Topic 1 Financial Institution and Globalization 1.

1 Finance - Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. - Financial Environment: Encompasses the financial system, institutions, markets, and individuals that make the economy operate efficiently. - Finance: Study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets. a. Areas of Finance within the Financial System: i) Financial Institutions: Help the financial system operate efficiently and transfer funds from savers to investors. ii) Financial Markets: Physical locations or electronic forums that facilitate the flow of funds. iii) Investment: Area involves sale or marketing of securities, analysis of securities, and management of investment risk iv) Financial Management: Involves financial planning, asset management, and fund raising decisions to enhance firm value 1.2 Six Principles of Finance 1. Time Value of Money - Money in hand today is worth more than the promise of receiving the same amount of money in the future. - Time value of money exists because a sum of money today could be invested and grow over time. 2. Risk-Return Tradeoff - Risk is the uncertainty about the outcome or payoff of an investment in the future. - Rational investors would choose a riskier investment only if they feel the expected return is high enough to justify the greater risk 3. Diversification of Investments - All investment risk is not the same - Some risk can be removed or diversified by investing in several different assets or securities - We will explore the benefits of investment diversification in Part 2 of this text 4. Efficient Financial Markets - A financial market is information efficient if at any point in time the prices of securities reflect all information available to the public - When new information becomes available, prices quickly change to reflect that information - Information efficient markets provide liquidity and fair prices 5. Management vs. Owner Objectives - Management objectives may differ from owner objectives (called principal-agent problem) - Owners or equity investors want to maximize the returns on their investments - Managers may seek to emphasize the size of firm sales, assets, or other perks - Solution: tie manager compensation to performance measures beneficial to owners

6. Reputation Matters - Ethical Behavior: How an individual or organization treats others legally, fairly, and honestly - High reputation value reflects high quality ethical behavior, so employing high ethical standards is the right thing to do 1.3 Why Study Finance? i) To make informed economic decisions ii) To make informed personal and business investment decisions iii)To make informed career decisions based on a basic understanding of business finance 1.4 Overview of the Financial System - Financial Institutions: Depository Institutions, Contractual Savings organizations, Securities Firms, and Finance Firms Role: Accumulate & lend/invest savings - Financial Markets: Securities Markets, Mortgage Markets, Derivatives Markets, and Currency Exchange Markets Role: Market & facilitate transfer of financial assets

1.5 Definition of Banks - The Banking and Financial Institutions Act 1989 (BAFIA) defines a bank as a person who conducts banking business. - Banking business included: Receiving deposits, Payment, Provision of finance a. Banking system - The banking system consists of i) Bank Negara Malaysia (Central Bank of Malaysia), ii) Banking institutions (commercial banks, finance companies, merchant banks and Islamic banks) iii) Miscellaneous group (discount houses and representative offices of foreign banks). - The banking system is the largest component of the financial system, accounting for about 60-70% of the total assets of the financial system.

1.5.1 Bank Negara Malaysia (BNM) - Bank Negara Malaysia is the central bank for Malaysia. It was established on 26 January 1959, under the Central Bank of Malaya Ordinance, 1958. a. Objectives of BNM: i) To issue currency and keep reserves safeguarding the value of the currency ii) To act as a banker and financial adviser to the Government iii) To promote monetary stability and a sound financial structure iv) To promote the reliable, efficient and smooth operation of national payment and settlement systems and ensure these systems directed to the advantage of Malaysia. v) To influence the credit situation to the advantage of the country. - In meeting these objectives, the Bank is guided by the principle that it should act only in the economic interest of the nation and without regard to profit as a primary consideration. b. Functions of BNM: i) Issues and manages the local currency to safeguard the value of the currency i) Acts as the Governments banker and advisor iii) Regulates the liquidity in the financial markets so as to promote a stable monetary and financial structure iv) Acts as the banker to all banks - Hence, the functions of the Bank are carried out within the context of: - The broader goals of promoting economic growth - A high level of employment - Maintaining price stability - Reasonable balance of payment position - Restructuring society 1.5.2 Commercial banks - The Banking and Financial Institutions Act,1989 The introduction of the Banking and Financial Institutions Act, 1989 (BAFIA) on 1 October 1989 extended BNMs powers for the supervision and regulation of financial institutions and deposit-taking institutions who are also engaged in the provision of finance and credit. a. Main functions: i) Retail banking services such as the acceptance of deposit, granting of loans and advances, and financial guarantees ii) Trade financing facilities such as letters of credit, discounting of trade bills, shipping guarantees, trust receipts and Bankers Acceptances iii) Treasury services iv) Cross border payment services v) Custody services such as safe deposits and share custody - Commercial banks are also authorized to deal in foreign exchange and are the only financial institutions allowed to provide current account facilities.

1.5.3 Finance Companies - BAFIA 1989 defines a finance company as a person who carries on finance company businesses. - Under the BAFIA, the legislative framework and the provisions of banking secrecy under the Banking Secrecy Act which applies to commercial banks are, thus, applicable to the finance companies as well. a. Defined as: i) The business of receiving deposits on deposit account, saving account or other similar account ii) The lending of money iii) Leasing business or the business of hire purchase v) Any other such business as BNM with the approval of the Minister may prescribe - Finance Companies form the second largest group of deposit-taking institutions in Malaysia. 1.5.4 Merchant Banks - There has been the growing need for full range of specialized services relating to all aspects of corporate financing, financial investment and management advice, and investment portfolio management. - They have been allowed to operate in wholesale banking and as corporate advisers and financiers. - Unlike the commercial banks, which depend on their large deposit base to fund their loan and investment portfolios, the merchant banks have been envisaged to function primarily as specialist financial intermediaries in money and capital markets, with particular expertise in the provision of basically fee-based services.