There are three different ways for transferring capital or fund from savers to borrowers in the financial market. The three different ways are direct transfers of the money and securities, investment banking house, and financial intermediaries. First of all have to know about the definition of financial institutions. Financial institution is defined as an agency or organization that provides financial services for them members or clients and financial institutions are normally highly regulated by government. The main function of financial institution is to collect fund from the investor and transfer the fund to various financial services that had providers. The financial institution provides services are bond, loan, stock, risk diversification, debenture, retirement planning, portfolio management, insurance, investment, hedging and many more.
First of the way for transferring capital or fund from savers to borrowers in the financial market is direct transfers of money and securities. It normally occur when a company sell its bond or shares directly to saver without going through any type of financial institution, it means in this way there is no any intermediaries intervene, all of the transaction only occur between the company and the saver and the company will deliver its securities to savers, and the savers will gives the company the money it needs. From this way of transferring capital or fund the saver and borrower can be save some money because it does not has any cost, but saver and borrower has to prepare the agreement for themselves to protect both of them benefit in future.
Second way for transferring capital or fund from savers to borrowers in the financial market is investment banking house. Investment banking house also known as an investment bank, it is an organization helping firm and government raise funds or capital by register and issue share on a share market. Investment bank also an organization that underwriters and distributes new investment securities and help business obtains financing. Besides that investment bank is split into three core investment banking activities which is front office, middle office and back office.
The job of front office is to Sale and trading and doing research. Front office will responsible for the sale and trading, starting from the company sells its sells the stocks or bond to the investment bank, and the front office will sells these same securities to savers. Besides that, front counter also doing research, review and report of company prospect to determine whether the company is in "buy" or "sell" rating. This will help the savers easier to buy or sell them stock.
Middle office is to manage risk management, corporate treasury, financial control, corporate strategy and compliance. The middle office wills doing risk management that involves analyzing the market and credit limit. The key of Middle Office role is to ensure the economic risk is captured accurately, correctly and on time. Financial control they will analyze the capital flow of the business and control the business global risk exposure and the profitability and structure of the firm's various businesses.
Back office, it is involve in operation and technology. The employee in back office will involve in data checking trade that have been conducted and ensure that there are not error and transacting that require transfer. Besides that, employee that worn investment bank back office will has to support technology or call information technology department. That means back office employee and technology team will be in charge of the technical support and in-house software, which created by the technology team. They also have to upgrading their online services to the latest example electronic trading.
As an investment bank it also act to be an underwriter serves as a middleman and provide facilitates the issuance of securities. Example of investment bank in Malaysia are Affin Investment Bank Berhad, Alliance Investment Bank Berhad, AmInvestment Bank Berhad, CIMB Investment Bank Berhad, ECM Libra Investment Bank Berhad, Hwang-DBS Investment Bank Berhad, Short Deposit Malaysia Berhad, KAF Investment Bank Berhad, Kenanga Investment Bank Berhad, Maybank Investment Bank Berhad, MIDF Investment Bank Berhad, MIMB Investment Bank Berhad, OSK Investment Bank Berhad, Public Investment Bank Berhad, RHB Investment Bank Berhad, Southern Investment Bank Berhad, and European Credit Investment Bank.
Third way for transferring capital or fund from savers to borrowers in the financial market is through financial intermediaries. Financial intermediaries are defined as specialized financial firms that transfer of funds from savers to demanders of capital. Financial intermediaries are a simple way to transfer money and securities between firms and savers. Financial intermediaries earning money or raising funds from savers in exchange for its own securities, after that the financial intermediary will use the money to purchase and then hold businesses' securities or giving loans such as house loan, education loan and anyone else need financial loan, but financial intermediaries will choose the borrowers which have the ability to pay back to them.
There are some financial intermediary's advantages to savers. First of all is less risky lending through a financial intermediary than directly lending. This is because financial intermediary can diversify the risk, they giving loans to many people so if there are some of those loans will be mistake but the losses will be largely offset by loans that are return. In contrast an average saver could directly make only a few loans because their capital are not big like financial intermediaries, and if any bad loans happen would substantially affect his wealth. Another advantage of financial intermediaries is liquidity. The definition of liquidity is the ability to convert assets into money or cash in a quickly time. A house is an illiquid asset, to selling a house need take a lot of time, if a person emergency need money he or she have to take time to sell the house to get money. So financial intermediaries are getting advantage to them, the borrower can mortgage his house to financial intermediaries to get money for emergency use.
