This document provides 15 questions to guide students and teachers in their study of non-banking financial business according to the syllabus. Each question has 4 sub-questions that will be awarded 5 marks each, for a total of 20 marks per question. Answers should be concise and provided in point form rather than lengthy essays. The questions cover a wide range of topics related to non-banking financial institutions, regulations, products, and risks.
1. INSTITUTE OF BANKERS OF SRI LANKA
Intermediate in Applied Banking and Finance (IABF)
Non-Banking Financial Business - Guidance Questions
a) The questions below are provided to guide students and teachers in their studies
on the subject as per the syllabus.
b) Each question will carry 20 marks distributed as 5 marks for each sub-question.
c) It is expected that about 30-35 minutes will be taken to answer a question.
d) Precise answers are expected in points. Detailed essay typed long answers are not
expected.
1. In the financial system, there are several categories of non-banking financial
institutions with several business models and this sector as a whole is known as
shadow banking. Answer the following questions:
i. What are the two key differences between banks and non-banking financial
institutions in Sri Lanka?
ii. List any two categories of non-banking financial institutions and brief the
major business line of each category.
iii. List any three categories of non-banking financial institutions which are
considered as financial intermediaries and reasons for such consideration.
iv. Why is non-banking financial sector considered as shadow banking?
2. Finance business in Sri Lanka is governed by the Finance Business Act No. 42 of
2011 (FBA) and a licence should be obtained to carry on finance business. Answer
the following questions:
i. Describe what is meant by finance business as per FBA.
ii. Who are the authorities involving in granting a licence for finance
business?
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iii. What are the key elements of criteria for taking a decision to grant a
licence?
iv. An entity "Gold Investment and Financial Services (Pvt.) Ltd." is carrying
on a business of financial consultancy without the relevant permission
obtained under the FBA. Is this a legally valid institution? Why?
3. There are several financial institutions facilitating the operations of the share
market in Sri Lanka and they provide varied services. Answer the following
questions:
i. What are the services provided by stock brokers?
ii. What is the importance of underwriters?
iii. What is the role of market intermediaries?
iv. How are money brokers different from stock brokers?
4. Finance leasing business provides a vital role to business activities in the economy
and is a regulated business under Finance Leasing Act. Answer the following
questions:
i. What is the nature of finance leasing business and its importance to the
economy?
ii. Who is the licensing authority for finance leasing business? Who are
eligible to apply for a licence?
iii. Briefly describe the major sources available to finance leasing institutions
to raise funds for their business operations.
iv. Outline the procedure set out in the Finance Leasing Act to be followed by
a lesser to recover the possession of leased equipment.
5. From time to time, several financial products are offered by various persons and
entities to canvass deposits from the public through various innovative systems to
circumvent the laws applicable to deposit-taking. Answer the following questions:
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i. What is the nature of a "deposit" as set out in the Finance Business Act?
Who are the categories of institutions authorised to accept deposits from the
public in Sri Lanka?
ii. What is the nature of unauthorised deposit-taking devices known as
"Pyramid Schemes?" Explain giving an example how these schemes raise
deposits without using the term “deposits”.
iii. What was the specific business model adopted by the recently failed
"Golden Key Credit Card Company" to mobilize deposits without the
authority? Why did it fail?
iv. Why are such unauthorised deposit-takers unsound and bound to fail sooner
or later? Explain three major reasons
6. Insurance companies carry on a business on accepting risks of other parties with
regard to specified risk events. However, despite such risk-taking, insurance
companies operate as profitable companies. Answer the following questions:
i. Outline the basic operational mechanism of conduct of insurance business.
ii. What is the difference between bank-assurance and re-insurance?
iii. How does the deposit insurance differ from the general insurance?
iv. Outline the statutory solvency margin and its importance as a prudential
measure.
