1

University of Technology and Applied Sciences

Business Studies Department
Sultanate of Oman

FINANCIAL INSTITUTIONS AND

SERVICES
Semester 1
AY 2021 - 2022
Goal:

To introduce the students to the wider

financial services sector and its component
institutions. Also, it will equip students with
knowledge of the wide range of financial
institutions currently available and their main
functions
Objective:

At the end of the semester, the course

will enable students to understand the
roles, characteristics, and operations of
financial institutions. The course
Course Learning Outcomes:
1. Recognize the terminology of finance and the financial
matters
2. Identify the role of non-bank and bank institutions in
money and capital markets
3. Analyze the financial markets within a framework of
flow of funds accounts.
4. Recognize the functions of the financial markets in
providing the link between saving and investments.
5. Analyze these functions within the context of the
suppliers of loanable funds and the demanders for
loanable funds.
6. Identify the role of non-bank financial intermediaries
and their financial instruments.
 Course Requirements:
■ FINANCIAL INSTITUTIONS AND
SERVICES( BAFI2210)
■ Pre-requisite :Financial Management
(BAFI 2109)
■ Passing Grade: C- (60 Marks)
 CHAPTER -1
FINANCE AND FINANCIAL MATTERS

Course: Financial Institutions and Services

Course Code: BAFI 2210
Specialization: Departmental Course
Department of Business Studies
Outcome : 1
Recognize the terminology of Finance and Financial Matters

■ Contents
- Meaning of Finance
- Core Principles of Finance
- Types of Finance
- Financial System and its 5 components
o 1. Money
o 2. Financial Institutions
o 3. Financial Markets
o 4. Financial Instruments
o 5. Central Bank
- 5 Core principles of Money and Banking
- Other Terms of Finance:
• Credit
• 5 Cs of Credit
7
I. Definition of Finance: Money and
funds
It is the art and science of managing
money. ( Khan and Jain)
“The Science on study of the
management of funds’ which includes:
circulation of money, granting of credit,
making of investments, and the provision
of banking facilities” (Webster’s Ninth
New Collegiate Dictionary)

8
II. Core Principles of Finance:
1. The Investment Principle:
determines where
businesses invest their
resources. Invest in assets
and projects that yield a
return greater than the
minimum acceptable
hurdle rate.
9
 Core Principles of Finance:

2. The Financing Principle:

Choose a financing mix
(debt and equity) that
maximizes the value of
the investments made and
match the financing to
nature of the assets being
financed.
10
3. The Dividend Principle: Core Principles of Finance:
■ It answers the questions: How much are the earnings of
how much earnings should investment?
be reinvested back into the
business? and how much
returned to the owners of
the business?
■ If there are not enough
investments that earn the
hurdle rate, return the cash
to the owners of the business
in the form of dividends. 11
III. Types of Finance:

12
Types of Finance:
■ 1. Private Finance - includes the Individual,
Firms, Business or Corporate Financial
activities to meet the requirements.
■ 2. Public Finance - which concerns with
revenue and disbursement of Government
such as Central Government, State
Government and Semi-Government Financial
matters. 13
 IV. Definition of Financial System:
• channels household savings to the corporate
sector and allocate investment funds among
firms;
• allows inter-temporal smoothing of
consumption by households and
expenditures by firms;
• enables households and firms to share risks.
14
Flow of Funds in Financial System

