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A financial system is a set of institutions and markets that enable the
transfer of funds between savers and borrowers.
It involves mobilising resources by providing the means for savers to hold
monetary and financial assets and at the same time allocating these
resources for productive investment.
The intermediation process involves mobilising funds from the economy’s
surplus units to its deficit units to aid in enhancing economic development.
A sound financial system is the key to achieving stability in both the public
and private sectors. It is responsible for the effective management of funds
and the efficient use of resources.
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Differences between financial system and financial intermediaries?
One key difference is that a financial system refers to the totality of financial
institutions and markets in a country or region.
While financial intermediaries are just one type of institution within the system.
Financial intermediaries are typically institutions that bring together lenders and
borrowers of funds, such as banks.
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1. As a platform that
allows the transfer of
money between savers
and borrowers
2. Channeled through
intermediaries such as
banks, provident funds
and insurance funds as
well as government
agencies
4. To meet short term
and long-term capital
needs of individual,
business and
Government
3. To help in the
formation of capital.
5. To mobilise the savings
and productively invest
them
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Financial Assets
• Financial Assets are a tangible or intangible asset whose value is
determined through a contractual agreement on future cash flows.
• Some key components of a financial assets contractual agreement include
the type of asset being exchanged, the price of the asset, the date of
the asset exchange, and any special conditions associated with the
exchange.
• As examples, security deposits, bonds, stocks, etc., which are frequently
traded in the market and are more liquid than real assets.
Types of Financial Asset:
This is an agreement between the customer and a bank,
Certificate
which states that the customer will keep a certain
of Deposit
amount of money deposited in the bank in exchange for a
fixed rate of interest.
Bonds
Bonds are debt securities issued by corporations or
government agencies to raise funds. They pay periodic
interest to the bondholders and return the principal at
maturity.
Bank
Deposits
Bank deposits refer to savings and current accounts held
by individuals or businesses with commercial banks. These
accounts offer a low rate of return, but provide a high
degree of security and easy access to the funds.
Loans and
Receivables
These are credit instruments that allow individuals or
businesses to borrow money from banks or financial
institutions. Loans are typically secured by collateral, such
as property or other assets, and carry a fixed or
variable interest rate. Receivables refer to amounts owed
by a third party to the lender and are typically used to
finance business operations.
Derivatives
Derivatives are financial instruments whose value is
derived from an underlying asset, such as a stock, bond,
commodity, or currency. Examples of derivatives include
options, futures, and swaps.
Cash
Cash refers to physical currency, coins, and bank deposits
that can be easily converted into cash. Cash is the most
liquid and readily available form of financial asset.
Features of Financial Assets
Liquidity:
• Liquidity refers to the ease with which
an asset can be bought or sold
without affecting its price. For
example, assets like stocks and
government bonds are considered
highly liquid, while assets like real
estate or private equity are
considered less liquid.
Risk:
• Risk is the chance that an investment
will result in a loss. Financial assets
with higher returns usually come with
higher levels of risk. For example,
stocks are considered riskier than
bonds, while bonds with lower credit
ratings are considered riskier than
those with higher ratings.
Returns:
• Return is the amount of money an investor
earns from an investment. Financial assets like
stocks or real estate have the potential for
higher returns, but also come with higher risk.
Bonds and savings accounts have lower returns
but also lower risk.
Convertibility:
• Convertibility refers to the ability of an
asset to be converted into another type
of asset. For example, convertible bonds
can be converted into a specified number
of shares of the issuing company's
stock.
Predictable:
• Predictability refers to the degree to
which an asset's future cash flows and
returns can be estimated with certainty.
Financial assets like bonds and savings
accounts are considered more
predictable than assets like stocks or
real estate..
Short-Term Income:
• Short-term income refers to the amount of
money an investor earns in a short period of
time, often through interest or dividends.
Financial assets like savings accounts or
short-term bonds are often used to generate
short-term income.
