Revise Lecture 11

Lecture 11

• Financial Services

Financial Services

• All types of activities which are of financial nature, could be brought under the term ‘Financial Services’.

• The term in a broad sense, means ‘mobilizing and allocating savings’. Thus, it includes all activities involved in the transformation of savings into investment.

Financial Services

• The financial services can also be called financial intermediation.

• Financial intermediation is a process by which funds are mobilized from a large number of savers and make them available to all those who are in need of them, particularly to corporate customers.

Financial Services

• Thus, the financial services sector is a key area and it is very vital for industrial developments.

• A well- developed financial services industry is absolutely necessary to mobilize the savings and to allocate them to various investable channels and thereby to promote industrial development in a country.

Financial Services

• Classification of Financial Services

Financial Services

Classification of Financial Services:

The financial intermediaries in Pakistan is traditionally classified into two;

1. Capital market intermediaries2. Money market intermediaries

Financial Services

Classification of Financial Services:

• The capital market intermediaries consist of the term- lending and the investing institutions which mainly provide long-term funds.

Financial Services

Classification of Financial Services:

• The money market intermediaries consists of commercial banks, cooperative banks and other agencies which supply only short-term funds.

• However, the term ‘financial services industry’ includes all kinds of organizations which intermediate and facilitate financial transaction of both individual and corporate customers.

Lecture 12

Financial Services

• Scope of Financial Services

Financial Services

• Financial services cover a wide range of activities. Their activities can be broadly classified into two, namely;

1. Traditional activities2. Modern activities

Financial Services

Traditional Activities:• Traditionally, the financial intermediaries have

been rendering a wide range of services encompassing both capital and money market activities.

• They can be grouped under two breaks 1. Fund-based activities2. Non-fund based activities

Financial Services

The fund-based activities include;1. Underwriting or investment in shares,

debentures, bonds etc. of new issues (primary market activities)

2. Dealing in secondary market activities.3. Participating in money market instruments

such as commercial papers, certificate of deposits, treasury bills and discounting bills.

4. Dealing in foreign exchange market activities

Financial Services

The non-fund based activities:• The non-fund based activities can also be

called ‘fee based’ activities. • Today, customers, whether individual or

corporate are not satisfied with more provisions of finance. They expect more from financial service companies. Hence, a wide variety of services are being provided under this head, which include;

Financial Services

1. Management the capital issue, i.e. management of pre-issue and post-issue activities relating to the capital issue in accordance with the SECP guidelines.

2. Making arrangements for the placement of capital and debt instruments with investment institutions.

3. Arrangement of funds from financial institutions for the client ‘project cost or their working capital requirements’.

4. Assisting in the process of getting all government and other clearances.

Financial Services

•Modern Activities

Financial Services

Modern Activities• Beside the traditional services, the financial

intermediaries render innumerable services in recent times.

• Most of them are in the nature of non-fund based activity.

• In view of their importance, these activities have been briefed under the head ‘new financial products and services’.

Financial Services

Modern Activities• Some of the modern services provided by them

are;1. Rendering project advisory services right from

the preparation of the project report till the raising of funds and starting the project with necessary government approvals.

2. Planning for Merger & Acquistion and assisting for their restructuring.

Financial Services

Modern Activities3. Guiding corporate customers in capital

restructuring.4. Acting as a trustees to the debenture holders.5. Recommending suitable changes in the

management structure and management style with a view to achieving better results.

Financial Services

Modern Activities6. Rehabilitating and restructuring sick

companies through appropriate scheme of reconstruction and facilitating the implementation of the scheme.

7. Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by using swaps and other derivative products.

Financial Services

Modern Activities8. Managing the portfolio of large public sector

corporations.9. Undertaking risk management services such

as insurance services and buy-back options.10. Guiding the clients in the minmization of the

cost of debt and in the determination of the optimum debt-equity mix.

Financial Services

• Sources of Revenue

Financial Services

Sources of RevenueThere are two categories of sources of income

for a financial services company, namely ;

1. Fund-based2. Fee based

Financial Services

Sources of Revenue• A fund-based income mainly from interest

spread (the difference between the interest earned and interest paid).

• On the other hand, a fee-based income has its sources in merchant banking, advisory services, custodial services, loan syndication etc.

Financial Services

Sources of Revenue• In fact, a major part of income is earned

through fund-based activities. • In recent times, a number of private financial

companies have started accepting deposits by offering a very high rate of interest.

• When cost of deposit resources goes up, the lending rate also should go up.

Financial Services

Sources of Revenue• A fee-based income, on the other hand, does

not involve much rick. But it requires a lot of expertise on the part of a financial company to offer such services.