Credit disbursement by banks

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First report: Credit disbursement by banks risesP1: Muscat: Review of the activities of conventional banks indicates an annual growth in total outstanding credit disbursement of 4.4 per cent at the end of April 2019. Credit to the private sector grew by 2.1 per cent to OMR18.9 billion. Conventional banks’ (Bank Muscat, NBO) overall investments in securities (Shares, Stocks, Bonds, Treasury Bills) increased by 9.0 percent to OMR3.4 billion. Investment in Government Treasury Bills (GTBs) stood at OMR290.5 million at the end of April 2019.P2: Aggregate deposits held with conventional banks increased by 4.7 per cent to OMR19.8 billion in April 2019 from OMR18.9 billion a year ago. Government deposits with conventional banks increased by 10.3 per cent to OMR5.7 billion, while deposits of public enterprises increased by 23.8 per cent to OMR1.1 billion during the same period.P3: Private sector deposits, which accounted for 64 percent of total deposits with conventional banks, increased marginally by 2.2 per cent to OMR12.7 billion. The core capital and reserves of conventional banks at the end of April 2019 stood at OMR4.9 billion.Read the above report and write an assignment based on the following tasks:(a) Briefly introduce monetary and financial system of Central Bank of Oman (CBO) in the report (10 marks).(b) Discuss the importance of financial market for the country and analyse the growth ofinvestment in securities (financial assets) in financial market mentioned in the report (25 marks). Week1 + Week 7 (most important)(c) Make comments how effective investment in securities (financial assets = Week1) improves economic growth of the country based on the report (25 marks). Week1 + Week 7 (most important) + P1 = . Investment in Government Treasury Bills GTBs, (financial assets)(d) Discuss roles and functions of conventional banks (Week 5 + P2 &P3) in managing the primary business risks (Week2) arising from financial markets (Week 7) based on the report (30 marks).(e) Provide a conclusion (conclude information from task a, b, c, and d ) with the logical flow of information given in the assignment report (10 marks)check the attached file for additional information and requirementsplagiarism free2000 words (no less than 2000 words)Week 5 is your answer to Task D conventional bank

 

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Financial Markets and
Financial Institutions
WEEK # 7
(b) Discuss the importance of financial market (Week 7) for the country and analyse
the growth of investment in securities (financial assets: Week1) in financial market
mentioned in the report (25 marks). Week1 + Week 7 (most important)
Learning objectives
• To understand the meaning of financial markets and financial
institutions
• To identify types of financial markets and financial institutions
• To understand services provided by financial markets and financial
institutions
• To understand the risk factors affecting a significant growth of financial
markets and financial institutions
2
(b) Discuss the importance of financial market (Week 7) for the country and analyse
the growth of investment in securities (financial assets: Week1) in financial market
mentioned in the report (25 marks). Week1 + Week 7 (most important)
What is Financial Market?
Financial markets refer to the marketplace where the trading of securities
(Financial assets – stocks, shares, bonds) occurs, including the stock market,
bond market, forex market, and derivatives market, among others.
3
The importance of financial markets
Financial markets are common to each country. Financial markets play a major role in the economic
growth of the country. Some countries have small markets, while some have big financial markets, like
NASDAQ. Financial markets act as an intermediary between savers and investors, or they help savers to
become investors. On the other hand, they also help businesses to raise money to expand their business.
So we can say that investors and businesses access the financial markets to raise money and also to
make more money. Financial markets can help the country to create more job opportunities.
Risk arising from financial market
Market Risk – the chance that a portfolio of investments can lose money because of
overall swings in financial markets
Liquidity Risk – the difficulty of selling corporate assets or investments that have only
a few willing buyers or are otherwise not easily transferable at favorable prices
under typical market conditions – having difficulty in selling or buying financial
assets – shares , bonds , stocks
Derivative Risk – the chance that volatile financial derivatives such as commodity
futures and index options could create losses by increasing rather than decreasing
price volatility – commodities’ prices are going up and down without advanced
notices
4
(d) Discuss roles and functions of conventional banks (Week 5 +
P2 &P3) in managing the primary business risks (Week2) arising
from financial markets (Week 7) based on the report (30
marks).
What are types of Financial Markets?