Tangible Assets
• The term "tangible" refers to anything that can be felt.
• Within the context of corporate assets, a tangible asset is precisely that;
an item that possesses real transactional value and, in most cases, a
physical form.
• Tangible assets are the most fundamental sort of asset on the balance
sheet, accounting for the bulk of an organisation's total assets.
• Some common tangible assets examples include land, real estate property,
cash, inventory, furniture, office supplies, machinery, equipment, vehicles.
Features of a Tangible Asset
Physical existence:
• Tangible assets have a
physical form and can be
seen, touched, and used.
Readily available value:
• The worth of a tangible
asset may be determined
very easily using the
asset's original cost, book
value, or market value.
Potential collateral:
• Tangible assets can be
used as collateral for
loans or lines of credit.
Subject to depreciation:
• A business's financial
statements include
depreciation to reflect the
decline in value of a longterm tangible asset.
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Financial Markets are platforms where
financial assets, such as stocks, bonds,
and currencies, are bought and sold.
Examples of financial markets include
the stock market, bond market, and
foreign exchange market.
If there were no financial markets,
businesses and individuals would have
difficulty obtaining the funds they need
to grow and invest. They would have to
rely on traditional banking methods such
as loans, which might not always be
available or affordable. The flow of
capital would be limited, and the
economy would be slower to grow.
Without financial markets, it would be
difficult to transfer funds from one
party that may have no investment
opportunity to the other party that
has investment opportunity.
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What are the different between financial system, financial intermediaries,
financial institutions and financial markets?
The main difference between the four concepts is that the financial system
refers to the entire network of financial institutions and markets, while
financial intermediaries are just one type of player within this system that
facilitate the flow of money and credit between savers and borrowers.
Financial institutions are organisations that provide financial services, such
as banks.
Financial markets are places where financial assets, like stocks and bonds,
are traded.
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a. Providing a secure place:
Financial markets serve as a
secure place for individuals and
institutions to invest their money
and earn a return.
b. Facilitating lending: They enable
borrowing and lending between
individuals, businesses, and
governments by providing a
platform for the exchange of
debt securities.
c. Improving liquidity: Financial
markets increase the liquidity of
investments by allowing individuals
and institutions to easily buy and
sell securities.
d. Facilitate the final exchange of
goods and services such as
contactless payments systems,
foreign exchange etc.
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e. Forward markets: They allow
market participants to trade
futures contracts, which are
agreements to buy or sell an asset
at a future date for a predetermined price.
f. Provide a market for equities:
Allowing the business to raise fresh
equity to find their capital
investment and expansion.
g. Primary and secondary markets:
Financial markets can be divided into
primary and secondary markets. The
primary market is where new
securities are issued, while the
secondary market is where existing
securities are traded.
h. Reducing risk: Financial markets
allow individuals and institutions to
manage risk by providing a platform
for buying and selling securities, such
as insurance and derivative
products, that help manage the
impact of price fluctuations.
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Overall, financial markets also play a critical role in supporting the
functioning of modern economies by facilitating the flow of capital,
providing price discovery and risk management, promoting liquidity,
and supporting economic growth.
Allocation of Capital: Financial markets facilitate the flow of capital
from savers to borrowers, allowing for efficient allocation of
resources and promoting economic growth.
Price Discovery: Financial markets provide a platform for buyers and
sellers to trade assets, helping to determine the fair value of these
assets through the process of price discovery.
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Risk Management: Financial markets offer various financial instruments,
such as bonds and derivatives, which allow individuals and organisations to
manage financial risks and hedge against potential losses.
Liquidity: Financial markets provide liquidity to investors by enabling them
to easily buy or sell assets as needed. This can help to reduce the risk of
price volatility and promote stability in the economy.
Economic Growth: Financial markets can support economic growth by
providing funding for new businesses and investment in productive assets,
as well as facilitating the transfer of capital to more efficient uses.
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Money markets – A money market
is a financial market where
short-term debt securities are
traded. These securities have
maturities of less than one year.