15
IV. Five Components of Financial System:

1. Money
2. Banking and Financial Institutions
3. Financial Instruments
4. Financial Markets
5. Central Banks

16
1. Money Flow of Funds in
Financial System

■ Money - is defined as anything

that is generally accepted in
payment for goods and services
or in the repayment of debt.
■ Primary Functions of Money:
– 1.1 Medium of exchange
– 1.1 Measure of value
17
 Money and its uses
1. Money
1. Primary Functions of Money:
• 1. 1 . Medium of exchange
• 1. 2. Measure of value
2. Secondary Functions of Money:
• 2. 1. Standard Deferred Payment
• 2. 2. Transfer of Value
• 2. 3. Store of Value
3. Contingency Functions of Money:
• 3. 1. Measurement and distribution of National Income
• 3. 2. Equalization of Marginal Utilities
• 3. 3. Basis of Credit System
• 3. 4. Transformation of Savings into Investments
• 3. 5. Encouragement of division of labor
• 3. 6. Perfectly liquid of all Assets 18
 2. Banking and Financial Institutions
• channel funds from individuals with surplus funds
to those desiring funds but have shortage of it.
• allow individuals to earn a decent return on their
money while at the same time avoiding risk;
• Examples are: banks, insurance companies,
finance companies, investment banks, mutual
funds, brokerage houses.
19
3. Financial Instruments
• “Securities” - financial instruments that
are traded on financial markets.
• a formal obligation that entitles one
party to receive payments and/or a
share of assets from another party; e.g.,
loans, stocks, bonds.
20
4. Financial Markets
- It is a market in which financial assets
(securities) such as stocks and bonds can be
purchased or sold.
- Funds are transferred here when one party
purchases financial assets previously held by
another party.
- It facilitates the flow of funds and thereby
allow financing and investing by households,
firms and government agencies. 21
5. Central Banks
• It is a governmental body that regulates
financial institutions, controls the supply of
money and credit in the economy, handles the
government's finances, and serves as the bank
to commercial banks.
• It is the "lender of last resort" to
commercial banks in times of crisis.
Commercial banks deposit to the central
bank as part of Legal Reserve Requirement. 22
 Central Bank

23
Two (2) Main Policies of Central Banks:
■ 1. Monetary policy is the management of the
money supply and interest rates.
■ 2. Fiscal policy- involves decisions about
government spending and taxation.
- Budget deficit is the excess of expenditures
over revenues for a particular year
- Budget surplus is the excess of revenues
over expenditures for a particular year
24
 V. Five Principles of Money and Banking:
■ 1. Time has value.
■ 2. Risk requires compensation. (the
higher the risk, the higher the return)
■ 3. Information is the basis for
decisions
■ 4. Markets set prices and allocate
resources
■ 5. Stability improves welfare (i.e.,
well-being). Money and Banking
25
 Five Principles of Money and Banking:
1. Time has value
■ For Example: A client applied for a car loan and bank
offered an interest rate of 5% for a loan of O.R. 9,000
to be paid in 5 years (60 monthly equal installment)
■ Interest = Prt (9000 x .05x5 = 2,250 + 9000 = 11, 250/
60 months = 187. 50
■ Total Amount borrowed: 9,000
■ Total Amount paid: 11, 250
■ Total Interest: 2, 250 (compensation of the lender for
the time the borrower is using the funds)
26
VI. Other Terms in Finance:
1. What is Credit ?
It is a contractual
agreement in which the
borrower receives
something of value now
and agrees to pay the
lender at some date in
the future with an
interest. 27
 Five C’s of credit:

28
Five C’s of credit:

29
Essential Readings
Agarwal, Prateek , “The Financial System, The Five Parts to the Financial System.
https://www.intelligenteconomist.com/financial-system/ , and “ The Five Principles of Money
and Banking” https://www.intelligenteconomist.com/principles-of-money-and-banking/

Recommended Readings
ProQuest Resources:
Andoh, Samuel K.. Essentials of Money, Banking and Financial Institutions : With Applications
to the Developing World, Lexington Books, 2014.ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/momp/detail.action?docID=1832599.. (Money and
Interest)

2. Paramasivan, C.. Financial Management, New Age International, 2009. ProQuest Ebook
Central, https://ebookcentral.proquest.com/lib/momp/detail.action?docID=437705. (Finance
and Types of Finance, Financial System)

Open Educational Resources:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/background/cfin.htm ( 3 Core Principles of Finance)
https://www.intelligenteconomist.com/financial-system/ (Financial system)
https://www.intelligenteconomist.com/principles-of-money-and-banking/ (5 Components of Money and Banking)

30
 CHAPTER-2
FINANCIAL INSTITUTIONS

Course: Financial Institutions and Services

Course Code: BAFI 2210
Specialization: Departmental Course
Department of Business Studies
Outcome -2: Identify the role of non-bank and bank
institutions in money and capital markets
Contents:
Financial Institutions
Bank Financial Institutions: Commercial Banks, its seven ( 7 ) functions and
services:
Non- Bank Financial Institutions:
1. Insurance
2. Investment Bank
3. Investment Companies
4. Credit Cooperatives
5. Savings and Loans Association
6. Brokerages
Role of Nonbank and Bank Institutions on Money and Capital Markets
2
Essential Readings
■ ProQuest Resources:
■ Machiraju, H.R.. Modern Commercial Banking, New Age International, 2008. ProQuest Ebook
Central, https://ebookcentral.proquest.com/lib/momp/detail.action?docID=405876.
■ Andoh, Samuel K.. Essentials of Money, Banking and Financial Institutions : With Applications to
the Developing World, Lexington Books, 2014.ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/momp/detail.action?docID=1832599.Created from momp
on 2019-04-23 02:52:21.
■ S. R. Diacon and R.L Carter “ Success in Insurance” 3rd Edition, Printed and Bound in Great
Britain by Biddles Ltd., Guildford and King’s Lynn, 1992, ISBN 0 -7195-5174-9 ( pages: 1-9)