In financial intermediaries it can be dividing into few classes of intermediaries, such as commercial banks, saving and loan association(S&Ls), mutual savings bank, credit union, life insurance companies, mutual funds and pension funds.
Commercial banks, one of the classes of financial intermediaries. It is most common use for everyone and it is the traditional "department stores of finance" serve a very wide of savers and borrowers. Commercial banks provide a very wide range of services; the services are internet banking, issuing bank draft, credit card and bank check, saving and deposit, lending money by overdraft bank or loan, stock brokerage and insurance , safekeeping of documents or other things in safe deposit boxes, cash management and treasury services, merchant banking and private equity financing and others. Commercial banks in Malaysia are Affin Bank Berhad, Alliance Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad (Maybank), Public Bank Berhad, RHB Bank Berhad, and Muamalat Bank Berhad.
Savings and loan associations(S&Ls), another type of financial intermediaries. Saving and loan association is a financial institution that more focuses in accepting saving and deposit and making mortgage loan. Deposits interest in saving and loan associations are normally higher than commercial banks. S&Ls will take the funds of many small savers and then lend the money to home buyers and others type if borrowers. S&Ls have more specialize in analyze credit, setting up loans, and making collections than individual savers, so that they can reduce the costs and increases the availability of real estate loans. S&Ls hold large of diversified portfolios of loans and other assets so that S&Ls can spread their risks and it is impossible for small savers were making mortgage loans directly.
Mutual savings banks, it is a financial institution for individuals to save and to invest those saving in mortgage, loan, bond, stock and others. Mutual savings banks are a bit similar to Savings and Loan Associations, they getting funds from individuals and lend mainly on a long-term basic to home buyers. But it different to commercial banks, mutual savings banks have no stockholders so the profit will beyond to the upkeep of the bank to the depositors of the mutual savings bank. Mutual savings banks are prioritizing security, and had a historically been characteristically conservative in their investments. This makes mutual savings banks to remain stable throughout the turbulent period of the Great Depression, despite the failing of commercial banks and S&Ls.
Credit unions are a cooperative financial institution that is owned and control by their members and promoting thrift. Credit Unions provide a reasonable rate of credit and others financial services to their members. In credit unions members' saving are only loan to other members in credit unions, the loans are generally for home improvement loans and home mortgages. Credit unions are often the cheapest source of funds available to individual borrowers.
Pension Fund is a financial institution that for retirement plans funded by government or corporation agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. There are two pension funds in Malaysia, it is Employees Provident Fund and Retirement Fund-KWAP. Employees Provident Funds was ranked no.19 in Top 300 World's Largest Pension Fund 2010 with a total asset of USD 109,002 million.
Life insurance companies, it is one of the financial institution that take savings in the form of annual premiums, invest these funds in stocks, bonds, real estate, and mortgages and finally make payments to the beneficiaries of the insures parties. The life insurance companies in Malaysia are Allianz Life Insurance Malaysia Bhd, AmLife Insurance Bhd, American International Assurance Bhd, AXA AFFIN Life Insurance Bhd, CIMB Aviva Assurance Bhd, Etiqa Insurance Bhd, Great Eastern Life Assurance (Malaysia) Bhd, Hannover Life Re Malaysian Branch, Hong Leong Assurance Bhd, ING Insurance Bhd, Malaysian Assurance Alliance Bhd, Malaysian Life Reinsurance Group Bhd, Manulife Insurance Bhd, MCIS ZURICH Insurance Bhd. Prudential Assurance Malaysia Bhd, Tokio Marine Life Insurance Malaysia Bhd, and Uni.Asia Life Assurance Bhd .
Lastly is Mutual Funds that in the classes of financial intermediaries. Mutual funds are corporations that use money from savers to buy stocks, long-term bonds or short-term debt instruments which issued by government or private businesses. There are different funds are design to meet the objectives of different types of savers and it is thousands of different mutual funds with dozens of different goals and purposes.
At the end, there are few ways of financial institutions to transferring capital or fund from savers to borrowers in the financial market, the important is to chose the way which suitable for the situation because different ways have different characteristic.
