UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF FINANCE

FN201: Introduction to Financial Services

Godsaviour Christopher
(Bcom – Udsm, MA Economics – Udsm)
 TOPIC ONE

An overview of the Finance, Financial

System, Financial Institutions and
Services

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 What is Finance?
In short Finance, studies and addresses the ways
in which individuals, businesses and
organizations raise, allocate and use monetary
resources over time, taking into account the
risks entailed in their projects.
The term finance may thus incorporate any of
the following:
Study of money and other assets
Management and control of those assets
Profiling and managing project risks
As a verb, "to finance" is to provide funds for
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business.
 Three interrelated area of
Finance
Money and capital markets which deals with
many of the topics covered in macro
economics
Investments, which focuses on the
decisions of individual and financial
institutions and all other institutions as they
choose securities for their investments
portfolios (allocation of fund) and
Managerial finance (business finance) which
involves the actual management of the firm.

In general all three areas are related.

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 Three interrelated area of Finance

The central goal of finance is the

relationship of risk and return. It reminds an
investor that there are no free lunches.
 For whatever decisions made there is trade-
off one has to make in term of the risks and
the returns.

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 What Financial Services?
Financial services is a term used to refer to the
services provided by the finance industry.
Financial services is also the term used to
describe services offered by organizations that
deal with the management of money.
Banks, investment banks, insurance
companies, credit card companies and stock
brokerages, are examples of the types of firms
comprising the industry, which provides a
variety of money and investment related
services.
Financial services Industry is the largest
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in
terms of earnings.
 Characteristics of Financial Services
Financial services shares with the “ General services”
the
following characteristics:
 Intangibility: refers to lack of substance i.e cannot
be touched, felt, tasted though it has tangible part
like insurance cover, chequebook etc.
 Perishability: Services expire as soon as produced,
service is produced face to face with consumer at
time of consumption and cannot be stored.
 Inseparability: Service cannot be separated from
the person who is the provider.
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 Characteristics cont….
 Heterogeneity: Services are heterogeneous
and cannot be standardized in anyway unlike
tangible products.
 Fiduciary responsibility: Financial service
providers have a great responsibility to their
customers in terms of quality, reliability and
safety of their product.
 Government Control: due to indirect
involvement into macroeconomics policy

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 Significance of Financial services in
the economy
The importance of financial services in an economy
and its regulation is manifested in the following
three central activities that are performed by
financial institutions:
• Financial Intermediation: Financial institution act
as a channel through which funds flow from
surplus unit to deficit unit.
• Credit creation: Provisional of credit to the public
• Uniqueness of financial service products: (they
are technically sophisticated and number of
financial services are long time in nature)
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 Nature of Financial Institutions

Financial Institutions are vital to the

economic well being and future growth of
the market-oriented economy.
Liabilities of financial institution are the
principal means of payment for goods and
Services.
Loans are chief source of credit.
Most rapidly growing component of global
economy –hence creating new jobs and
career opportunities.

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 What is a financial Institution?
 Is a business firm whose principal assets are financial
assets or claims stocks bonds and loans; instead of
real assets such as buildings, equipment and raw
materials.
 They provide financial services to the economy and
they are subject to regulations by the government
authority, worldwide.

 What do they do?

 Make loans to customer.
 Purchase investment securities in Financial
markets
 Offer insurance protections
 Sale of retirement plans.
 Provision of a mechanism for making payments and
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 Distinctions Between Financial Intermediaries
and Financial Institutions?
Financial Intermediaries: Do acquire IOU’s
issued by borrowers and sell their own IOU’s
to savers
E.g. Commercial bank accepts your savings
account or check account as a financial
asset (but a liability to the banker). The bank
can use these savings to make a loan
(Secondary Security) and other investments
by accepting primary securities.
Financial Institutions: Include all other
Financial Institution
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 Types of Financial Intermediaries
 Security Brokers: Act as bridge for buyers and
sellers of securities bringing the two together
to make a financial transaction (middlemen).
 Security Dealers: - They bring buyers and
sellers of securities together and also
purchase securities on their own accounts -
accept the risk anticipation to sell - not paid
commission - price difference is the profit/
loss made.
Both Dealers and Brokers provide the
essential service of creating a resale of
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 Financial Intermediaries…cont’d
 Investment Banks
Provide a conduit for offering new securities
in the global financial market place.
Investment banks do underwriting of new
issues of corporate securities (bonds and
stocks). - And government and local debt
securities. - Line up willing buyers and sell
the portfolio at higher or favorable price.
 Mortgage banks - acquire mortgage securities
arising from the construction of new homes,
apartments and place these mortgages with
long term lenders (insurance companies or
pension funds savings banks).
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Types of Financial Institutions