• Primary Markets
• Secondary Markets
• Money Markets
• Capital Markets
• Foreign Exchange Markets
5
Primary Markets versus Secondary Markets
• Primary Markets
• markets in which users of funds (e.g. corporations, governments) raise funds by issuing
financial instruments (e.g. stocks and bonds) – new issued financial assets – shares, bonds,
stocks
• Secondary Markets
• markets where financial instruments (e.g. stocks and bonds) are traded among investors (e.g.
Bolsa Madrid, NYSE, NASDAQ) – resold financial assets – shares, bonds, stocks
6
• Money Markets
• markets that trade debt securities (shares, stocks, bonds) with maturities of one year or less
(e.g. Spanish Government bonds, U.S. Treasury bills) – trading (buying or selling) financial
assets less than one year or short-term trades
• Capital Markets
• markets that trade debt (bonds) and equity (stock) instruments with maturities of more than
one year – trading (buying or selling) financial assets more than one year or long-term trades
Foreign Exchange Markets – for End-term assignment
• Foreign Exchange or “FX” markets deal in trading (buying and selling) one currency for
another (e.g. dollar for yen)
1. The “spot” FX transaction involves the immediate exchange of currencies at the
current exchange rate – 1 or 2 days trade
2. The “forward” FX transaction involves the exchange of currencies at a specified date in
the future and at a specified exchange rate – for future trade – next month or next year
or next three years, for instance
7
What is Financial Institution? – for End-term assignment
Financial institutions refers to institutions that provide a wide variety of (1) deposit, (2)
lending and (3) investment products to individuals, businesses or both. While some financial
institutions focus on (4) providing services and accounts for the general public, others are
more likely to serve only certain consumers with more specialized offerings.
8
End-term assignment = Week 7 Slide No. 8, Week 8 Week 9 Week 10 and Week 11
Types of Financial Institutions
• Commercial banks – Banking system – you can withdraw money for daily use
• depository institutions whose major assets are loans (e.g. home loans, car loans, business
loans, personal loans) and major liabilities are deposits (e.g. savings or deposit accounts)
• Thrifts and savings banks – non-banking system – you can not withdraw money for daily use
• depository institutions in the form of savings banks, savings and loans, credit unions, credit
cooperatives, for American express credit cards
• Insurance companies – non-banking system
• financial institutions that protect individuals and corporations from adverse events – car
insurance, home insurance, building insurance, factory insurance, life insurance, health
insurance, for instance
• For example; National Life & General Insurance Company SAOG. – Seeb
9
(continued)
• Securities firms and investment banks – non-banking system
• financial institutions that underwrite securities (issuing, selling, or buying stock, shares, bonds : financial asset)
and engage in securities brokerage and trading (buying and selling) securities such as stock, shares, bonds
(financial asset)
for example: Global Financial investments Holdings or Gulf Investment Service Company
• Finance companies – non-banking system
• financial institutions that make loans to individuals and businesses – car loans, home loans, business loans,
personal loans
For example: Oman ORIX Leasing Company SAOG –Seeb or Taageer Finance, Islamic Bank, Oman Finance
company
• Mutual Funds – non-banking system
• financial institutions that pool financial resources and invest in diversified portfolios – organizations or company
that provides funds for investment
• Pension Funds – non-banking system
• financial institutions that offer savings plans for retirement – organizations or company accepting your saving plans
after you retire from work, for example Civil Service Employees Pension Fund, Diwan of Royal Court Pension Fund
10
Types of Financial Institutions
Services Performed by Financial Institutions
• Monitoring Costs
• aggregation of funds provides greater incentive to collect a firm’s information and monitor actions – calculating or
collectiong all kinds of expense transactions or funds for customers or business
• Liquidity and Price Risk
• provide financial claims to savers with superior liquidity (helps customer to get easy buy or sell products) and lower price
risk (manage risks for customers or businesses)
• Transaction Cost Services
• transaction costs are reduced through economies of scale – helps customer transfer money for payment in an easy way
and quick to reduce the expenses from payment transactions
• Maturity Intermediation
• greater ability to bear risk of mismatching maturities of assets and liabilities – managing risks arising from savings and
loans for their customers or business, for example when you make savings at the bank you feel safe
• Denomination Intermediation
• allow small investors to overcome constraints imposed to buying assets imposed by large minimum denomination size –
helps customers (savers) to make investment in securities (e.g. stocks, shares, bonds or financial assets)
11
(continued)
Services Provided by Financial Institutions benefiting the Overall
Economy for the country
 Money Supply Transmission – helping people for savings, depositing, transferring money
• Depository institutions are the conduit through which monetary policy actions impact the economy in general
• For example, commercial banks, saving and loans companies, pension funds,
 Credit Allocation – providing credits, loans for people and businesses
often viewed as the major source of financing for a particular sector of the economy
(e.g. farming and real estate)
For example, commercial banks providing home loans, car loans, personal loans, or business loans
 Intergenerational Wealth Transfers
• life insurance companies and pension funds provide savers with the ability to transfer wealth from one generation to the next
generation
• For example, Mr. Ali bought life insurance premium for his son 10,000 OMRs. So after Mr. Ali dies, his son will be given life
insurance premium 10,000 OMRs from the life insurance company.
