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Topic 5 - Financial Institutions Markets by 16-05423
Topic 5 - Financial Institutions Markets by 16-05423
INTRODUCTION
• Commercial banks: Depository institutions whose major assets are loans and
major liabilities are deposits commercial banks are the most dominant
depository institutions. They offer a wide range of deposit accounts. They
transfer the deposits to deficit units through loans, advances, overdrafts,
letter of credit, letter of guarantee and they can also buy debt securities.
Commercial banks serve both private and public. Their services are utilised
by households, businesses and government.
• Thrifts/Saving institutions: Depository institutions in the form of saving and
loans, credit unions. They include savings and loans(S&L) and savings
banks. Like commercial banks, S&L offer depository facilities to surplus units
they then channel these surplus to deficit units. S&L concentrates on
residential mortgage loans unlike commercial banks who concentrate on
commercial loans
Types of financial institutions continued…
• Credit unions/ Savings and credit organisations: These institutions differ
from commercial banks and savings institutions in that they are:
Nonprofit making organization
Restrict their credit to the credit union members who share a common
bond e.g common employer, common business, common geographical
location. They use most of their funds to advance loans to their members
• Financial companies: Financial institutions that make loans to individuals
and businesses. Most finance companies obtain funds from issuing
securities then lend the money to individuals and small businesses.
Although the functioning of finance companies overlap those of
depository institutions, each type of institution concentrates on a
particular segment of the financial market.
Types of financial institutions continued…
• Direct flow markets: Users of funds obtain finance directly from savers
Advantages
• Avoid cost of intermediation
• Increases range of securities and markets
Disadvantages
• Matching of preferences
• Liquidity and marketability of a security
• Search and transaction costs
• Assessment of risk, especially default risk
Direct and intermediated financial flow markets continued
• Monitoring costs
• Liquidity and price risk
• Transaction cost services
• Maturity intermediation
• Denomination intermediation
Services provided by FI benefiting the overall economy
• The T-bills generally are 91, 182 and 364 days in terms of maturity. The
minimum allowable denomination is Ksh. 50,000 from a previous
minimum of Ksh. 100,000.
• T-Bills are generally considered to be free of default risk because they are
obligations of the government of Kenya.
• T-Bills are highly liquid.
Repurchase agreements