Introduction to financial services 3
- 1. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Introduction to Financial Services1
- 2. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Types of Financial Institutions and their Respective Roles Uganda Retail Banks The Structure of Financial Markets The Credit Reference Bureau Trends in Financial Services Industry Personal Financial Services MODULE COVERAGE 2
- 3. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The structure of Financial Markets In this unit we will look at the structure of financial markets. You will get to learn about the different players in the financial markets. Simply put, financial markets are markets in which funds are transferred from people who have an excess of funds to those who have a shortage. The efficiency of such markets determines to a very large extent the wealth of the nation. 3
- 4. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The structure of the financial system Player 1.Government 2.Central Bank 3.Other financial sector regulators Main Role • Overall oversight of the financial sector, issuance and oversight of fiscal policy and other related policies • Monetary policy implementation, regulating and supervising banks and other deposit taking institutions, banker to government and commercial banks, policy advisor to government • Issuing currency for use in the economy • Regulating their respective financial service providers (like insurance, capital markets, other) 4
- 5. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The structure of the financial system Player 4.Retail Banks 5.Non bank Financial inst 6. Investment Banks 7.Merchant banks 8. Dev. Banks 9. The accounting profession Main Role • Offering a full range of banking services to the public • Offering authorized deposit and loan services to the public • Advice to clients on investing; investing funds on behalf of clients, investing funds of their own in the money and capital markets • Financing trade and business transactions, offering relevant advice and (more recently) some investment banking activities • Long term funding (loans and equity) to viable businesses • Oversight and regulation of the activities of accountant and external auditors, to ensure that FIs, like other businesses, produce reliable audited financial reports 5
- 6. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The structure of the financial system Player 10. Forex Bureau 11.Credit Reference Bureau 12. Institutional investors 13. Insurance companies 14.Factoring and Invoice discounting companies 15.Debt collectors 16. Rating Companies/ Agencies Main Role • Buying and selling foreign currencies • Keeping a comprehensive database of borrowers, from which credit history of each person or organization included therein can be compiled and communicated • Long term investments by way of loans or equity, usually in hard currencies • Insuring businesses and persons against various risks • Financing businesses by either collateralizing their invoices for loans advanced to them or discounting such invoices for cash • Collection of debts on behalf of financial institutions and other creditors as assigned • Rating borrowers and other business organizations, including financial institutions, for public or specific consumption 6
- 7. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The structure of Financial Markets Financial markets can be classified on the basis of several parameters: 1. The nature of the financial securities traded (primary versus secondary markets) 2. Forms of organization (organized exchanges versus over-the counter markets) 3. Maturity of the financial instruments traded (capital markets versus money markets) 4. Forms of trade intermediation (quote driven dealer markets, order-driven markets and brokered markets). 7
- 8. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Debt and Equity markets • A company or government can obtain funds from the financial system in two ways. The most common one is to issue a debt instrument such as a bond. • A bond is a contract by the borrower to pay the holder of the instrument fixed shilling amounts periodically (interest) and a final payment on maturity. • The bond market is also where interest rates are determined. This is the reason why bond markets and interest rates are usually covered together. Bonds can be used by the central bank to manage the supply of money in the economy and to control interest rates. 8
- 9. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Primary and secondary markets • A primary market is a market in which new issues of a security such as a bond or stock are sold to the initial buyers. • A secondary market is where securities that have been previously issued can be resold. • The investment banks which we saw as part of the financial system play the role of assisting in the sale of securities in the primary market. This is because initial issues may not be well known and the investment bank may guarantee their price to the issuing company i.e. pays off the issuer at a certain price, and does the selling to the public. This process is known as underwriting. 9
- 10. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Exchanges and over the counter markets • Secondary markets can be organized in two ways. One is to organize exchanges where buyer and sellers of securities meet to buy and sell the securities. The Uganda securities exchange is such a market. • The other method is to have an over the counter (OTC) market in which dealers at different locations who have securities stands ready to buy and sell securities over the counter to anyone who goes to them and is ready to pay their price. 10
- 11. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Money and capital markets. • The money market is a financial market in which only short term debt instruments (generally those which mature within a year) are traded. Capital markets is where securities with longer term maturities are traded 11
Editor's Notes
- #4: Have you ever wondered why bankers and traders anxiously wait for the setting of the bank rate by Bank of Uganda every month? What does the bank rate have to do with the price of imported goods? Financial markets are markets such as those for bonds, stocks and foreign exchange. Financial markets operate within a financial system. In a sense, Unit One of this module already presented you with a typical structure of a financial system(Uganda). By the end of this unit, you should be able to identify the different types of financial markets as well as typical key players in the financial system and their roles. We will start by looking at the structure of the financial system.
- #8: What you should keep in mind is that from our definition, all these markets perform one common function which is to channel funds from people who have an excess of funds to those who have a shortage
- #9: The bond market is an important part of the financial markets because it enables corporations and governments to borrow to finance their activities. The other way of raising funds is by issuing equities such as common stock which are claims to a share of the net income and assets of a business. The main disadvantage of holding equities rather than debt is that the equity holder is a residual claimant. i.e. the company has to pay all its debts before the equity holder gets paid. The advantage is that the equity holder’s value rises as the value of the company rises.