Recommended Readings:
http://www.preservearticles.com/201104115277/7-main-functions-of-a-
commercial-bank.html
Open Educational Resources:
https://www.moneyadviceservice.org.uk/en/articles/overdrafts-explained
https://guichet.public.lu/en/entreprises/gestion-juridique-
comptabilite/facturation/paiement/lettre-de-change.html
3
I. Definition of Financial Institutions:
• an establishment that conducts
financial transactions such as
investments, loans and deposits.
• providing various services to
the economic development
with the help of issuing financial
instruments.
• Financial institutions can be
classified into banking and non-
banking institutions. 4
 Financial Institutions:

5
 I. BANKING
FINANCIAL INSTITUTIONS

6
II. Banking Institutions:
• Play a major role in the field of
savings and investments of money
from public sector and lending
loans to the businessmen.
• The Banking Regulation Act, 1949,
defines banking as : accepting
deposits from the public for the
purpose of lending or investment,
repayable on demand or
otherwise and withdrawable by
cheque, draft, order otherwise. 7
II. Banking Institutions:
■ Two Categories of Banking Institutions:
1. Commercial bank- (deposits mobilization and
disbursers of finance)
2. Cooperative Bank – (holds deposits, makes loans
and provides other financial services to
cooperatives and member-owned organizations)

8
Commercial Banks: Functions and Services

9
Commercial Banks: Functions and Services
■ 1. Accepting deposits
■ 2. Giving loans
■ 3. Overdraft
■ 4. Discounting of Bills of Exchange
■ 5. Investment of Funds
■ 6. Agency Functions
■ 7. Miscellaneous Functions
10
1. Deposit

How much are the

earnings of my deposit?
11
Types of Deposits

12
2. Loans

How much are the

earnings of investment?
13
Types of loans

14
3. Over-Draft:

15
3. Over-Draft:
• It is a debt. It means using money that’s being
loaned by bank.
• Interest can be more: 15- 20 % annually except
additional fees
• Banks advance loans to its customer’s up to a
certain amount through over-drafts, if there are
no deposits in the current account.
• banks demand a security from the customers
and charge very high rate of interest. 16
3. Over-Draft: ( types of Overdrafts)
Authorized
–
overdrafts:
• – are arranged in advance.
• the borrower agreed a borrowing limit with the bank
• The borrower can spend up to that limit through all the
normal payment methods.
Unauthorized overdrafts:
• known as ‘unplanned’ or ‘unarranged’ overdrafts.
• client spends more than what he has in his bank account
without agreeing it in advance.
• It can also happen if bank has agreed an overdraft for
client but he went over the limit they’ve set. 17
4. Discounting of Bills of Exchange
How bill of exchange works?

18
 Discounting of Bills of Exchange
• Most prevalent and important method of advancing
loans to the traders for short-term purposes.
• Under this system, banks advance loans to the traders
and business firms by discounting their bills.
• In this way, businessmen get loans on the basis of
their bills of exchange before the time of their
maturity.
• A bill of exchange is a bill whereby a creditor asks
his/her/its debtor to pay a specific sum to a
designated person by a specific due date 19
Parties involved in Bill of Exchange:
1. Drawer- is the party that issues a bill of
exchange – the 'creditor';
2. Drawee - is the party to which the order to
pay is sent - 'the debtor‘, becomes acceptor
when he/she/it has written the acceptance on
the bill of exchange.
3. Beneficiary or payee - is the party to which
the bill of exchange is payable;
20
21
5. Investment of Funds

