Chapter 1 - Structure of Financial System

FIN250
Learning Outline:
1.1 What is a Financial System?
1.2 Structure of Malaysian financial system
1.3 Financial intermediation
1.4 Roles of financial Institutions as

Intermediary
1.5 Roles of financial markets Intermediary

Learning Outcomes:
Upon completion of this topic, student should be
able to:
1.1 Explain the term of financial system
1.2 Illustrate the structure of Malaysian

financial system
1.3 Illustrate the financial intermediation by

Financial Institutions and Financial Markets
1.4 Describe the roles of financial institutions

as intermediary
1.5 Describe the roles of financial markets as

intermediary
1.1 What is a Financial System
What is a Financial System?
Defines as a system which consists of institutional units

and markets that interact, typically in a complex maner,
for the purpose of mobilising funds for investment, and
providing facilities, including payment systems, for the
financing of commercial activities.
Economic Co-operation and Development (OECD)
1.2 Struture of Malaysian Financial
System
Structure of Malaysia Financial System
Financial System
Financial Institutions Financial Markets
Banking System Non-Bank Financial Money and Foreign

Intermediaries Exchange Markets
Bank Negara Malaysia (BNM) Development Finance

Capital Markets: (i) Equity
Institutions (DFIs)
Market; (ii) Bond Market
Banking Institutions: (i) Commercial Banks; Savings Institutions

(ii) Islamic Banks; (iii) Investment Banks; (iv) Derivatives Market
Offshore Banks
Insurance/ Takaful
Companies Offshore Market
Representative Offices of Foreign Banks
Provident and Pension Funds
Unit Trusts
Structure of Malaysia Financial System
The financial system in Malaysia is structured into two major categories: financial
institutions and financial markets.
The financial institutions comprise banking system and non-bank financial

intermediaries. The banking system primarily consists of Bank Negara Malaysia and
banking instutions (Commercial Banks, Investment Banks, Islamic Banks and oOfshore
Banks) and a miscellaneous group such as Representative Offices of Foreign Banks. On
the other hand, non-bank financial intermediaries are mainly made up of
Deveopment Finance Institutions, Savings Institutions, Insurance/ Takaful Companies,
Povident and Pension Funds and Unit Trusts.
The financial markets in Malaysia comprise four (4) major markets namely; money and
foreign exchange markets, capital markets, derivatives market, and offshore market.
1.3 Financial Intermediation
Financial Intermediation by Financial
Institutions
Financial
Surplus Units Deficit units
Institutions
• Financial institutions are important to facilitate the movement of funds between two parties, surplus
units and deficit units.
• Surplus units are those who have extra cash or funds.
• While, deficit units are those who need funds.
• For example, commercial banks as intermediary receive deposits from depositors (surplus units).
• Using the deposits, the commercial banks gives loans to borrowers (deficit units).
• Hence, the commercial banks function as an intermediary between depositors and borrowers.
• The effort by the various financial institutions in meeting the requirements of depositors and
borrowers is called financial intermediation.
Financial Intermediation by Financial
Markets
Surplus Financial Deficit
Units Markets Units
• Financial markets are important to facilitate the movement of funds between two parties, surplus
units and deficit units.
• Surplus units are those who have extra cash or funds.
• While, deficit units are those who need funds.
• The units can be individuals, organizations or even government.
• Financial markets as intermediary inform the surplus units where to invest their extra money and to
inform the deficit units where they can obtain funds.
• An efficient financial markets allow investors (surplus unit) to make investment and to receive return
for their investments.
• An efficient financial markets also allow borrowers (deficit unit) to receive funds and use them for
the purpose of investing in capital assets.
1.4 Roles of Financial Institutions as
Intermediary
Roles of Financial Institutions as Intermediary
The roles of financial institutions in the financial system as an intermediary are as
follows:
i. Offer savers/ supplier of funds (investos) a well-diversified portfolio of depository

or invetsment instrument that can maximize return.
ii. Allow deficit units/ users of funds (borrowers more options of borrowing, financing
or advances at lowest possible prices.
iii. Provide reliable information of various instruments available such as level of
safetiest or liquidity.
iv. Act as advisor for participants to utilize the instruments and/ or financing available.
v. Provide products and services using the new technology in line with the virtual
banking concept or electronic banking.
vi. Identify the actual provider of funds and users of funds through an effective
banking network.
1.5 Roles of Financial Markets as
Intermediary
Roles of Financial Markets as Intermediary
The roles of financial markets in the financial system as an intermediary are as follows:
i. To provide a platform for market participants (deficit units and surplus units) to
mobilise funds more effectively according to specific needs.
ii. To have options for participants on types of markets that meet corporate vision
and goals.
iii. To provide options for supplier of funds to diversify the portfolio that meet
company objectives.
iv. To provide a well-protected fund movement system.
END OF
CHAPTER 1
Study Questions:
1. What is a financial system?

2. Illustrate the structure of the Malaysian financial system.
3. Provide any two (2) roles of financial institutions in the financial system as an
intermediary.
4. Give any two (2) roles of financial markets in the financial system as an
intermediary.
List of References:
1. Ibrahim Abdul Rahman & Siti Norbaya Mohd Rashid, Financial Market and
Banking Operations.
2. Mohd Nizal Haniff, Norli Ali, Norashikim Ismail & Noreena Md Yusoff,
Introduction to Malaysian Financial Markets. McGraw-HIll, 2022, ISBN: 978-
967-0761-53-4.

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FIN250

1.1 What is a Financial System?

1.2 Structure of Malaysian financial system

1.3 Financial intermediation

1.4 Roles of financial Institutions as

1.5 Roles of financial markets Intermediary

1.1 Explain the term of financial system

1.2 Illustrate the structure of Malaysian

1.3 Illustrate the financial intermediation by

1.4 Describe the roles of financial institutions

1.5 Describe the roles of financial markets as

Defines as a system which consists of institutional units

Financial Institutions Financial Markets

Banking System Non-Bank Financial Money and Foreign

Bank Negara Malaysia (BNM) Development Finance

Banking Institutions: (i) Commercial Banks; Savings Institutions

Provident and Pension Funds

The financial institutions comprise banking system and non-bank financial

i. Offer savers/ supplier of funds (investos) a well-diversified portfolio of depository

1. What is a financial system?

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