 Payment Services
• efficiency with which depository institutions provide payment services directly benefits the economy
• For example, commercial banks helpings people or businesses to transfer money for payment transactions within the country or
out side the country
12
(continued)
Risk faced by financial institutions
Business Risk – the chance of loss associated with a given managerial decision; typically a by-product of the unpredictable variation in
product demand and cost conditions
For example commercial banks, finance companies, or insurance companies can face with lost in giving loans or credits to customers or
businesses
Inflation Risk – the danger that a general increase in the price level will undermine the real economic value of corporate agreements
For example when the prices of products increase and affect the interest rates of the banks or demand of the customers or businesses
Interest-rate Risk – another type of market risk that can affect the value of corporate investments and obligations
For example when the inflation risk happens, it can create high or low interest rates of the banks
Credit Risk – the chance that another party will fail to abide by its contractual obligations
For example when you or businesses are unable to make payment for the credits or loans, you may lose your credits and this affects the
banks when they are not able to receive your loans
Currency Risk – the chance of loss due to changes in the domestic currency value of foreign profits
For example when your OMR currency decreases or weak, financial institutions or businesses may loss in investment in foreign currency
13
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Financial Intermediation
(Center) and Banks
WEEK # 5
Learning objectives
• To understand the roles and functions of financial intermediaries
(institutions) and banks
• To identify the differences between conventional banking system and
Islamic banking system
• To explain the differences between central bank and commercial bank
2
Financial Intermediations and Banks
• Most nations have a banking system that encompasses two types
of institutions.
1. Private banking institutions – Commercial banks – Bank Muscat, NBO.
2. Central bank – Government – regulating commercial banks.
3
Financial Intermediation and Banks
• Financial Intermediation
• The process by which financial institutions (1) accept savings from businesses,
households, and governments and (2) lend the savings to other businesses,
households, and governments
4
Financial Intermediation and Banks
• Direct finance
• Individuals purchase securities (Shares, Stocks, or bonds) from a business
• Indirect finance
• Individuals hold money in a bank – make savings
• The bank lends the money to a business
5
The Process of Financial Intermediation
6
Financial institutions
Banking system
Non- banking system
Lending money
Giving loans
Omar 1000 OMRs
Omar 1000 OMRs at Bank Muscat – saving – liabilities
Jalal 1000 OMRs
Cash loans = Asset of the banks
Jalal 1000 OMRs
Cash loans = Asset of the banks
Financial Intermediaries and Their Assets and Liabilities
7
Banking system
Non- banking system
Financial Intermediation and Banks
• Payment Intermediaries
• Institutions that facilitate transfers of funds between depositors who hold
transactions deposits with those institutions – transferring money for payment
• Capital Controls
• Legal restrictions on the ability of a nation’s residents to hold and trade assets
denominated in foreign currencies – buying and selling the foreign currencies
• International Financial Intermediation
• Financing investment projects in more than one country – helping business for
investment in other countries
8
Functions of financial intermediations
The World’s Largest Banks
9
Car loans, Home loans
Business loans
Banking Structures Throughout the World
• The ways that banks around the world differ
• Size
• United States has banks of various sizes
• Europe and Japan have a few large banks
• Legal
• Universal banking
• Limits on financial services such as insurance and bank stock ownership
• Importance in financial system
• Major importance
• Part of a varied financial system (United States)
10
Islamic & Conventional Banking
Conventional banks = general banks – Bank Muscat
NBO, Ahli bank, HSBC, Dhofar etc.