22
5. Investment of Funds
• Banks invest their surplus funds to government
securities like Treasury bills (T-bills) and National
Savings Certificates.
• channels the funds of surplus economic units to those
wanting to spend on real capital investments.
• transferred funds through lending by banks or by
creation of financial liabilities such as bonds and
equity shares.
23
 Investment of Funds
• Banks intermediate by obtaining the funds of
savers in exchange for their own liabilities
such as entries in a pass book and then in turn
make loans to others.
• Financial intermediaries including banks buy
and sell the right to future payments. Banks
collect deposits from savers by offering
interest and other features that meet
customers’ needs better than alternative uses
of funds.
24
6. Agency Functions
–

25
Agency Functions
• Collect cheques, drafts, bills of exchange and
dividends of the shares for their customers.
• Makes payment for their clients and at times accept
the bills of exchange: of their customers for which
payment is made at the fixed time.
• Pays insurance premium of their customers. Besides
this, they also deposit loan installments, income-tax,
interest etc. as per directions.
• Purchases and sells securities, shares and debentures
on behalf of their customers
• Arrange to send money from one place to another for
the convenience of their customers.
26
6. Miscellaneous Functions of the Banks
•Make arrangement of lockers for the safe
custody of valuable assets of their customers
such as gold, silver, legal documents etc.
•Banks give reference for their customers.
•Banks collect necessary and useful statistics
relating to trade and industry.
• For facilitating foreign trade, banks undertake
to sell and purchase foreign exchange.
27
 Miscellaneous Functions of the banks

•Advise their clients relating to investment

decisions as specialist
• Make under-writing of shares and debentures.
• Issue letters of credit.
• During natural calamities, banks are highly
useful in mobilizing funds and donations.
• Banks provide loans for consumer durables like
Car, Air-conditioner, and Fridge etc. 28
 II. Non- Banking
Financial Institutions

29
II. Definition of Non- Bank Financial Institutions:
• Non-depository financial institutions include financial
intermediaries : finance companies, insurance
companies, mutual funds and pension funds.
• provides insurance coverage, provision of financing
(such as installment loans to individuals and
businesses)
• assisting in the transactions of securities such as
buying and selling of bonds and stock by investors.
30
Non- Bank financial Institutions:
1. Insurance Companies
2. Investment Bank
3. Investment Companies
4. Credit Cooperatives
5. Savings and Loans Association
6. Brokerages
31
 1. Insurance Companies
• An arrangement by which one party
( an insurer) promises to pay the
(insured or policy holder) a sum of
money if something happens to the
policy holder.
• The insurer will have the responsibility
of paying the losses of the policy
holder but the latter has to pay a
policy premium (price of the
insurance) as agreed between them. 32
 Insurance Companies
• The main role is to provide
policyholders (individual/ company)
with some form of protection against
an adverse or unfavorable occurrence
of event. (risks)
• By receiving payments (premiums)
from those seeking coverage for risks,
it promises to pay a policyholder or
their beneficiaries a specified amount Protection
if such an event occurs. against risk
33
Classification of Insurance

■Life Insurance
■Nonlife Insurance

34
Life Insurance
■ Definition
The term life insurance implies the type of
insurance that covers the risk of life and
provides a guarantee to compensate by
paying the specified sum, either on the death
of the insured or after the specified period.

35
 Three Types of Life Insurance
■ Whole life assurance: In whole life assurance, the
amount of the policy is paid only on the death of the
insured, to the nominee or the legal heir of the insured.
■ Term life assurance: In term life assurance, the policy
amount is paid to the nominee, if the insured passes
away before the expiry of the specified term, or to the
insured himself, on the maturity of the term.
■ Annuity: When the term of the policy expires, the
payment of the policy amount is paid to the holder
periodically, as long as the insured is alive.
36
General Insurance
■ Definition
General insurance or otherwise known as non-
life insurance or property and casualty
insurance, is a contract that covers any risk
apart from the risk of life. The insurance is to
safeguard us and our property, such as home,
car, and other valuables from fire, theft, flood,
storm, accident, and earthquake and so on.
37
Types of General Insurance
■ Fire insurance: The insurance covers the risk of loss
to the property due to fire.
■ Marine insurance: The insurance covers the risk
associated with loss due to a marine adventure, like
sinking, stranding and collision of the ship, caused to
the ship or cargo owner.
■ Health insurance: It covers the risk of the health of
the policyholder or his/her family members from
accident or disease.
38
 Types of General Insurance

■ Home insurance: The insurance of home and its

contents from any uncertainty.
■ Motor insurance: The insurance of vehicles is
covered under motor insurance, which is divided
into two heads, i.e. two-wheeler insurance and four-
wheeler insurance.

