Course outline

Management of Financial Institutions

CHAPTER 1-GENERAL INTRODUCTION: Chapter 2: Banking System
Introduction to Financial Institutions  Central Banking System
 Meaning and nature of financial  Evolution of Central Banking
institutions
 Types of financial institutions  Definition of a Central Bank
 Functions of financial institutions  Central Banking Functions
 Role of financial institutions  Credit Control Methods
 Monetary Policy & its Objectives
 Regulation of the financial system
 Central banking system in Ethiopia
 Commercial Banking system
 Definition of commercial banking
 Commercial banking services
 Domestic and international
banking operation
 Outline…
Chapter 3: BANKING AND THE MANAGEMENT
OF FINANCIAL INSTITUTIONS
 The Bank Balance Sheet
 General Principles of Bank
Management
 Liquidity Management and the
Role of Reserves
 Asset Management
 Liability Management
 Capital Adequacy Management
 Strategies for Managing Bank
Capital
• Chapter 4- ECONOMIC ANALYSIS OF
BANKING REGULATION
 Asymmetric Information and Banking
Regulation
 Restrictions on Asset Holdings and
Bank Capital Requirements
 Assessment of Risk Management
 Political Economy of the Savings and
Loan Crisis
 The Financial Institutions Reform
bank regulations
Chapter 5 - NONBANK FINANCE
 Insurance
 Pension funds
 Mutual funds and internet
 Financial Derivatives
Management of Financial
institutions
Chapter 1
Introduction
 Meaning and nature of financial
institutions
• financial institutions and financial intermediaries are
often used interchangeably.
• Financial institution is a company whose primary
function is to intermediate between lenders and
borrowers in the economy.
• Financial institutions perform the essential functions of
channeling funds from those with surplus funds to
those with shortages of funds.
• Intermediation improves the social welfare by
channeling recourses to their most effective use.
• E.g.: commercial banks, savings and loan associations,
mutual savings banks, credit unions, insurance
companies, mutual funds and pension funds.
 Classification/types of Financial institutions
– Generally financial institutions are classified into two
as depository and non-deposit financial institutions.
– These two types of financial institutions are discussed
as follows:
• Depository financial institutions
• Include commercial banks and nonbank thrift
institutions (like savings & loan associations,
savings banks, credit unions, and money market
mutual funds)
• They derive the bulk of their loanable funds from
deposit accounts sold to the public.
 Types…
• Non-Depository Intermediaries:
• Include contractual institutions (like insurance
companies and pension funds) and investment
institutions (like investment companies or mutual
funds, finance companies, and real estate
investment trusts).
• Contractual institutions attract funds by offering
legal contracts to the public in order to protect the
savers against potential risks.
• Investment institutions sell shares to the public and
invest the proceeds in stocks, bonds, and other
securities.
 Functions or services of financial institutions
• Financial institutions provide services related to one or more of
the following:
• Pooling the saving of individuals, business and government
• Providing safekeeping ,accounting and access to payment system
• Transforming financial assets into different, and more widely
preferable, type of assets.
For instance, banks facilitate the exchange of funds - by transforming
primary claims into secondary, more attractive claims.
The primary security that a bank might purchase is a mortgage, a
commercial loan, or a consumer loan.
The indirect (secondary) claim issued is a demand deposit, a savings
account, or a certificate of deposit. The indirect securities issued to
ultimate lenders are more attractive than is a direct or primary
security. In particular, these indirect claims are well suited to the small
savers.
 Functions…
 Exchanging of financial assets for their own
accounts.
 Currency exchange
 Assisting in the creation of financial assets for their
customers, and then selling those financial assets
to other market participants.
 Providing investment advice to other market
participants.
 Managing the portfolios of other market
participants
 Role of Financial Intermediaries in the economy

• Investment (direct investment): Issuing financial claims

against themselves to market participants, and then investing
those funds. Here fund suppliers are indirect investors.
• Transforming financial assets that are less desirable for a
large part of the public into other financial assets , hence
 Providing maturity intermediation; Eg. Commercial bank
provides various maturity loans
 Reducing risk via diversification; Eg an investment company
pool funds & invest in different assets
 Reducing the costs of contracting and information processing:
Financial intermediaries have more skills & understanding to
evaluate investments than individuals
• Providing payments mechanism: Most transactions made
today are not done with cash, instead, payments are made
using checks, credit cards, debit cards, and electronic
transfers of funds.