Special Topics 001

FINANCIAL SYSTEM(CENTRAL BANK)

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Financial System Banking

InstitutionsNon Banking Institutions

Islamic Banks

Investment Banks

Specialized Banks

Commercial Banks

Foreign Exchange

Insurance Companies

We Can Define Commercial We Can Define Commercial Banks Also As Follow:Banks Also As Follow:

It’s a Connecting Place Between Deficit Units And Surplus Units.

When Income Is More Than Expenses = Deposits ( Surplus Units ).

When Expense Is More Than Income = Loans ( Deficit Units ).

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Definition: A Company That Trades In Definition: A Company That Trades In Money.Money.

OROR A Place Where Demand And A Place Where Demand And Supply Of Money MeetSupply Of Money Meet.

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Investor People

Banks

The Difference Between Comm. Banks And Insurance Co. Can Be illustrated As Follows:

ParticularsCommercial Banks

Insurance Co.

Main Source Of Finance

DepositsInstallments + Capital

Funds Stability

Less StableMore Stable

InvestmentsShort TermLong Term4

COMMERCIAL BANKS V/S SPECIALIZED BANKS

The Difference Between Comm. Banks And Specialized Banks Can Be illustrated As Follows:

ParticularsComm. BanksSpecialized Banks

Main Source Of Finance

DepositsCapital + Grants + Loans

Purpose Of Loans

ProfitEconomic Development

Loan TermShort TermLong Term

Type Of Securities

PersonalCollateral5

1. Deposits.2. Loans.3. Capital.4. Retained Earnings.5. Reserve and Surplus.

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FUNCTIONS OF COMMERCIAL FUNCTIONS OF COMMERCIAL BANKSBANKS

The Comm. Banks Functions Can Be Classified Into Two Categories As Follow:

Category 1 –– Classical Or Classical Or Traditional Functions.Traditional Functions.

Category 2 –– Modern Modern Functions.Functions.

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1- Issue Of A.T.M. Cards .2- Issue Of Credit Cards (Visa ,

American Express).3- Remittances .4- Buying and Selling Foreign

Currencies .5- Issue Of Guarantee Letters.6- Issue Of Documentary Credit .7- Issue Certificate Of Deposit .8- Phone Banking Services .9- Bank Acceptances .10- Travelers Checks.11- Investing On Behalf Of Clients .12- Safety Lockers . 8

1- Fixed Deposit – Characteristics :

A- High Interest Rate . B- All Banking Services Except A.T.M. Card and Check Book .

C- Stable Source Of Finance . D- Drawing On due Date . E- Deposit Period Ranges From 1 Day to 1 Year .

F- Minimum Balance .

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2- Saving Deposit -Characteristics : A- Minimum Balance .A- Minimum Balance . B- All Banking services Except Check B- All Banking services Except Check

Book .Book . C- Low Interest Rate .C- Low Interest Rate . D- Main source Of Finance For Banks .D- Main source Of Finance For Banks . E- By Low Income People .E- By Low Income People . F- Drawing Subject To Certain F- Drawing Subject To Certain

Conditions :-Conditions :- * Amount Of Drawings * Number Of Drawing Times

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3- Current Deposits - Characteristics :A- Minimum Balance .B-All Banking services Including Check Book and A.T.M. Card .

C- No Interest .D- Reflect Supply Of Money .

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4- Subject to Notice, Characteristics :A- Minimum Balance .B- Drawing Subject To Prior Notice .C- Notice Period Ranges From 1- 3

Weeks .D- Interest Paid For Investment Period

.E- Interest Is Paid At high Rate .

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Factors Affecting The Volume Of Public Deposit :

1- The Financial Position Of The Central Bank

2- Central Bank Credit Policy.3- Number Of Central Bank Branches.4- Legislations .

Expense Revenue

Budget

Import Export

Balance of Payment

Financial Position

Public Deposit

Factors Affecting The Volume Of Private Deposits :

1- The Level Of Economic Activity .2- Economic Stability .3- People's Confidence In Banks .The People Confidence Is Affected By The

Following Factors :a-Cash Requirement .b-Peoples Awareness of Banking Services.c-Peoples Beliefs And Religions .d-Interest Rate .E- Services quality

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Private Deposit

LOANS Is the Second Classical Function Of Commercial Banks .

Types Of Loans :Types Of Loans :1- Cash OR Direct Loans:-2- Bank Overdraft :- Over Drew

Account3- Bills Discounted:- Loan Amount = Face Value – Discount

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1- Cash or Direct Loan: Its an agreement between the bank and the client in which the bank adds the loan amount to the client a/c or directly given to him on cash against proper securities. Interest being charged on the whole amount of loan. Loan can be paid on installment or lump sum.

2- Bank Overdraft: The bank allows the client to over draw his account up to certain limit, for a short period (maximum one year ). Interest being charged on the amount actually over drawn commission is charged on the amount not used by client.