39
 LIFE INSURANCE Vs GENERAL INSURANCE
■ The insurance contract, in which the life risk of an
individual is covered, is known as life insurance. As
opposed, the insurance, which is not covered under life
insurance and includes various types of insurance, i.e. fire,
marine, motor, etc. is general insurance.
■ Life insurance is nothing but an investment avenue. On
the contrary, general insurance is a contract of
indemnity.
■ Life insurance is a long-term contract, which runs over a
number of years. Conversely, general insurance is a short
term contract, which needs to be renewed every year. 40
 Life Insurance Vs General Insurance
■ In life insurance, the sum assured is paid, either on the
happening of the event or the on the maturity of the
term. As against this, in general insurance, the amount
of actual loss is reimbursed, or liability incurred will be
repaid on the happening of an uncertain event.
■ In life insurance, the premium is paid throughout the
life of the term. In contrast, in general insurance, one
shot payment of premium is made.
■ The component of saving is normally present in life
insurance but not in general insurance. 41
 Life Insurance Vs General Insurance
■ In life insurance, the insurable interest must be
present only at the time of the contract, but in
general insurance, the insurable interest must be
present, both at the time of contract and at the time
of loss.
■ Life insurance can be done for any value based on
the premium the policyholder willing to pay. Unlike,
general insurance the sum payable is confined to the
amount of loss suffered, regardless of the policy
amount.
42
Insurance Companies in Oman
National Insurance Companies
# Name of the Company Reg Date Company's Activities
1 Muscat Life Insurance Company 9/13/1999 All Types of Life Insurance
2 Muscat Insurance Company 4/27/1995 All Types of General Insurance
3 Oman United Insurance Company 4/27/1998 All Types of General & Life Insurance
4 Dhofar Insurance Company 9/5/1989 All Types of General & Life Insurance
5 Al Ahlia Insurance Company 8/16/1998 All Types of General & Life Insurance
6 National Life Insurance Company 11/15/1995 All Types of Life Insurance
7 Oman & Qatar Insurance Company 8/25/2004 All Types of General Insurance
8 Royal & Sun alliance Insurance Company 5/4/2004 All Types of General Insurance
9 Falcon Insurance Company 9/14/2005 All Types of General & Life Insurance
10 Al Madina Gulf Insurance Company 7/12/2006 All Types of General & Life Insurance
11 Vision Insurance Company 10/1/2007 All Types of General & Life Insurance
43
Insurance Companies in Oman
Foreign Insurance Companies
Registration
# Name of the Company Company's Activities
Date
1 Axa Insurance Gulf (BSC) 7/15/1980 All Types of General & Life Insurance
2 New India Assurance Co. Ltd 7/15/1980 All Types of General Insurance
3 Arabia Insurance Co. Ltd 7/15/1980 All Types of General & Life Insurance
4 American Life Insurance Co. 7/15/1980 All Types of Life Insurance
5 Chartis Memsa Insurance Company 8/1/2007 All Types of General Insurance
6 Iran insurance Company 8/2/1980 All Types of General Insurance
7 Life Insurance Corporation (International) 12/14/2003 All Types of General Insurance
Oman Insurance Company - Oman
8 12/15/2007 All Types of General & Life Insurance
Branch
9 Lebanese Insurance Company 11/6/2008 All Types of General Insurance

