Session 3

Contents

 Financial institutions
 Banks
 Accounts
 Payments methods
 Deposits
 Loans
 Mutual funds
Financial Institutions:
They are types of financial intermediaries that
collect money from savers and to invest it in
financial assets.

Bank Definition:
• Financial institution licensed to receive deposits
and make loans.
• They are intermediaries between depositors and
borrowers.

Bank Importance:
• Making loans.
• Safe place to store your cash.
• Investing your money.
• Transfer money from one place to another.

Types of Banks:
1- Commercial Banks:
• Provide consumers with basic banking services.
• Help create capital and liquidity in the market.
• Play an important role in boosting the economy.
• Such as: HSBC, CIB.
2- Investment Banks:
• They help individuals and businesses raise capital through the issuance
of securities.
• They are usually involved when a start-up company is launched for the
first time (IPO).
• Such as: BARCLAYS.

3- Central Banks:
• They are responsible for currency stability, controlling inflation,
monetary policy and overseeing a country's money supply.
• They are responsible for the oversight and management of all other
banks.
• Such as: Central Bank of Egypt.
What is an Account:
In banking, an account refers to an arrangement by which an
organization, typically a financial institution, accepts a
customer's financial assets and holds them on behalf of the
customer at his or her discretion.

Types of accounts:
1) Current accounts:
The most basic type of bank account is the checking
account. It’s where your pay check gets deposited,
where bills get paid from, and where you keep the
money they need to get too quickly.

2) Savings accounts:
A savings account is exactly what it sounds like: a place
to put your money that you want to save. It’s a great
spot for funds that you don’t need right away but want
to have nearby just in case. It’s good for: A first bank
account for kids or teens or an account for adults
looking for a place to earn interest on savings or park
cash they would otherwise be tempted to spend.
Payment Methods:

A. Cash: One of the most common ways to pay for

purchases. Both paper and coins are included under
the larger category of "cash". While cash has the
advantage of being immediate, it is not the most
secure form of payment since, if it is lost or
destroyed, it is essentially gone.

B. Debit card: A debit card is a payment card that deducts

money directly from a consumer's checking account to pay for
a purchase. Debit cards eliminate the need to carry cash or
physical checks.

C. Credit card: Paying with a credit card temporarily

delay the buyer's bill. At the end of each month, the buyer
receives a credit card statement with an itemized list of all
purchases. The company is authorized to charge interest
on the buyer's remaining balance if they exceed the grace
period.

D. Prepaid card: A prepaid card is not linked

to a bank checking account or to a credit union
share draft account. Instead, you are spending
money you placed in the prepaid card account
in advance. This is sometimes called “loading
money onto the card.
E. Checks: Is a paper form that is a written, dated, and signed
instrument used to transfer money from your bank account to
the person (or company) you named.

F. Swift Code (Bank Identification Code):

 SWIFT codes are a combination of various kinds of
letters and are used to identify the branch codes of
the banks. These codes are used as Bank Identifier
Codes (BIC).
 A SWIFT code is used to identify a particular branch
of a bank. These codes play an important role in
various bank transactions, especially when it comes
to international transactions.
 A SWIFT code may be of 8 to 11 digits and has the following
components:
 The first four characters are used as the bank codes.

 The next two characters are to describe or give the country code.
 The next two characters, these are used for location-based codes.

 The last three characters, and are optional are used to give details
about the branch code.
Deposits:
- A deposit is a financial term that means money held at a
bank. A deposit is a transaction involving a transfer of money
to another party for safekeeping.
- Deposit refers to the money an investor transfers into a savings or
checking account held at a bank or credit union.

Types of Deposits:
1) Time Deposit:
 A time deposit is an interest-bearing bank account that
has a pre-set date of maturity. The money must remain
in the account for the fixed term in order to earn the
stated interest rate.
 The longer the time to maturity, the higher the interest payment will
be.
 Its maturity starts from 7 days till 7 years.
Pros:
• Time deposits offer investors a fixed interest rate until maturity.
• Time deposits have various maturity dates and minimum deposit
amounts.
• Time deposits pay a higher interest rate than regular savings accounts.
Cons:
• Depositors can't withdraw their money or else they would lose all of
the interest.
 2) Certificate of Deposit:
 A certificate of deposit (CD) is a deposit, a financial
product commonly sold by banks.
 CDs differ from savings accounts in that the CD has a specific, fixed
term (often one year to five years), usually, a fixed interest rate and what
penalties it applies for early withdrawal.
 Its maturity starts from 1 year or 5 years.
 You can’t withdraw your money before 6 months and if withdrawn
before the maturity. You will lose half of the interest.
3) Demand Deposit:
 A demand deposit is money deposited into a bank account
with funds that can be withdrawn on-demand at any time. The
depositor will typically use demand deposit funds to pay for
everyday expenses.
 For funds in the account, the bank or financial institution may pay either
a low or zero interest rate on the deposit.
 Types of demand deposit include savings account, checking account and
money market account.
[Important: Demand deposits and term deposits differ in terms of
accessibility or liquidity, and in the amount of interest that can be earned
on the deposited funds.]

