Financial Sector



LECTURE 20BUSINESS FINANCEFinancial SectorThe financial sector is made up of agencies such as:Government financing agencies Central bank, Commercial banks, Mortgage companies,Credit unionsInsurance companiesBuilding societies - A building society is a type of financial institution that provides banking and other financial services to its members. Building societies resemble credit unions in that they are owned entirely by their members.Micro-lending agencies – eg Island FinanceUnit trust, stock market. Development banks (Caribbean Development Bank, Agricultural Development Bank)A commercial bank- is a financial institution that provides a range of financial services to individuals and business clients. They accept deposits and give loans. The bank pays a percentage to the depositor as interest or gain on the deposit. In essence they borrow a surplus of funds to lend to those who are experiencing a shortage.Role of Financial InstitutionsCommercial bank accepts money deposits and therefore provides a safe place for saving money.Offering loans and overdraft to persons who need financial assistance.Assisting customers to easily make payments through standing orders, current accounts and debit cards.They also offer investment opportunities such as mutual funds, annuities and stocks and bondsServices offered by Financial InstitutionsCommercial banks provide advisory services to clients who wish to borrow a loan to make investments and persons who wish to purchase securities.Safety deposit boxes at the bank are used to store safely items that individuals deem as highly valuable.Selling travellers cheques.Credit cards allows persons to purchase items by using funds that the bank makes available. There is a limit to how much the bank makes available to credit card holders.Offer a variety of deposits- Money can be deposited in a current account upon which cheques can be drawn or a fixed deposit account where a higher interest rate is earned. Foreign currency can also be deposited.Credit facilities (loans) can be provided through deposits where through using a cash ration a portion of the deposits are kept in the bank while the rest are loaned.Money Transfers (remittance services) from depositors account to another account. This called a standing order. They also facilitate bank drafts and letters of credit.Trustee work - Any individual or company who manages assets on behalf of another. For example, a bank may hire a trustee to distribute funds from a loan to the borrower.Offering settlement services such as authorizing credit card paymentsCheques:Essential data on a cheque:The date, payees name, the amount, the signature, personal cheque account number, other data (counterfoil, branch number)Types of cheques:Bearer cheques- Paid to the person who bears or presents the cheque.Order cheques – Paid to the person that the cheque instructs payment to.Open cheque – can be cashed over the counter and can be cashed by the wrong personCrossed cheque – can only be paid into a bank account.Jamaica Deposit Insurance Company (JDIC).JDIC works in close collaboration with the?Bank of Jamaica?(BOJ), the regulatory and supervisory agency for deposit-taking financial institutions. It receives copies of the Bank’s on-site examination reports as well as all other information relating to the safety and financial soundness of insured institutions (Policyholders)Financial Services Commission (FSC)The mandate of the?Financial Services Commission?(FSC) is to supervise and regulate the securities, insurance and private pensions industries.In doing so the FSC oversees the registration, solvency and conduct of firms and individuals doing business in the securities and insurance (Life and General) industries.?The FSC oversees these entities by administering a number of statutes and accompanying regulations.The FSC also handles customer complaints and provides the public with important financial informationSupervisor of InsuranceTo protect the interest of the public, whether as a consumer or third party. This is done through the monitoring of insurance entities and pension administrators to ensure financial stability and use of fair business practices while carrying out their business operations.Administration of the Insurance Act and RegulationsLicensing of Insurance Companies and Insurance IntermediariesEnsure the payment of appropriate annual feesMonitor statutory departments and statutory fundsReview?annual financial statements submitted by insurers and intermediariesEnsure overall compliance by all licensed insurance entities with requirements of the Insurance Act and RegulationsRole of regulatory bodiesTo monitor, control and guide various industry sectors in order to protect consumers.Functions of regulatory bodies:To enforce regulations and licenses of various financial activities, including depository, lending, collection and money transmission activities.Functions of the Central BankThe Central Bank has the sole authority to issue notes and coins.The Central Bank is a banker to the government as it keeps the government accounts.It manages the national debt.It is a banker to all banks as commercial banks must keep an account with the central bank.A lender of last resort-The commercial banks and all other financial institutions can count on the central bank for financial assistance.It is a financial agent for government. The government uses the Central