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 Depository and Non Depository
Intermediaries
 Depository –
Most of their secondary securities (so called
loanable funds) consist of deposits received
from businesses, households and
government. Included are Commercial
banks Savings and Loan Associations,
Credit and Savings banks.
 Non deposit - Contractual intermediary
Enter into contracts with customers to
promote savings and/or Financial protection
against loss of life or property. Included are
Insurance Companies and Pension funds.
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 Financial Institution and the Financial
System
• The financial system: is composed of a network
of financial markets, institutions, businesses,
households and governments that participate in
that system and regulate its operation.
• The primary function of any financial system is to
facilitate the allocation and deployment of
economic resources in time and space, in an
uncertain environment.
or The function is to facilitate efficient allocation
of capital and risk
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 Functions of the Financial
System:
 Main functions of the system is to:
 Transfer loanable funds from the lenders
(saving-surplus units) to the borrowers (saving
– deficit units).
That process is done by negotiations and
trading a wide array of the financial markets
that bring together buyers (borrowers - demand
funds) and sellers (savers - supply funds).
 Credit: supply credit to support the purchase
of goods and services, and to finance capital
investments
 Payments: Supply a mechanism for making
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payments in form of currency, check accounts,
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8 and other transaction media.
 Functions of Financial
Systems…Cont’d
• Money Creation: through the services of
supplying credit and providing a mechanism for
making payments, the financial system makes
possible the creation of money – (M1, M2 and
M3); increases or decreases of money supply.
• Savings:
 Provides a profitable outlet for savings
 Release surplus funds (scarce resources) to the
borrowers
 Savers earn income in form of interest, dividends,
capital gains, etc.
 When more funds are demanded, financial
system increases savers interest rates to
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FIs and F/System

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 Specialness of Financial Institution/
Functions
 Information Services: Agency costs – Actions
contrarily to the best interests of the savers.
 Liquidity Services: Offering liquid assets and
immediate cash items.
 Price – Risk reduction services: low price of the
securities
 Transaction Costs services: Reduced economies
of scale in information collection
 Maturity Intermediation services: Risk of
mismatching of maturities of assets and liabilities.

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 FI Specialness…………
 Money Supply Transactions (Banks): impact on
inflation.
 M1= Coins and notes
 M2= M1 + loanable funds
 M3= M2 + foreign currencies
 Credit Allocation: (Thrifts and Banks)
 Intergeneration Transfer: (Pension Funds, life
insurance) between Youth and Old age. Savers
ability to transfer wealth.
 Payment Services: (banks and Thrifts), checking
and wire transfer.
 Denomination Intermediation: (Mutual funds,
pension funds)

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 Financial Intermediation
 Types of Financial Intermediation
 Denomination intermediation
 Occurs when intermediaries accept small amounts
of savings from individuals and others and pool
those funds to make large loans extended
principally to corporations and government.
 Default - Risk intermediation
 Refers to the willingness of financial intermediaries
to make loans (primary securities) to risky
borrowers at the same time issue relatively safe
and liquid (secondary) securities in order to attract
loanable funds from savers.
 Maturity intermediation
 Refers to the practice of borrowing comparatively
short-term funds from savers and making long term
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3 commitment of funds.
 Informational Intermediation
Refers to the process by which
financial intermediaries substitutes
their skill in the market place for that
of the saver who frequently has neither
the time to stay abreast of market
developments nor access to relevant
information about market conditions
and opportunities.

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 Methods of Moving Loanable Funds
Direct extension of credit from
lenders to borrowers
Intermediation of Brokers and
Dealers (Semi-direct Finance)
Financial Intermediation
(Indirect Finance)

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 Areas of Management Decision making in
Financial Institution

 Management of assets, liabilities and Capital

 Yield on the asset, liabilities and capital
 Differences between average yield on assets and its
cost of debt or equity capital is known as its spread or
Net Interest margin.
 Negative spread: interest on the savings is greater that
interest on lending.
 Positive spread: Interest on the savings is less than
interest on lending.
 Positive spread is needed for the institution to remain
in the business in the long run.
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 Decision making in FIs
 Risks Involved: Liabilities (Deposits) and assets (Loans).
 Liquidity: Cash out i.e. not able to pay demand for cash
(withdrawals)
 Insolvency: In ability to cover the intermediary’s debt in
the long run. Market value of the financial assets is less
than the market value of the liabilities; hence technically
insolvent.
 Capital: Management of capital or net worth (owner’s
investments. It involves the maximum use of financial
leverage. Case of Twiga Bancorp (Oct 28, 2016)
 Expenses Control: Increasing profitability and revenues
as compared to expenses.
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7  Marketing Policy: Pricing of financial services offered to
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 Reading
Assignment

1. Evolution of Financial System in Tanzania

from Colonial Period until to date

2.Read about Bank of Tanzania (Its Role and

Functions)

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 Thank you

End of Topic One

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