Topic 7: NonBank Financial Institutions II: Savings Institutions, Mutual Fund, and Credit Unions - PowerPoint PPT Presentation

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Topic 7: NonBank Financial Institutions II: Savings Institutions, Mutual Fund, and Credit Unions

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Mutual Funds: Structure, principal sources and uses of Funds, Performance Evaluation. ... Mutual Fund ... money market mutual fund ... – PowerPoint PPT presentation

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Title: Topic 7: NonBank Financial Institutions II: Savings Institutions, Mutual Fund, and Credit Unions


1
Topic 7 Non-Bank Financial Institutions II
Savings Institutions, Mutual Fund, and Credit
Unions
  • Savings Institutions Structure, principal
    sources and uses of Funds, Performance
    Evaluation.
  • Mutual Funds Structure, principal sources and
    uses of Funds, Performance Evaluation.
  • Credit Unions Structure, principal sources and
    uses of Funds, Performance Evaluation.
  • Finance Companies Structure, principal sources
    and uses of Funds, Performance Evaluation.

2
Savings Institutions (SIs)
  • They are deposit taking financial intermediaries
    that pool funds from owners/depositors for
    purpose of investing in financial securities.
  • Unlike commercial banks, SIs provide loans
    (mostly consumption, mortgage etc.) to households
    and individuals.
  • SIs can be classified as mutual or stock owned.
    SIs are often referred to as mutual banks or
    savings and loans associations (S L).
  • Activities of SIs are regulated by special
    regulatory agency of government.
  • Regulation of Sis covers their capital, risk
    exposure, performance, among other. They are
    monitored using CAMELs rating.

3
  • Sources of funds
  • Deposits savings and time deposits, retail CDs,
    money market deposit accounts (MMDA).
  • Borrowed funds (usually for short-term basis)
    from other institutions deposits with the Central
    Bank (CB), CB discount windows, or repos.
  • Capital retained earnings or issued stocks.
  • Uses of funds
  • Cash
  • Mortgages
  • Mortgage-backed securities
  • Other securities
  • Consumer and commercial loans
  • Other uses

4
  • Risk exposure of SIs
  • Like other FIs, Sis are exposed to certain
    risks, such as
  • - Liquidity risk
  • - Credit risk
  • - interest rate risk
  • Valuation of SIs
  • SIs are valued in the same way commercial are
    valued. That is
  • The same factors that affects CF, K, Rf, and RP
    in commercial banks also affect them in SIs.

5
  • SIs Performance analysis
  • SIs performance can be analysed by an
    examination of their income statement.
  • Performance indicators are measures as percentage
    of total assets.

6
Mutual Fund
  • MF They are financial intermediaries that pool
    funds from small investors through the sales of
    shares, and then use the proceeds to invest in
    financial securities.
  • MF are also known as Unit Trust (UT), and they
    serve as importance sources of finance for
    government and corporate bodies within the
    primary market.
  • MF/UT are made up of three components - trustee,
    management company (portfolio managers) and funds
    or unit holders.
  • Fund Types
  • - open end shares can be increased/reduced,
    new savers can join the trust
  • - closed end fixed number of shares
  • - Hedge fund
  • - money market mutual fund
  • - Exchange traded fund are designed to mimic
    stock indexes and are usually traded on a stock
    exchange just like stocks.
  • - Sales Load - front-end load, back-end load,
    and level load

7
  • Value of Fund
  • The net worth of MF is measured in terms of
    value per share.
  • Net asset value of fund is calculated on daily
    basis as
  • Net asset value Market value of fund/number
    of shares
  • where market value is obtained by multiplying
    number of shares by prevailing unit price
  • Interest/dividends accrued are usually added to
    the market value, and all expenses incurred are
    deducted
  • Category of MF
  • Stock Mutual fund
  • - growth funds
  • - capital appreciation funds

8
  • - growth and income
  • - international and global funds
  • - specialty funds
  • - index funds
  • - multi-fund mutual funds
  • Bond MF
  • - income funds
  • - tax-free funds
  • - high-yield (junk) funds
  • - international and global funds
  • MF Performance
  • Performance measurement of MF depends on the
    nature and category of the fund

9
  • Stock Mutual Fund performance
  • - open-end fund
  • ?PERF f(?MKT, ?SECT, ?MANAB)
  • - for a closed-end stock fund, change in
    premium or discount is another factor that
    affects performance
  • Bond Mutual Fund Performance
  • - open-end fund
  • ?PERF f(?Rf, ?RP, CLASS, ?MANAB)
  • - for a closed-end stock fund, change in
    premium or discount is another factor that
    affects performance

