Financial Services & Records

Chapter 5Chapter 5

Financial Services & Financial Services & RecordsRecords

Financial ServicesFinancial Services

Financial InstitutionsFinancial Institutions

Type of sources Type of sources Commercial banksCommercial banks Consumer finance companiesConsumer finance companies Credit unionsCredit unions Savings and loan associationsSavings and loan associations Others Others

Insurance companiesInsurance companies Credit card companiesCredit card companies Pawn-brokersPawn-brokers

Commercial Bank

Often referred to as full-service institution Offer broad range of services – checking account, savings

account, trust facilities, almost all types of loan Banks are examined by the Bank Negara Also examined by their own internal auditors & by

outside auditors on orders from the bank’s board of director

Consumer Consumer Finance Companies

Often referred as small loan companies, personal finance Often referred as small loan companies, personal finance companies, licensed lenderscompanies, licensed lenders

Following the mergers among financial institution in Following the mergers among financial institution in Malaysia, the finance companies are absorbed under the Malaysia, the finance companies are absorbed under the commercial bankscommercial banks

Principal distinguishing features:Principal distinguishing features:

a)a) Characteristics of the loansCharacteristics of the loans

b)b) Their customersTheir customers

c)c) Their method of operationTheir method of operation

Consumer Consumer Finance Companies (cont.)

a)a) Principal types of loanPrincipal types of loan Installment loan of small loan (less than commercial Installment loan of small loan (less than commercial

bank)bank) Through sales finance companies (their subsidiary), Through sales finance companies (their subsidiary),

they buy installment contract from local retailersthey buy installment contract from local retailers With small loan offered, the risk is higher, thus With small loan offered, the risk is higher, thus

charging higher interest ratecharging higher interest rate Since the loan amount is small, the operational cost & Since the loan amount is small, the operational cost &

other expenses are almost fixed, hence, the cost in other expenses are almost fixed, hence, the cost in terms of percentage from the loan is higherterms of percentage from the loan is higher

Consumer Finance Companies (cont.)Consumer Finance Companies (cont.)

b)b) CustomersCustomers different occupational group from commercial bankdifferent occupational group from commercial bank offered to less income stability or less occupational offered to less income stability or less occupational

stability group stability group customers represent higher riskcustomers represent higher risk security accepted for loan is often of lesser value or security accepted for loan is often of lesser value or

difficult to appraise (eg. household goods)difficult to appraise (eg. household goods)

Consumer Finance Companies Consumer Finance Companies (cont.)(cont.)

c)c) Service & method of operationService & method of operation Usually located for the customer’s convenience, & are Usually located for the customer’s convenience, & are

likely to have many small branches in one citylikely to have many small branches in one city Do not accept deposits, or have safe-deposit boxesDo not accept deposits, or have safe-deposit boxes Offices relatively small, few workers, often located in Offices relatively small, few workers, often located in

malls & convenient locationmalls & convenient location

Credit UnionCredit Union

Is a cooperative financial institutionIs a cooperative financial institution An association of people who save money together & An association of people who save money together &

make loans to each other at relatively low interest ratemake loans to each other at relatively low interest rate Later offer loan for non-members with higher interest rateLater offer loan for non-members with higher interest rate Organised by people who share a common bond – eg. Organised by people who share a common bond – eg.

Employee working for the same employer Employee working for the same employer They participate in the ownership & control of the credit They participate in the ownership & control of the credit

unionunion

Credit Union (cont.)Credit Union (cont.) Characteristics of Credit UnionCharacteristics of Credit Union

Adhere to basic principals as other cooperative Adhere to basic principals as other cooperative institutionsinstitutions

Savings & loans are their main functionSavings & loans are their main function Acquire capital from membership savings that are Acquire capital from membership savings that are

invested as the credit union sharesinvested as the credit union shares Each member, irrespective of amount of shares, is Each member, irrespective of amount of shares, is

entitled to one vote in the election of its board of entitled to one vote in the election of its board of directorsdirectors

Additional dividends may be declared after expenses Additional dividends may be declared after expenses are paid & legal reserves set asideare paid & legal reserves set aside

Are operated mainly for the benefit of their membershipAre operated mainly for the benefit of their membership

Savings & Loan AssociationSavings & Loan Association

Are depository institution Are depository institution Originally organised to accept savings deposits & Originally organised to accept savings deposits &

provide mortgage financingprovide mortgage financing Later provide commercial loan & consumer loan, Later provide commercial loan & consumer loan,

competing with commercial bankcompeting with commercial bank The most common loan involves mortgage lending, The most common loan involves mortgage lending,

even though they offer wide variety of loanseven though they offer wide variety of loans Active in second mortgage & home equity lendingActive in second mortgage & home equity lending Is also a cooperative bankIs also a cooperative bank

OthersOthersInsurance CompaniesInsurance Companies The main purpose insurance policy is to provide financial The main purpose insurance policy is to provide financial

security for dependents, but it also contain savings & security for dependents, but it also contain savings & investment features such as for retirement planninginvestment features such as for retirement planning

It is a nondeposit institutionIt is a nondeposit institution

Credit card companyCredit card company Companies offering credit card for general purpose Companies offering credit card for general purpose

(purchasing & cash-loan)(purchasing & cash-loan) Usually offered through banks or private agencies (eg. Usually offered through banks or private agencies (eg.