3- Bills Discount: Commercial banks do discount commercial papers that fulfill certain conditions. Loan amount is equal to face value – discount rate.

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MONEY MONEY CREATIONCREATION

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Definition Of Money Creation :- It’s a Process Where Commercial

Banks Create More Deposit from the Original One subject to certain Theories and Assumptions .

There Are Two Cases ( THEORIES ) Of Money Creation :-

1- Single Monopoly Bank . 2- Competitive Banks.

CASE NO. 1 - CASE NO. 1 - ASSUMPTIONS OF ASSUMPTIONS OF MONOPOLY BANK THEORYMONOPOLY BANK THEORY

1- One single Bank with many branches.2- Clients Deposit All Their Money.3- Clients Keep Current Account only.4- The Bank Is willing To Lend Surplus

Money.5- There Is Demand For Surplus Money.6- The Bank Keep A certain Percentage

As Reserve.7- Interest Is Ignored.

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CASE NO. 2- CASE NO. 2- COMPETITIVE COMPETITIVE BANKS ASSUMPTIONSBANKS ASSUMPTIONS

1- There are many banks in the country.

2- Certain percentage is returned to the bank as deposit.

3- Loans are given directly or cash basis.

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BALANCE SHEETBALANCE SHEET

BALANCE SHEET

ASSETS LIABILITIES AND OWNERSHIP RIGHTS

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DEFINITION OF BALANCE SHEET :-DEFINITION OF BALANCE SHEET :-

“ It is a statement that reflect the financial position of the bank at a particular date “ .

The balance sheet is divided into :-

1- Liabilities –Represent sources of funds .

2- Assets – Represent uses of funds .

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LiabilitiesAmountAssetsAmountCapitalCashReservePortfolioRetained Earnings

Loans and Advances

DepositsBills DiscountedLoansForeign CurrencyBad debts provisions

Fixed Assets

Depreciation provisions

Preliminary Expenses

Unclaimed dividend

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TYPES OF CAPITALTYPES OF CAPITAL

1- Authorized Capital : - The maximum amount of shares that the bank is permitted to issue by law

2- Issued Capital :- Its that number of shares which is issued for public subscription .

3- Subscribed Capital :- That number of shares which has been purchased ( subscribed ) but their value is not yet paid.

4- Paid up Capital :- The number of shares which their value has been paid for by the investors.

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RESERVESRESERVES

Its an amount ( percentage ) which is calculated and deducted out of net profit after taxes.

Reserves can be divided into two types :-1- Legal Reserve : It is a compulsory deduction

out of net profit after tax every year tell its equal to the paid up Capital.

2- Optional Reserves:- Every bank has the choice to deduct an additional amount ( reserves ) out of its yearly net profit after tax for different uses .

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USES OF RESERVESUSES OF RESERVESUssually reserves are used by banks for the following purposes :

1- To increase capital .1- To increase capital .2- To off set ( face ) the unexpected 2- To off set ( face ) the unexpected losses .losses .

3- To protect the rights of depositors 3- To protect the rights of depositors and investors (share holders) .and investors (share holders) .

4- To gain depositors and investors 4- To gain depositors and investors confidenceconfidence . .

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DEPOSITSIt is an amount of cash that is kept by different parties in the bank in different forms :-

( Current – Saving – Fixed )Deposits are kept by :-1- public .2- other banks .3- central banks .

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Deposits kept by other commercial banks are of two types :

1- Fixed Deposit : As short term investments .

2- Current Deposit : For settlement of payment ( clearing ) with the other banks .

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CONT. DEPOSITCONT. DEPOSIT

Deposits kept by central bank are also of two types:

1- Fixed Deposit : As an investment and to increase bank's liquidity .

2- Current Deposit : For settling government's payments .

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RETAINED EARNINGS:-RETAINED EARNINGS:-It is that amount of net profit after

tax and after deducting Reserves , Management fees , Scientific research fees & Dividend .

Loans :-Loans :- Its an amount obtained by

commercial banks from different institutions (sources) to finance its lack of liquidity.

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Assets Types:

Profitable Non Profitable

Portfolio Loans & Advances

Foreign Currency

Bills Discounted Cash Fixed

Assets

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In General The Commercial Banks Assets Can Be Divided Into Two classes:

Types :1-1- Cash In Hand : It’s the minimum amount

required to be kept by banks to meet the day to day demand of money by depositors

2- 2- Cash With Other Banks :( Fixed & Current )3-3- Cash With Central Bank : Every commercial Bank is obliged to keep a certain percentage

of its total deposit with the central bank. (Legal Cash Reserve).

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6- Foreign Currency: Banks Buys and sells foreign currency to earn a profit (the difference in exchange rate).

7- Preliminary Expenses : That expenses which is paid by the bank at the beginning of its business to start operation .

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