10
Credit Union
  • Definition of Credit Unions
  • Types of Credit Unions
  • Ownership Structure
  • Principal Sources and Uses of Funds
  • Performance evaluation indicators
  • Problems of Credit Unions

11
Definition of Credit Unions
  • A credit union is a cooperative financial
    institution, owned and controlled by the members
    who use its services.
  • Credit unions serve groups that share a common
    bond.
  • Credit unions are also not-for-profit and exist
    to provide a safe, convenient place for members
    to save money and to get loans and other
    financial services at reasonable rates.
  • Credit unions are cooperative financial
    institutions that provide many of the same
    financial services that banks do.
  • Credit unions have grown within and around the
    Caribbean over the years Jamaica -49 Caribbean
    351.

12
Types of Credit Union
  • Employee-based credit union e.g., UWI-Mona CU
  • Professional organisations credit unions e.g.,
    Farmers credit union.
  • Region or national-based credit union e.g.,
    labour union.
  • Ownership Structure of Credit Union
  • Each member of a credit union is an equal owner -
    entitled to one vote at the annual meeting.
  • Voluntary leadership - Credit unions are led by a
    board of directors elected from the membership at
    the annual meeting.

13
Principal Sources and Uses of Funds
  • Sources of Funds
  • - member deposits/savings
  • - reserves retained earnings
  • - subscriptions and contributions
  • - external credit
  • - institutional capital
  • Uses of Funds
  • - loans
  • - liquid investments
  • - financial investments
  • - non-earning assets

14
Performance evaluation indicators
  • In general, there is no fixed rule for evaluating
    credit unions performance.
  • However, credit unions performance can be
    monitored and evaluated on the basis of PEARLS.
  • PEARLS stands for a financial performance
    monitoring system designed to offer management
    guidance for credit unions. It stands for
    protection, effective financial structure, asset
    quality, rates of returns and costs, Liquidity
    and signs of growth.
  • PEARLS is set of financial ratios or indicators
    that help to standardize terminology among credit
    unions.

15
Components of PEARLS
  • Protection ensure that the financial
    institution provides depositors a safe place to
    save their money. Provision against loan losses.
    It comprises
  • - delinquency outstanding
    port-folio-at-risk
  • - Solvency measures the worth of member
    savings, after adjusting for losses
  • Loan delinquent Total liabilities Problem
    Assets
  • Total shares Total deposits

16
Components of PEARLS (contd.)
  • Effective financial structure measures the
    adequacy of funds (savings, shares, external
    credit and institutional capital) and its uses of
    funds (loans, liquid investments, financial
    investments and non-earning assets).
  • - Net Funds/ Total assets.
  • Asset quality ratio of non-earning assets to
    total assets
  • Rates of Return and costs measures rates of
    return on each type of asset (use of funds) and
    the cost of each type of liability (source of
    funds).
  • e.g., Net loan income/Average net loan
    portfolio.

17
  • - financial cost ratio costs of savings
    deposits, external credit and dividends on
    Liquidity shares.
  • Liquidity measure the extent of liquidity
  • - non-earning liquid assets/total assets.
  • Signs of growth measures growth of institution,
    e.g., the growth in Shares, income, savings,
    assets.
  • Risk exposure of CU
  • CU are exposed to three basic risks
  • - Liquidity risk
  • - Credit risk
  • - Interest rate risk

18
Finance Companies
  • Finance companies are specialised FIs that
    provide short- and intermediate-term credit to
    consumers and small businesses.
  • They raise funds through the sales of commercial
    papers, stocks and bonds, and use same to provide
    loans.
  • Finance companies are usually in the form of
  • Sales Finance companies owned by companies for
    the purpose of providing sales credit to
    customers, or be a separate firm that grants
    credits to retailers and dealers.
  • Consumer finance companies they may be owned by
    banks, or be a separate companies. They offer
    specific consumption loans
  • Business finance companies provide loans and
    equipment leasing.

19
  • Risk exposure of FC
  • - liquidity risk
  • - interest rate risk
  • - credit risk
  • Valuation of FC
  • FCs are valued in the same way commercial are
    valued. That is
  • The same factors that affects CF, K, Rf, and RP
    in commercial banks also affect them in FCs.
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