Bank to carry out its economic policies. These policies are known as monetary policies.Relationship between the Central Bank and Commercial BanksThe Central Bank is the head of the financial system. All financial institutions including commercial banks are regulated and monitored by the Central Bank.All commercial banks must keep an account with the Central Bank. These balances are used for cheque clearing purposes between banks. ?Payments for cheques between banks are set off at the Central Bank’s clearing house. The Central Bank can also demand commercial banks to deposit a certain percentage of their total deposits with the central bank in order to control the money supply. (Setting the cash reserve ratio)The Central Bank is a lender of last resort and will aid commercial banks when needed. The Central Bank dictates the interest rate that commercial banks can offer by setting the bank rate. This is the interest rate set by the Central Bank and the rate at which commercial banks and the Central Bank do business, e.g. loans offered by the Central Bank to commercial bank.Direct controls and requests are also issued. These might include the reduction of loans to particular industries. This could be the form of verbalised encouragement (moral suasion) or measures such as increased interest rates on certain loans.Central Bank may demand special deposits from the commercial banks, which are for fixed time periods. Although these earn interest it means that there is less money for commercial banks to lend out.Strategies to Manage Personal IncomeSubsequent to the deduction of taxes and other statutory payments the income earner must manage his money to maximize its use. He must exercise and develop habits of careful spending and saving techniques. ?A good money manager will budget.A budget outlines how much of an individual’s income is to be spent on his various expenses; it disciples an individual to live within the constraints of his personal income. The process of preparing a budget involves the record keeping of past expenditures, and making decision based on these about future expenditures. Priorities must be set to meet basic needs and a systematic plan for savings to achieve future goals.Financial advising provides financial advice or guidance to customers for compensation. Financial advisors, or advisers, can provide many different services, such as investment management, income tax preparation and estate planning. Sources of Short & Long Term FinancingShort-term capital may be accessed through the money market. Institutions in the money market include commercial banks, merchant banks, credit unions and discount houses. Borrowers are required to repay within a short-term e.g. 1 to 5 years.Sources of Short term financing include:Personal sources eg. personal savings, credit cards and redundancy paymentsTrade credits and Promissory NotesUnsecured loans (no collateral required) and overdraftsSecured loansLoans from family Loans from government agencies such as NEDCOAdvances from customersCrowd funding eg Kickstarter, PatreonLong –term capital may be accessed through building societies, the stock exchange, unit trust companies and development banks. Borrowers are given a much longer repayment periods e.g. up to 20 years.Sources of Long term financing include:SharesSecured loansDebenturesLoans from government agenciesMortgagesSavings and InvestmentsSavings is defined as money set aside or not spent from ones personal income. Money saved is most effective in an interest bearing facility such as a commercial bank to keep up with inflation which reduces the value of money over time. Other forms of savings include, the credit union, insurance and partner (meeting turn, sou sou, box hand).Investment is defined as methods of increasing wealth.? It differs from savings as it involves risks. Earning from capital invested is usually much higher than interest earned on savings. Forms of investments include: unit trust companies, mutual funds, the stock exchange and starting a business.Types of bookkeeping systemsSingle Entry - is a method of bookkeeping relying on a one sided accounting entry to maintain financial information. Used for simplicity.Double Entry - means that every business transaction will involve two accounts (or more). Both a Debit and Credit entries will be used.Financial Statements and their purposeIncome statement or Profit and Loss StatementAllows owners, shareholders and partners and investors to identify whether or not the business is profitable. Investors would only invest in a profitable business while owners must justify the continuation of the business.Balance Sheet or Statement of financial positionThe Balance Sheet illustrates the businesses net worth through its assets and liabilities. If the Net Assets are significant then there is little chance that the business will fail. Investors and owners use this statement to assess the performance of a business.Cash Flow StatementThis statement gives information on the liquidity of the business or its ability to possess and retain liquid cash for the operation of a business. Liquid assets such as cash are important as goods and services have to be acquired in order for a business to be successful. If a business cash outflows are greater than its inflows then this indicates low level of performance for the business. ................
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