Petronas-VISA)Petronas-VISA) Made arrangement with businesses to accept the credit card Made arrangement with businesses to accept the credit card

instead of cashinstead of cash

Others (cont.)Others (cont.)

PawnshopsPawnshops Make loans based on the value of tangible possessions Make loans based on the value of tangible possessions

eg. jewelleryeg. jewellery Obtaining cash-loan quickly by low & middle income Obtaining cash-loan quickly by low & middle income

familiesfamilies A non-deposit institutionA non-deposit institution Higher fees charged than other financial institutionsHigher fees charged than other financial institutions

Financial ServicesFinancial ServicesSome common servicesSome common services Checking & savings accountsChecking & savings accounts Safe deposit facilitiesSafe deposit facilities Trust servicesTrust services Loan & credit cardsLoan & credit cards MortgagesMortgages Electronic bankingElectronic banking Investment departmentInvestment department

Commercial bank offered most of the services Commercial bank offered most of the services compared to other financial institutions compared to other financial institutions

Financial Services (cont.)Financial Services (cont.)

Checking accountChecking account Checks acts as a substitute for cash in Checks acts as a substitute for cash in

financial transactionsfinancial transactions More convenient & less risk of lossMore convenient & less risk of loss

Savings accountSavings account Accounts where person deposits money Accounts where person deposits money Flexibility in withdrawal at the convenience Flexibility in withdrawal at the convenience

of the depositorof the depositor Benefits in terms of security of money Benefits in terms of security of money

deposited & interest incurred deposited & interest incurred

Financial Services (cont.)Financial Services (cont.)Safe deposit facilitiesSafe deposit facilities Safe deposit boxes provide the best security for Safe deposit boxes provide the best security for

valuable items & documents, on a yearly rental basisvaluable items & documents, on a yearly rental basis At the time the box is rented, the person signed a At the time the box is rented, the person signed a

signature card & got a key to the boxsignature card & got a key to the box Access to the box is permitted to those signed the card Access to the box is permitted to those signed the card

& who has the key. The bank will have another key. To & who has the key. The bank will have another key. To allow entry to a box needs a combination of two keys allow entry to a box needs a combination of two keys

Trust servicesTrust services Offer a trusted custodian of money or property Offer a trusted custodian of money or property

servicesservices

Financial Services (cont.)Financial Services (cont.)Loan & Credit cardLoan & Credit card Credit offered to individuals Credit offered to individuals Cash-loan: personal loans, advance from credit card taken Cash-loan: personal loans, advance from credit card taken

from the bank issuing the credit card from the bank issuing the credit card Credit-purchase: hire-purchase loan, purchasing using Credit-purchase: hire-purchase loan, purchasing using

credit cardcredit card The credit card companies make arrangement with the The credit card companies make arrangement with the

banks for the banks to offer their credit card to bank‘s banks for the banks to offer their credit card to bank‘s clientsclients

MortgagesMortgages Loan for obtaining property or real estate (home, land)Loan for obtaining property or real estate (home, land) Need collateral of the propertyNeed collateral of the property


Electronic bankingElectronic banking Automated teller machine (ATM) – withdrawal, deposit, Automated teller machine (ATM) – withdrawal, deposit,

loan repayment, transfer of money using a plastic card. loan repayment, transfer of money using a plastic card. Fee would be charged if the card is used at a different Fee would be charged if the card is used at a different bank than the issuer bankbank than the issuer bank

Internet bankingInternet banking

Investment departmentInvestment department Banks also invest part of their money in hig-quality Banks also invest part of their money in hig-quality

government & corporate bonds government & corporate bonds Securities offered through banks are more convenient & Securities offered through banks are more convenient &

less costly than through stock brokerage firmsless costly than through stock brokerage firms


Islamic BankingIslamic Banking refers to a system of banking that is consistent with refers to a system of banking that is consistent with

Islamic Law (Islamic Law (Sharia’Sharia’) principles & guided by Islamic ) principles & guided by Islamic economicseconomics

Islamic law prohibits usury, i.e. the collection & Islamic law prohibits usury, i.e. the collection & payment of interest, also commonly called ribapayment of interest, also commonly called riba

Islamic law also prohibits investing in businesses that Islamic law also prohibits investing in businesses that are unlawful, or are unlawful, or haramharam (such as businesses that sell (such as businesses that sell alcoholic drinks, or business that are contrary to alcoholic drinks, or business that are contrary to Islamic values)Islamic values)

Financial Services (cont.)Financial Services (cont.) Islamic banking has the same purpose as conventional Islamic banking has the same purpose as conventional

banking except that it operates in accordance with the rules banking except that it operates in accordance with the rules of Syariah, that is of Syariah, that is Fiqh al-MuamalatFiqh al-Muamalat (Islamic rules on (Islamic rules on transactions)transactions)