Capital markets are the markets
for long term debt (i.e. debt
securities that have maturity
more than one year) and equity.
Examples: certificate of deposits,
commercial papers, treasury
securities, banker acceptance etc.
It includes stock (equity) and bond
(debt).
Equity represents ownership in a
firm. There are two types of
equity: ordinary shares and
preference shares
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a. Primary market – used when firms
(and Government as well) first issue
securities for funds/capital.
b. Secondary market – is the place
where the stocks, bonds and other
financial instruments that were issued
in the primary market are traded
between the potential buyers and
sellers.
The firm engages in two types of
primary market activities; public
offerings and private placements
Several investors do not buy the
stocks or the bonds when they are
issued for the first time in the
market.
They prefer buying the stocks from
the holders of the stocks. The trade
of the stocks/share takes place
between new buyers and sellers who
are already holding the stock.
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The main purpose of derivatives is to reduce and
manage the risk associated with an underlying
asset.
c. Derivative market
A derivative is a contract
between two parties which
derives its value/price from
an underlying asset.
The most common types of derivatives are
futures, options, forwards and swaps.
Forwards and swaps are purchased in the market
for ‘private’ placement such as through the banks.
Futures and options are traded on Bursa Malaysia
Derivatives Exchange
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Blockchain
• Blockchain is a distributed ledger technology (DLT). DLT refers to a type of
database that is spread across multiple locations or among different
participants in a network. DLT contains a shared record of all transactions or
activity that has taken place in the network. This record is not maintained by a
centralized authority but is instead distributed among the participants in the
network.
• Blockchain technology is secure and tamper-proof because it utilises a
decentralised network of computers, called nodes, to validate and store
transaction data. This data is then encrypted and timestamped, creating a
permanent record that cannot be altered.
• Blockchain is immutable, meaning that once a transaction is recorded on the
blockchain, it cannot be changed or removed.
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Blockchain..continue
• Blockchain is often used to support cryptocurrencies. Bitcoin is a
cryptocurrency that uses blockchain technology.
• Unlike regular money (like the Malaysian Ringgit), decentralised digital
currencies are not controlled by a central authority. Instead, their
control is distributed among a wide network of computers.
• Blockchain is transparent, meaning that all transactions are publicly
viewable by anyone on the network. Although transaction data is
publicly viewable on a blockchain, user data is typically pseudonymous,
meaning that user identities are not directly attached to transaction
data (user's alias or "nickname" in the blockchain).
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Cryptocurrency
• Cryptocurrency is a digital or virtual asset that uses cryptography
for security. Cryptography is a technique used to protect data or
communications from unauthorized access. In blockchain, cryptography
is used to secure transactions and protect the privacy of users.
• Satoshi Nakamoto developed the first cryptocurrency (Bitcoin) by
adopting the blockchain technology in 2009.
• Cryptocurrencies are decentralised, meaning they are not subject to
government or financial institution control. This means that no single
entity can control the supply or price of cryptocurrencies.
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Cryptocurrency..continue
• Cryptocurrency transactions are verified and recorded on the
blockchain through a process called mining. In mining, people use
powerful computers to solve complex mathematical problems. When
a problem is solved, a block of transaction data is verified and
added to the blockchain.
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What are the key similarities and differences between blockchain and
cryptocurrency?
Similarities:
• Both blockchain and cryptocurrency are technologies that use
cryptography to secure transactions and maintain a decentralised
network.
• They both have the potential to disrupt traditional financial systems
and industries by enabling peer-to-peer transactions without the need
for intermediaries.
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Differences:
• Blockchain is a digital ledger technology that records and verifies
transactions in a secure and decentralised manner. Cryptocurrency is
a type of digital asset that uses blockchain technology to facilitate
secure and anonymous transactions.
• While cryptocurrency is one use case for blockchain, blockchain has
many other potential applications, such as supply chain management,
voting systems, and identity management.
