul><ul><li>refers to a system of banking that is consistent with Islamic Law ( Sharia’ ) principles & guided by Islamic economics </li></ul></ul><ul><ul><li>Islamic law prohibits usury, i.e. the collection & payment of interest, also commonly called riba </li></ul></ul><ul><ul><li>Islamic law also prohibits investing in businesses that are unlawful, or haram (such as businesses that sell alcoholic drinks, or business that are contrary to Islamic values) </li></ul></ul>
  19. 19. Financial Services (cont.) <ul><ul><li>Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Syariah, that is Fiqh al-Muamalat (Islamic rules on transactions) </li></ul></ul><ul><ul><li>The basic principle is the sharing of profit & loss and the prohibition of riba (usury) </li></ul></ul><ul><ul><li>Most common Islamic concepts: </li></ul></ul><ul><ul><ul><li>safekeeping ( Wadiah ) </li></ul></ul></ul><ul><ul><ul><li>cost plus ( Murabahah ) </li></ul></ul></ul><ul><ul><ul><li>profit sharing ( Mudharabah ) </li></ul></ul></ul><ul><ul><ul><li>joint venture ( Musharakah ) </li></ul></ul></ul><ul><ul><ul><li>leasing ( Ijarah ) </li></ul></ul></ul>
  20. 20. Financial Services (cont.) <ul><li>Wadiah (Safe-keeping) </li></ul><ul><li>The bank is a keeper & trustee of funds </li></ul><ul><li>Funds deposited in the bank are guaranteed by the bank to refund the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it </li></ul><ul><li>The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank </li></ul><ul><li>The bank compensates depositors for the time-value of their money (i.e. pays interest) but refers to it as a gift because it does not officially guarantee payment of the gift </li></ul>
  21. 21. Financial Services (cont.) <ul><ul><li>Murabahah (cost plus) </li></ul></ul><ul><ul><li>In an Islamic mortgage transaction, instead of loaning the buyer money, a bank buy the item from the seller, and re-sell it to the buyer at a profit, & the buyer pay to the bank in installments </li></ul></ul><ul><ul><li>No additional penalties charged for late payment as profit cannot be made explicit </li></ul></ul><ul><ul><li>To protect itself against default, strict collateral is needed </li></ul></ul><ul><ul><li>The asset (home or land) is registered to the name of buyer from the start of the transaction but mortgaged to the bank </li></ul></ul><ul><ul><li>Loans for vehicles are handled in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid) </li></ul></ul>
  22. 22. Financial Services (cont.) <ul><ul><li>Murabahah (cost plus) (cont.) </li></ul></ul><ul><li>The purchase & selling price, other costs, and the profit margin is stated at the time of the sale agreement </li></ul><ul><li>The bank is compensated for the time value of its money in the form of the profit margin </li></ul><ul><li>It’s a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin </li></ul><ul><li>The asset remains as a mortgage with the bank until the Murabahah is paid in full </li></ul>
  23. 23. Records <ul><li>Principal records most people should maintain </li></ul><ul><li>Income statement </li></ul><ul><ul><li>Summary of income & expenses for selected time period </li></ul></ul><ul><ul><li>Provides 1st important step in financial planning & budgeting </li></ul></ul><ul><li>2. Balance sheet </li></ul><ul><ul><li>Listing of assets & liabilites that determine the financial worth </li></ul></ul><ul><ul><li>Summary of a person‘s financial condition </li></ul></ul>
  24. 24. Records (cont.) <ul><li>3. Personal inventory </li></ul><ul><ul><li>Compilation of personal possessions, listing such factors as date of purchase & original cost </li></ul></ul><ul><ul><li>Birth certificate </li></ul></ul><ul><ul><li>Marrige license </li></ul></ul><ul><ul><li>Will‘s document </li></ul></ul><ul><li>4. Tax records </li></ul><ul><ul><li>Consist of income data & list of deductions of income during the year </li></ul></ul><ul><ul><li>Copies of previous tax return </li></ul></ul>
  25. 25. Records (cont.) <ul><li>5. Homeownership records </li></ul><ul><ul><li>Record on purchasing of home or other property, documents on mortgage loan </li></ul></ul><ul><li>6. Insurance records </li></ul><ul><ul><li>Policies documents, schedule of policy due dates, the insurance annual statement </li></ul></ul><ul><li>7. Banking records </li></ul><ul><ul><li>Accounts book, bank statement, credit card bill, checking accounts, bank transactions </li></ul></ul>
  26. 26. Records (cont.) <ul><li>8. Investment records </li></ul><ul><ul><li>Record of sales & purchases of investment – stock, bond, unit trust </li></ul></ul><ul><ul><li>Retained for tax purposes </li></ul></ul><ul><ul><li>Helped evaluating the investment </li></ul></ul><ul><li>9. Working file </li></ul><ul><ul><li>documents such as bills –utility bills </li></ul></ul><ul><ul><li>worksheets for family budget </li></ul></ul>