Islamic banks = Meethaq Islamic Banking
Alizz Islamic Bank…..
Islamic Banking
Islamic banks adhere to the concepts of Islamic
law, Islamic banking revolves around many well
established concepts which are based on Islamic
canons.
Islamic banking refers to a system of banking or
banking activity that is consistent with Islamic
law (sharia) principles and guided by Islamic
economics
12
Principles of Islamic banking
• Prohibition of riba (No interest)
• Profit sharing (mudharabah)
• Safekeeping ( wadiah)
• Joint venture ( musharakha)
• Cost plus ( murabahab)
• Leasing ( ijarah )
13
Conventional Banking
• Functions and operating modes of conventional banking are based on
fully man made principles – profits, interest….
• The investor is assured of a predetermined rate of interest
• It aims at maximizing profit without any restriction.
• Lending money and getting it back with compounding interest is the
fundamental function of the conventional banks
14
Roles and functions of conventional banks
• Payment Intermediaries
• Institutions that facilitate transfers of funds between depositors who hold transactions deposits with those institutions – transferring money for
payment
• Capital Controls
• Legal restrictions on the ability of a nation’s residents to hold and trade assets denominated in foreign currencies – buying and selling the foreign
currencies
• International Financial Intermediation
• Financing investment projects in more than one country – helping business for investment in other countries
(d) Discuss roles and functions of conventional banks (Week 5 +
P2 &P3) in managing the primary business risks (Week2) arising
from financial markets (Week 7) based on the report (30
marks).
State Bank of OMAN & Its Role In Islamic
Banking
• In order to promote Islamic Banking in OMAN, State Bank is
following a three pronged strategy as under:
I) Establishment of full-fledged Islamic bank(s) in the
private sector; – NOT government
II) Setting up of subsidiaries for Islamic Banking by
existing commercial banks – deposits, savings, ; and
III) Allowing Stand-alone branches for Islamic banking in
the existing commercial banks.
15
It does not deal with zakat In modern Islamic banking, it has become one of the service
oriented function of the Islamic banks to be a zakat
collection centre and they also pay out their zakat
It can charge additional money in case of defaulters Islamic banks have no provision to charge any extra money
from the defaulters
Very often it results in the banks own interest becoming
prominent. it makes no effort to ensure growth with equity –
Interest
It gives due importance to the public interest, its ultimate
aim is to ensure growth with equity – No interest
Conventional bank has to guarantee all its deposits Islamic bank can only guarantee deposits for deposit
account, thus depositors are guaranteed repayment of their
funds
The status of a conventional bank, in relation to its clients is
that of creditor and debtors
The status of Islamic bank in relation to its clients is that of
partners, investors and trader buyer and seller
Conventional banking – Bank
Muscat, NBO….. Task D
Islamic banking
16
Difference b/w Central and Commercial Bank
Central Bank – Government sector Commercial Bank – Private sector or conventional banks
1.Work for the public welfare and economic development
of a country. A central bank is governed by the
government of a country.
2. Controls and regulates the entries banking system of a
country.
1.Operates for Profit Motive. The Majority of Stake is held
by the government as well as the private sector.
2. Operates under the direct control and supervision of
the central bank. In India all the commercial banks works
under the guidelines issued by RBI.
17
Difference b/w Central and Commercial Bank
Commercial Bank – Private sector or conventional
banks
3. Does not deal directly with the public. It issue
guidelines to commercial banks for the economical
development of the country.
4.Issues currency and control the supply of money in
the Market.
3. Deals directly with the Public. It serves the financial
requirement of the public by providing short and
medium terms loans and depositing and securing
money that can be drawn on demand.
4. Does not Issue currency, but only adds to the
approval of the central bank.
18
Difference b/w Central and Commercial Bank
Commercial Bank – Private sector or conventional
banks
5. Acts as a state owned institution.
6. Acts as a custodian of a foreign exchange of the
country.
7. Acts as a banker to the Government
5. Acts as a state or private owned institution.
6. Perform foreign exchange business only on the
approval of the central bank.
7. Acts as agents of the central bank.
8. Acts as a clearing house only as a agent of the
central bank.
19
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21

 

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