• Not all blockchain systems use cryptocurrency, and not all
cryptocurrencies use blockchain.
In summary, blockchain is the underlying technology, while cryptocurrency
is one application of it.
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Artificial Intelligence (AI)
• AI refers to the simulation of human intelligence in machines that
are designed to think and act like humans.
• These machines can perform tasks such as recognising speech,
making decisions, and solving problems that typically require humanlike intelligence.
• The field of AI involves the development of algorithms and computer
programs that can learn from experience and data, and improve
their performance over time.
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Artificial Intelligence (AI)..continue
• AI is transforming the way financial transactions are conducted. It
is helping firms to improve processes and lower costs.
• Artificial intelligence can be used for a variety of tasks in the
banking and finance industry, such as identifying and preventing
fraud, analysing customer data, and providing recommendations for
investment opportunities.
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Artificial Intelligence (AI)..continue
• The systems simulate the process of human intelligence such as:
a) Learning (includes the information and rules for data)
b) Reasoning (making the conclusion using the rules)
c) Self-correction (obtaining the result from one scenario to
improve future performance)
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Financial Technology (Fintech)
• The term Financial technology, also known as Fintech refers to
software and other modern technologies used by businesses that
provide automated and improved financial services.
• Fintech is a new and innovative way to deliver financial services. It
uses modern technology to provide a more efficient, convenient
and cost-effective way to access financial services.
• Fintech companies typically develop products or services that
replace or enhance traditional methods in the financial sector.
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Financial Technology (Fintech)
• Financial technology includes a wide range of products and
services, including mobile payments and online lending platforms.
• Broadly, Fintech describes any company using the internet, mobile
devices, software technology or cloud services to perform or
connect with financial services.
• Fintech can offer users a number of benefits, including increased
access to financial services, lower costs, and more convenient
and user-friendly services.
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What are some other benefits of Fintech in business
1. Improved access to financing. Fintech provides new financing options for
businesses, including crowdfunding (crowdfunding is a form of alternative
finance, which has emerged outside of the traditional financial system. It is
typically used by startups and small businesses to raise capital from a
large number of people, via the internet) and peer-to-peer lending (. Peerto-peer lending is a digital lending platform that enables borrowers to
directly connect with lenders. Lenders can choose to fund loans, which are
then repaid by the borrower with interest.)
2. Greater transparency and efficiency. Fintech can help businesses to
track their finances more effectively and improve their overall financial
management.
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3. Enhanced customer experience. Fintech can provide businesses with the ability
to offer innovative and convenient services to their customers.
4. Increased competition. Fintech brings new players into the financial services
market, which can lead to increased competition and lower prices for
consumers.
5. New business models. Fintech enables businesses to create new business
models that are more efficient and data-driven.
6. Greater financial inclusion. Fintech can help to provide financial services to
underserved populations, such as small businesses.
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Are blockchain and artificial intelligence similar or not?
Both blockchain and artificial intelligence are technologies that are
revolutionising the way we live and work. Both technologies have the potential
to change the way we interact with the world around us. However, Blockchain
and artificial intelligence basically are not similar.
Blockchain is a distributed database that maintains a continuously growing list
of records, called blocks, secured from tampering and revision. Artificial
intelligence is a branch of computer science that deals with the simulation of
intelligent behavior in computers.
Furthermore, blockchain is decentralised and immutable, while artificial
intelligence is often centralised and constantly evolving.
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What are the differences between blockchain, cryptocurrency, artificial
intelligence and fintech?
Blockchain is a distributed database that allows for secure, transparent
and tamper-proof record-keeping.
Cryptocurrency is a digital or virtual currency that uses cryptography to
secure its transactions and to control the creation of new units.
Artificial intelligence is a technology that can be used to create and
interpret human-like or machine-like responses.
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Fintech is a term used to describe financial technology, which includes any
technology that is used to facilitate financial transactions or processes.
This can include anything from mobile payments, digital wallets and
blockchain technology.