The basic principle is the sharing of profit & loss and the The basic principle is the sharing of profit & loss and the prohibition of riba (usury)prohibition of riba (usury)

Most common Islamic concepts:Most common Islamic concepts: safekeeping (safekeeping (WadiahWadiah)) cost plus (cost plus (MurabahahMurabahah)) profit sharing (profit sharing (MudharabahMudharabah)) joint venture (joint venture (MusharakahMusharakah)) leasing (leasing (IjarahIjarah))


Wadiah Wadiah (Safe-keeping)(Safe-keeping) The bank is a keeper & trustee of fundsThe bank is a keeper & trustee of funds Funds deposited in the bank are guaranteed by the bank to Funds deposited in the bank are guaranteed by the bank to

refund the entire amount of the deposit, or any part of the refund the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands itoutstanding amount, when the depositor demands it

The depositor, at the bank's discretion, may be rewarded The depositor, at the bank's discretion, may be rewarded with a with a hibahhibah (gift) as a form of appreciation for the use of (gift) as a form of appreciation for the use of funds by the bankfunds by the bank

The bank compensates depositors for the time-value of The bank compensates depositors for the time-value of their money (i.e. pays interest) but refers to it as a gift their money (i.e. pays interest) but refers to it as a gift because it does not officially guarantee payment of the giftbecause it does not officially guarantee payment of the gift

Financial Services (cont.)Financial Services (cont.)Murabahah Murabahah (cost plus)(cost plus) In an Islamic mortgage transaction, instead of loaning the In an Islamic mortgage transaction, instead of loaning the

buyer money, a bank buy the item from the seller, and re-buyer money, a bank buy the item from the seller, and re-sell it to the buyer at a profit, & the buyer pay to the bank sell it to the buyer at a profit, & the buyer pay to the bank in installmentsin installments

No additional penalties charged for late payment as profit No additional penalties charged for late payment as profit cannot be made explicit cannot be made explicit

To protect itself against default, strict collateral is neededTo protect itself against default, strict collateral is needed The asset (home or land) is registered to the name of buyer The asset (home or land) is registered to the name of buyer

from the start of the transaction but mortgaged to the bankfrom the start of the transaction but mortgaged to the bank Loans for vehicles are handled in a similar way (selling the Loans for vehicles are handled in a similar way (selling the

vehicle at a higher-than-market price to the debtor and then vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid)retaining ownership of the vehicle until the loan is paid)


Murabahah Murabahah (cost plus) (cont.)(cost plus) (cont.) The purchase & selling price, other costs, and the profit The purchase & selling price, other costs, and the profit

margin is stated at the time of the sale agreementmargin is stated at the time of the sale agreement The bank is compensated for the time value of its money in the The bank is compensated for the time value of its money in the

form of the profit marginform of the profit margin It’s a fixed-income loan for the purchase of a real asset (such It’s a fixed-income loan for the purchase of a real asset (such

as real estate or a vehicle), with a fixed rate of profit as real estate or a vehicle), with a fixed rate of profit determined by the profit margindetermined by the profit margin

The asset remains as a mortgage with the bank until the The asset remains as a mortgage with the bank until the Murabahah is paid in fullMurabahah is paid in full

RecordsRecords

Principal records most people should maintainPrincipal records most people should maintain

1.1. Income statementIncome statement Summary of income & expenses for selected time periodSummary of income & expenses for selected time period Provides 1st important step in financial planning & Provides 1st important step in financial planning &

budgetingbudgeting

2.2. Balance sheetBalance sheet Listing of assets & liabilites that determine the financial Listing of assets & liabilites that determine the financial

worthworth Summary of a person‘s financial conditionSummary of a person‘s financial condition

Records (cont.)Records (cont.)3.3. Personal inventoryPersonal inventory

Compilation of personal possessions, listing such factors as Compilation of personal possessions, listing such factors as date of purchase & original costdate of purchase & original cost

Birth certificateBirth certificate Marrige licenseMarrige license Will‘s documentWill‘s document

4.4. Tax recordsTax records Consist of income data & list of deductions of income Consist of income data & list of deductions of income

during the yearduring the year Copies of previous tax return Copies of previous tax return

Records (cont.)Records (cont.)

5.5. Homeownership recordsHomeownership records Record on purchasing of home or other property, Record on purchasing of home or other property,

documents on mortgage loan documents on mortgage loan

6.6. Insurance recordsInsurance records Policies documents, schedule of policy due dates, the Policies documents, schedule of policy due dates, the

insurance annual statement insurance annual statement

7.7. Banking recordsBanking records Accounts book, bank statement, credit card bill, Accounts book, bank statement, credit card bill,

checking accounts, bank transactionschecking accounts, bank transactions

Records (cont.)Records (cont.)

8.8. Investment recordsInvestment records Record of sales & purchases of investment – stock, Record of sales & purchases of investment – stock,

bond, unit trustbond, unit trust Retained for tax purposesRetained for tax purposes Helped evaluating the investmentHelped evaluating the investment

9.9. Working fileWorking file documents such as bills –utility billsdocuments such as bills –utility bills worksheets for family budgetworksheets for family budget

Economy & Finance

Financial Services & Records