Loans:
 A loan is when money is given to another party in exchange for
repayment of the loan principal amount plus interest.
 A loan is a form of debt incurred by an individual or other entity. The
lender—usually a corporation, financial institution, or government—
advances a sum of money to the borrower.
Types of loans:
1) Secured loans:
 Loans are backed by collateral. Lenders offer unsecured
personal loans against your vehicle, personal savings, or
any other valuable asset.
 Secured loans usually have a lower interest rate since
they’re considered to be safer than unsecured loans since
collateral can offset the risk of default.

2) Unsecured loans:
 Personal loans can be unsecured loans, which means
you’re not putting collateral like a home or car on the
line in case you default on your loan.
 Lenders approve unsecured personal loans based on
your credit score. A good credit score will make it easier
to get approved.

3) Consumption loan:
 A consumer loan is a loan given to consumers to finance
specific types of expenditures. In other words, a
consumer loan is any type of loan made to a consumer by
a creditor.
 The loan can be secured or unsecured.

4) Investment/productive loans:
An investment loan is a type of home loan that someone
takes out to buy an investment property. It is a mortgage
designed for those who want to buy a property and rent it
out to receive income from it, but can’t afford to buy the
property without a loan.
 5) Close-ended loan:
 A closed-end consumer loan, also known as instalment
credit, is used to finance specific purchases. In closed-end
loans, the consumer makes equal monthly payments over a
period of time.
 Such loans are generally secured.
 You can make additional principal payments and pay them off early, but
once paid you do not have access to the equity in the property that you
have purchased.

6) Open ended loan:

 An open-end consumer loan, also known as revolving credit,
is a loan in that the borrower can use for any type of purchases
but must pay back a minimum amount of the loan, plus
interest, before a specified date.
 Open-end loans are generally unsecured.
 These are loans that you can borrow over and over.


Mutual Funds:
 A mutual fund is a type of investment vehicle consisting of
a portfolio of stocks, bonds, or other securities, which
allows you to pool your money together with other
investors.
 Mutual funds give small or individual investors access to
diversified, professionally managed portfolios at a low
price. They invest in a vast number of securities, and attempt to produce
capital gains and/or income for the fund's investors.
  Characteristics:
1) Name
2) Capacity
3) Maturity
4) Units

Types of mutual funds:

1) Closed-ended: Close-ended funds are mutual fund schemes

that restrict entry into the scheme only during the offer period. It
has a specified amount of money. We can’t start investing until
we reach this amount of money. It has a maturity date, after a
certain period the investors take their money back. Also, it invests
in specific sectors agreed upon by the investors.

2) Open-ended: An open-ended scheme, as the name

explains, is ‘open’ for investors to enter or exit at any time. It
has no specified amount of money to start buying and selling
securities; we can invest money in it as long as it’s open.
Also, it has no specific period after which we can take our
money back (i.e., has no maturity date).

3) Inverted: We can say that it is a mix between the open and

closed ended types. It’s open as it has no specified amount of
money to start investing, but closed because it has a specified
period of time, after which you can withdraw your money back.
Advantages of MFs:

1) Risk Sharing: Reducing the exposure of risk by

distributing the losses among all investors.

2) Instant diversification: With one investment, you will

own shares of stock in many corporations. A mutual fund
portfolio combines a variety of stocks, bonds,
commodities and cash, mutual funds are, by nature,
diversified. If one stock or asset goes down, there will be
others that compensate for it. Meaning that losses are
spread out conservatively.

3) Professional Management: The money

accumulated in a mutual fund is managed by
professionals who decide on behalf of shareholders on
investment strategy. These professionals choose
investments that best match the fund’s objectives. Their
investment decisions are based on extensive knowledge
and research.

Disadvantages of mutual fund:

Management Fees: As it is managed by professionals, high
fees are taken from investors; however, higher fees do not
correlate with higher performance. In fact, many studies have
been done that show higher fees generally correlate to lower
performance.