Course- Financial Management Shehrin Radiyat Shahnawaz Roll 68 IBA BBA 28 Section B Reflection Paper on Class 3- 07.02.2022 Financial System Monetary system is the system that deals with money. Money can be in the form of notes, currency, coins, cheque. Central and commercial banks are part of monetary system as these have the ability to issue cheques and generate money. Not all banks can issue cheques and hence are not part of the monetary system. Governments usually avoid open market operation as it involves artificially injecting money in the economy which will lead to inflation. However, at times when a rapid increase in GDP is noticed, the economy is brought to balance by injecting money artificially. This is called Fragomen economics. Monetary system is governed by central bank which takes monetary policy. It establishes a relationship between fiscal and monetary policy. Financial institutions include both bank and non-bank institutions. NBFI cannot issue cheque but banks can hence it cannot create money. CRR rate- The CRR rate refers to the minimum percentage of the deposit amount which banks must keep at the reserve of the Central Bank. If this CRR rate had not been present then banks would have been able to create unlimited amount of money which would have destabilized the economy. Asymmetric information- when users have unequal amount of information available. Due to asymmetric information adverse selection and moral hazard arises. Regulators are a very imp part of a financial system. Trust is the heart of the financial institution. As without public confidence people will not invest money and hence the financial system will crash. Government subsidies do not exist in US as it is a capitalist society but exists in welfare societies as Australia. These are provided by US only to rescue the banking sector. Financial system should be protected as it deals with people’s money. The regulators are the central bank and BSEC in the perspective of Bangladesh. Course- Financial Management Shehrin Radiyat Shahnawaz Roll 68 IBA BBA 28 Section B Introduction to Financial Management Finance refers to the management of money or mobilization of funds. From the economic perspective it is mobilization of funds and from the micro perspective it is management including how funds can be raised, managed and invested. Finance can be divided into public, corporate and personal finance. Public finance-includes financing by government. Also called government economics. Financial management covers corporate finance. Social finance is similar to public finance but not exactly the same. Stabilization policy includes the policies to stabilize the economy by regulating inflation, unemployment and other components. Inflation is not always negative as inflation is also a consequence of the increase in GDP. Personal finance includes an important component of reducing tax. Public finance and corporate finance have a major difference in budgeting. In public finance expenditure is calculated first and then the revenue is generated whereas in corporate finance the vice versa takes place. Government has expenditure budget from which it clears all salaries another is annual development program which is a form of investment. It is a form of loan which is used to make investment and then returned. Taking loans for clearing expense is problematic. Public finance does not have profit motive but corporate and personal finance have profit motive. Corporate finance includes- acquisition, financing and asset management. Wealth maximization includes shareholder’s wealth maximization. When we collect fund from financial market this is called financing. Then we invest it which is called acquisition and then we manage it. Balance sheet has 2 sides of assets and liabilities and owner’s equity. Both the sides must match with each other. Liabilities and OE is called source of funds while asset is called use of fund. Fixed asset, investment and current assets are the main components of assets. For liabilities there are long term liability, owner’s equity and current liability. Financing decision includes long term Course- Financial Management Shehrin Radiyat Shahnawaz Roll 68 IBA BBA 28 Section B liability and owner’s equity. Investment decision includes investing in fixed asset and investment in order to increase total wealth. Working capital management is managing current asset and current liability. Firstly, fund is collected from financial market and then is invested in assets. The return from asset generates cash flow which s distributed in 3 parts- government tax, cash reserves for future use, pay debts or dividends. Ultimately the firm must be a cash generating activity. The role of financial manager is to collect fund, invest and distribute the generated cash.