44
 2. Investment Banks :
■ It is a financial intermediary that performs services
for businesses and some govt like:
• Underwriting (raise capital from investor in behalf
of corporations issuing securities)
• Making markets
• Facilitating mergers, reorganizations, & acting as
broker for institutional clients.
• Provide research and financial advisory services
to companies.
45
 Investment Companies:
• a corporation or a trust through
which individuals invest in
diversified, professionally
managed portfolios of securities
by pooling their funds with those
of other investors.
• Here, an investor can purchase
securities indirectly through a
package product like a mutual
fund.
46
 List of some Investment Companies in Oman
1. Dhofar International investment and International
Holding Company- largest investment companies in
Oman; its main activity is investment in all economic &
business sectors including new projects & existing activities;
quoted on the Muscat Securities Market
2. Oman Investment Fund- founded to invest in long &
medium-term projects within & outside Oman; portfolio
includes real estate & private equity assets across travel &
leisure, financial services, utilities, media, telecom
infrastructure etc
47
 List of some Investment Companies in Oman
3. Takamul Investment Company-formed in 2006 to support
Oman's industrial sector; promotes & invests in value-added
economically viable projects that feed off local upstream
industries
4. Financial Services Company (SAOG)- Investment &
brokerage company based in Muscat, with a branch in
Salalah; acts as portfolio manager, issue manager &
underwriter; listed on the Muscat Securities Market & licensed
by the Capital Market Authority
5. Al Yousef Group (AYG) – related in oil and gas, financial
services and real estate.
48
 4. Savings and Loans Associations (S&Ls)
• Traditional S&Ls take deposits from small customers and
use the deposit to make loans to borrowers. The difference
between the deposit rate and the lending rate constitutes
a profit for the institution.
• Several S&Ls in the United States run into financial
difficulties because they used the deposits (mostly short-
term in nature) to make long-term loans with fixed
interest rates in the form of mortgages. So, following a rise
in interest rates, refinancing the deposits became more
expensive (because of the higher interest rates) while
interest payments from the fixed mortgage loans
remained very low. 49
5. Credit Unions
• It is formed on the basis of associations in
which the members have a common
affinity.
• Members could be teachers and nurses, or
residents of a particular district or region in
a country. Membership is not open to the
public and there is membership fee.
• savings (deposits) made by the members
are used to make loans with reasonably
low interest rates to only members of the
union and offer higher rates on deposits,
there is patronage refund.
• always organized as not-for-profit
cooperatives. 50
 ■ Credit Unions
Established in Germany in 1850’s -1860
based on cooperative (caring for others,
principles founded by Hermann Schulze-
Delitzsch, developed further by Raiffensen Hermann Schulze- Delitzsch

approach which focus on microfinance.

Most successful credit union today: Navy
Federal Credit Union (USA)more than 5
million members(US armed forces, govt
employees) with very low interest rate on
loans, with 223 branches and 450 atms 51
6. Brokerages

52
Brokerages
• They act as an intermediary between buyers
and sellers to facilitate securities transactions.
• They are compensated via commission after
the transaction has been successfully
completed.
• For example, when a trade order for a stock
is carried out, an individual often pays a
transaction fee for the brokerage company's
efforts to execute the trade
53
Brokerages
■ Brokerage can be:
• full service brokerage -provides investment
advice, portfolio management and trade execution,
here a high level of service, customers pay significant
commissions on each trade.
• Discount brokerage - allow investors to perform
their own investment research and make their own
decisions, brokerage still executes the investor's
trades, its trade commissions are
54
55
Kinds of Brokerage Account:
1. Cash Management Account investor must pay within 3
days either by cash, personal checks or credit cards on the
settlement date including
2. Margin Account- allows investor to buy securities
borrowed from brokers. The Federal Reserve limits up to
50% of the amount invested, the brokerages charge low
interest on margin loans to encourage inventors to buy
on margin price of security and commission of broker.
3. Discretionary Account- it permits the broker to buy and
sell shares for the investor without first contacting the
investor for approval.
56
III. ROLE OF NONBANK AND BANK
INSTITUTIONS ON MONEY AND
CAPITAL MARKET
 INTERMEDIATION
 BROKERAGE AND ASSET TRANSFORMATION

57
 1. INTERMEDIATION
■

• Commercial banks are the most important financial

intermediaries accounting for about 66% of total
assets of financial system,
• funds or savings of the surplus sectors are channeled
to deficit sectors

58
 Intermediation

• They have a comparative advantage among other

intermediaries in the provision of liquidity and
payment services, credit supply and information
services..
• Non- Banks transfer Funds through lending or by
creation of financial liabilities such as bonds and
equity shares.

59
60
 2. Brokerage and Asset Transformation
• Brokerage function brings together lenders and borrowers
and reduces market imperfections such as search,
information and transaction costs.
• The asset transformation activity is provided by institutions
issuing claims against themselves which differ from the
assets they acquire.
• Mutual funds, insurance companies, banks and depository
institutions undertake size transformation by providing
many depositors with a share of a large asset or issuing
debt type liabilities against equity type assets. 61
 Brokerage and Asset Transformation

• While providing asset transformation, financial firms

differ in the nature of transformation undertaken
and in the nature of protection or guarantees which
are offered.
• Banks and depository institutions offer liquidity,
insurance against contingent losses to assets and
mutual funds against loss in value of assets.

62
63