7. In any financial system in the current world, a large number of institutions and
systems provide payment related services. Without such services, money may find
very difficult to function in the current world. Answer the following questions:
i. What is nature of business undertaken by card payment service providers?
ii. How does the factoring help banks and other credit institutions?
iii. List the four major payments and settlements systems operating in Sri
Lanka and outline operations of any one of them.
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iv. What is the common card switch introduced recently in Sri Lanka? What is
its importance to the payments system?
8. There are several statutes and regulatory authorities in respect of non-banking
financial businesses. Briefly outline the specific nature and the importance of the
following regulations to the safety and soundness of the relevant financial
institutions:
i. Finance Companies (Interest Rates) Direction
ii. Finance Leasing (Gearing Ratio) Direction
iii. Technical Reserve for general insurance business
iv. Maximum limit on broker credit
9. Non-banking financial institutions carry on the business of a few specialized
financial products to compete with the banks and such products are often involved
in high risks and high returns. State the major financial product affected by each
of the following changes and outline the risk to such product.
i. Decline in world market gold prices
ii. Significant rate of increase on tariff on vehicle imports
iii. Continuous decline in interest rates
iv. Decline in the property market
10. Finance companies sector as a whole is an important component of the financial
system. Further, this sector has a specific socio-economic importance. Therefore,
finance companies are highly regulated and supervised. Answer the following
questions:
i. Do you think that finance companies have specific socio-economic impact
considering the nature of customers and business of finance companies?
Give your reasons.
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ii. Outline the three components of minimum liquid asset requirement
imposed on finance companies and its specific importance to customers.
iii. Outline the two components of the risk-weighted capital adequacy ratio and
its importance to safety and soundness of finance companies.
iv. Outline the criteria given in the Direction on the provision for bad and
doubtful debts for classification of accommodation as non-performing and
provisioning rates for the specified categories of non-performing
accommodations and their importance to safety and soundness of finance
companies.
11. During the last five years, finance and leasing companies sector has been affected
by a crisis that erupted in 2008 in Sri Lanka. Answer the following questions:
i. Describe what was the primary cause of the above stated crisis on finance
and leasing companies.
ii. Describe the immediate outcome of the crisis to the finance and leasing
companies sector.
iii. Were there any closures of licensed finance and leasing companies due to
this crisis so far? Explain why?
iv. Explain the current policy initiative implemented by the Central Bank to
strengthen the finance and leasing companies sector and the rationale for
such policy initiative.
12. Primary dealers in government securities play a major role in the economy by
facilitating the government securities market and these primary dealers have
particular financial business model and regulatory system. Answer the following
questions:
i. Outline the key elements of business of the primary dealers in government
securities.
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ii. What are the specific funding sources used by these primary dealers to raise
funds for their business?
iii. Since government securities are virtually risk free in Sri Lanka, primary
dealers are also risk free institutions. Do you agree? Why?
iv. Outline the specific services provided by the Central Bank to these primary
dealers to facilitate their business operations.
13. Outline the specific importance and the nature of the following financial services
to the financial system and the economy:
i. Money Changing
ii. Co-operative Rural Banking
iii. Credit Rating
iv. Issue Management
14. It is argued that non-banking credit institutions are exposed to higher business
concentration risk due to specific nature of their businesses. Answer the following
questions:
i. What is meant by the concentration risk?
ii. What are the specific concentration risk areas faced by finance companies
and leasing companies?
iii. Outline the major regulation in place to limit the concentration risk
iv. Outline the specific risk management strategies available to mitigate the
concentration risk.
15. Finance Business Act contains several statutory provisions for action against
persons carrying on finance business or accepting deposits without authority.
Answer the following questions:
i. Who is the specific investigating authority for the above purpose and list
the major powers vested in this authority.
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ii. Who is the authority determining the above violation? What are the
immediate actions permitted to this authority consequent to determination
of the above violation?
iii. Outline the nature of the "Freezing Order" permitted to be issued during the
investigations.
iv. What is specific responsibility cast on media institutions with regard to
publication of deposits-soliciting advertisements?
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