** A blockchain allows a person to safely send money to another person
without going through a bank or financial provider i.e allows for peer-topeer transactions without the need for a trusted third party. Example
send and receive Bitcoin through Bitcoin ATMs.
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Are blockchain and Fintech similar or not?
Blockchain and Fintech are related but not exactly the same. Fintech refers to the
use of technology in the financial industry, while blockchain is a specific
technology that enables secure and transparent transactions through
decentralised databases.
Examples of Fintech include digital banks, payment processors, and mobile wallets,
while examples of blockchain applications include cryptocurrencies like Bitcoin.
Overall, blockchain is a tool that is used in the fintech industry, but it is not
the only technology being used. The rise of fintech has also led to the
growth of blockchain and other digital technologies in finance.
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How Blockchain and Fintech can be related?
Blockchain and Fintech are related as blockchain technology can be used as a
tool for financial innovation and disruption.
Blockchain's key features such as decentralisation, transparency, and security
make it suitable for use in financial services, leading to the development of new
Fintech solutions.
These solutions include digital currencies, peer-to-peer lending platforms, digital
wallets, and more. In this way, blockchain can enable Fintech companies to offer
more efficient, secure, and innovative financial services to customers.
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i. Accurate decision-making
• Machine will analyse the data and will come up with the recommended
results which can help the users for better decision
ii. Automated customer support
• System such as Chatbots can deliver humans like customer service or
expert advice experience at a low cost.
iii. Fraud detection and claim management.
• Machine Learning techniques are used to analyse and predict the
behavioral patterns of users to identify fraud attempts and warning
signs. It can also reduce the overall processing time by taking into
account various factors like time and cost.
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iv. Insurance management
• AI systems in insurance management will help improve the efficiency of
the underwriting process and provide better decisions to the
customers.
v. Automated virtual financial assistants
• Automated Financial assistants and planners can help users make
informed financial decisions. They can monitor events and stock price
trends to help them reach their goals.
vi. Predictive analysis in financial services
• Predictive analytics can help businesses improve their efficiency and
profitability. It can also help them develop and implement effective
marketing and sales strategies.
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What are the similarities and differences between artificial intelligence
and fintech?
Similarities:
• Both AI and fintech are innovative technologies that are transforming
their respective industries.
• Both are data-driven and rely heavily on algorithms to process and
analyse large amounts of information.
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Differences:
• AI refers to the development of computer systems that can perform tasks
that normally require human intelligence, such as visual perception, speech
recognition, decision-making, and language translation. Fintech refers to the
integration of technology in the delivery of financial services, such as online
banking, mobile payments, and peer-to-peer lending.
• AI has a broader application beyond the financial industry and can be used in
many other industries such as healthcare, retail, and transportation. Fintech is
specifically focused on improving financial services.
• The goal of AI is to make computers intelligent, while the goal of fintech is to
make financial services more accessible and efficient through the use of
technology.
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How are artificial intelligence and fintech related?
Artificial intelligence is used to develop and improve financial technology,
or fintech.
Financial institutions use artificial intelligence to automate processes,
make better decisions, and improve customer service.
For example, machine learning can be used to develop algorithms that can
predict stock prices or identify fraudulent activity. Machine learning is a
subset of artificial intelligence that deals with the construction and study
of algorithms that can learn from and make predictions on data. Fintech,
on the other hand, is an industry that uses technology to help provide
financial services.
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1. Explain the main differences between the primary and
secondary markets. Discuss how the primary market is
dependent on the secondary market.
2. Discuss SEVEN (7) differences between money and capital
markets.
3. Discuss FIVE (5) types of financial institutions and explain the
primary services offered by each.
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4. How would economic transactions between the supplier of
funds (e.g., households) and users of funds (e.g., corporations)
occur in a world without financial institutions?
5. Discuss how banks deal with Fintech.
6. Define and explain cryptocurrency. Give your opinion on
whether or not cryptocurrency should be considered money.