as a lecture 2 Financial Institutions Lecture 1 Introduction to Banking Systems 1 OUTLINE Financial Institutions The Structure of the Financial Industry Bank, Bank Operation, Types of Bank and Types.
Lecture Introduction to Banking Systems 1-1 OUTLINE Financial Institutions The Structure of the Financial Industry Bank, Bank Operation, Types of Bank and Types of Bank Account Bank Services What is Money, The History of Money Interest Rate and How Calculate Interest Rate 1-2 Simple present Value Financial Institutions A financial institution (FI) is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange Financial institutions encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers 3-3 The Structure of the Financial Industry We can divide intermediaries into two broad categories: ◦ Depository institutions, Take deposits and make loans What most people think of as banks ◦ Non-depository institutions Include insurance companies, securities firms, mutual fund companies, etc 3-4 Bank A bank is a commercial or financial institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and creating credit There are various types of banks The necessity for the variety among these banks is because each bank is specialized in their own field Each bank has its own principles and policies Different rates of interests are also noted among these banks Bank Operation Deposit Deposito rs Loans and Credits Banks Withdrawal of deposit along with interest Repayment of loans and credits along with interest History of Banking Joint stock commercial banking Bank of England 1716 Bank of Amsterdam 1690 1694 1833 General private bank (France) 1401 &1407 160 Bank of Hamburg Bank of Venice 1157 Bank of Barcelona and the bank of Genoa Types of Banks Commercial banks Community banks Community development banks Land development banks Credit unions or Co-operative Banks Postal savings banks Private banks Offshore banks Building societies and Landbanks Spare Bank Exchange Banks Consumer’s Bank Ethical banks Direct or Internet-Only bank Investment banks "underwrite“ Merchant banks Universal banks Central banks Islamic banks Savings Banks Indigenous Banks Mortgage Banks Internet Bank Types of Banks Savings Banks – these banks are suited for employees with a monthly salary Low waged people may open an account in the savings bank Commercial Banks – These bank collects money from people in various sectors and gives the same as a loan to business men and make profits in interests these business men pay Since the loan is large the interest rates are also high Types of Banks Internet Bank – provides banking facilities only via internet There will be no physical contact with the bank All transactions are permitted only through online Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse Current Deposit account Big businessmen, companies and institutions such as schools, colleges, and hospitals have to make payment through their bank accounts Since there are restrictions on the number of withdrawals from savings bank account, that type is not suitable Banks open a current account for them Like savings, this also requires minimum initial deposit Here, bank does not pay any interest Rather the account holder pays a certain amount each year as an operational charge Fixed (Time or Term)Deposit Account Some bank customers may like to put away money for a longer time Such deposits offer a higher interest rate If money is deposited in savings bank account, banks allow a lower rate of interest Therefore, money is deposited in a fixed deposit account to earn an interest at a higher rate Various Banking Services • Advancing of Loans • Overdraft • Discounting of Bills of Exchange • Check/Cheque Payment • Collection and Payment Of Credit Instruments • Foreign Currency Exchange • Bank Guarantee • Credit cards • • • • • ATMs Services Debit cards Home banking Online banking Mobile Banking What is money? Money is anything that serves as a commonly accepted medium of exchange 1-23 The Evolution of Money 1-24 Barter : which consists of the exchange of goods for other goods Commodity Money : cattle, olive oil, beer or wine, iron, and cigarettes Metallic Money : With progress of human civilization, commodity money changed into metallic money Metals like gold, silver, copper, etc Paper Money : Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services Credit Money : Credit money is monetary value created as the result of some future obligation or claim Like bonds and money markets Digital Money: or digital currency, refers to any means of payment that exists purely in electronic form Like Bitcoin INTEREST RATES The interest rate is the price paid for borrowing money and deposit we usually calculate interest as percent per year on the amount of borrowed funds and deposits there are many interest rates, depending upon the maturity, risk, tax status, and other attributes of the loan 1-25 HOW TO CALCULATED INTEREST RATES Assume, Azadi bank pay $1000 to a client with 10% interest rate, at the end of year how much does it earn? 1-26 HOW TO CALCULATED INTEREST RATES If AB loans $1100 at the same interest rate, at the end of the second year it would has Continuing with the loan again , at the end of the third year it would has 1-27 HOW TO CALCULATED INTEREST RATES The amount AB would has at the end of each year by making the $1000 loan today can be seen in the following timeline : 1-28 Today Year Year Year $1000 $1100 $1210 $1331 SIMPLE PRESENT VALUE 1-29 SIMPLE PRESENT VALUE Example: What is the present value of $2500 to be paid in two years if the interest rate is 15%? Today Year Year $2500 1-30 $1890.35 Example: if Ali borrows $1000 from Bank A, next year Bank A wants $1200 from him How much is the interest rate? Today $1000 1-31 Year $1200 ... loans What most people think of as banks ◦ Non-depository institutions Include insurance companies, securities firms, mutual fund companies, etc 3-4 Bank A bank is a commercial or financial... money? Money is anything that serves as a commonly accepted medium of exchange 1-2 3 The Evolution of Money 1-2 4 Barter : which consists of the exchange of goods for other goods Commodity... attributes of the loan 1-2 5 HOW TO CALCULATED INTEREST RATES Assume, Azadi bank pay $1000 to a client with 10% interest rate, at the end of year how much does it earn? 1-2 6 HOW TO CALCULATED INTEREST