Project ON

C REDIT M ANAGEMENT

Credit Credit
Management Management

Credit
Manage
ment

MBA (Banking & Finance) 3rd Term, Session 2009-2011

Student NamesClass Roll NumberExam Roll NumberRomana
NargusA-1462Rida Farooq KhanB-3467Sehrish JabeenA-2452Asma
Sadia GulB-4451
 DECLARTION
E C L A R T I O N

We declare that this project report entitled “Financing Methodologies” is

original and bonafide work of our own in the partial fulfillment of the

requirements for the award of the Degree of MASTER OF BUSINESS

ADMINISTRATION (Banking & Finance) and submitted to the Department

of Business Administration, Gomal University Dera Ismail Khan,

Khyber.Pakhton.Khwa.

The data that has been collected by us is truly authentic and contains true and

complete information.

Romana Nargus
Rida farooq Khan
Sehrish jabeen
Asma Sadia Gull
 ACKNOWLEDGEMENT
C K N O W L E D G E M E N T

All praise to ALLAH, the most merciful, kind and beneficent,

and the source of all knowledge, wisdom within and beyond our
comprehension. He is the only God, who can help us in every
field of life. All respect and possible tributes goes to our Holy
Prophet Mohammad (SAW), who is forever guidance and
knowledge for all human beings on this earth.

We are proud to say that we are very grateful to our families whose kind
prayers and cooperation helped us at every step of our work. Special
thanks go to our formative Teacher’s for their cooperation for the sake
of our knowledge.

Romana
Nargus
Rida Farooq
Sehrish Jabeen
Sadia Gul
M.B.A (B/F), 2009-
2011
 b r i e f c o n t e n t s

BRIEF CONTENTS
What is financing 2
Why financing 2
What is the financial system 2
Flow of funds through financial 3
system
Classification of the financial system 3
Financing methodologies 4
Direct financing 4
Debt and equity market 4
Primary markets 5
Secondary markets 5
Money markets 5
Capital markets 6
Indirect financing 7
Depository institution 7
Commercial banks 7
Saving & Loan Associations 8
Mutual saving banks 8
Credit unions 8
Contractual saving institution 8
Life Insuring companies 8
Fire & casualty insurance companies 8
Pensions funds, Govt retirements funds 8
Investment intermediaries 8
Financial Companies 8
Mutual Funds 9
Direct versus indirect financing 9
References 9

WHAT IS FINANCING?
The act of providing funds for business activities, making purchases or investing. Financial
institutions and banks are in the business of financing as they provide capital to businesses,
consumers and investors to help them achieve their goals.

WHY FINANCING?

pg. 1
 – Obvious? Not necessarily.
– Integral part of the plan for the business (and “Business Plan”).
– Varies by type of business.

WHAT IS THE FINANCIAL SYSTEM?

• “In finance, the financial system is the system that allows the transfer of money between
savers and borrowers. It comprises a set of complex and closely interconnected financial
institutions, markets, instruments, services, practices, and transactions.”
• The financial system consists of the group of institutions in the economy that helps to
match one person’s saving with another person’s investment.
• The financial system is made up of financial institutions that coordinate the actions of
savers and borrowers.
• Financial system refers to a set of activities, which facilitate transfer of resources from
savers to borrowers. This system provides for regular, smooth, efficient and cost effective
linkage between depositors and investors.
• The financial system allocates funds from surplus units to deficit units.
A Surplus Unit is any party whose income over a period exceeds its outlays.
A Deficit Unit is any party whose income over a period is less then its outlays.

FLOW OF FUNDS THROUGH FINANCIAL SYSTEM

pg. 2
CLASSIFICATION OF FINANCIAL SYSTEM
• Financial Market
• Financial Institutions
• Financial Instruments

pg. 3
FINANCING METHODOLOGIES
There are two types of financing…

1- DIRECT FINANCING
 Raising funds from financial markets involve the issue of securities. Direct financing
mainly occur in capital markets

 The borrower goes directly to the investor to borrow funds.

 The direct exchange of money and financial claims between individuals with excess
funds and individuals with a shortage of funds.
 The participant with a deficit issues a financial claim (a bond for example) purchased by
the participant with a surplus of funds.

Direct Financing

Supply Funds
Arranged By the
Leander’s BANKs
Borrowers
Repayment
Obligation

OR

DIRECT FINANCING
The borrower borrow funds directly from lenders in financial markets by selling them securities,
also called (financial instruments) which are claims on he borrowers future income or assets.
Securities are assets for the person who buys then but liabilities (IOU or debt) for the individual
or firm that sells (issues) them.

DEBT & EQUITY MARKET

The firm or an individual can obtain funds on financial markets in two ways. the most common
method is to issue a debt instruments, such as a bond, or a mortgage which is contractual
agreement by the borrower to pay the holder of the instrument fixed amount at regular intervals
(interest & principal payments) until a specified date (Maturity Date) when financial payment is
made that instruments expiration date.

pg. 4
The debt instruments are short-term if maturity is less then a year and log-term if its maturity is
ten years or longer. Debt instruments with a maturity b/w one and 10 years are said to b
intermediate-term.
Second method of raising funds is by issuing equities, such as common stock, which are claims
to share in the net income (income after expenses & taxes) and the assets of the business.
Equity often make periodic payment (dividend)to their holders are consider long-term securities
because they have no maturity date, in addition owning stock mean that you own a portion of
the firm and they have a right to vote on issue important to the firm and to elect its director.

PRIMARY MARKETS
It is a financial market in which new issue of a security such as corporation or Government
agencies borrowing the funds. The primary markets is the investment bank it does this by
underwriting securities, it grantee a pries for a corporations securities and then sells them then to
the public.

SECONDARY MARKETS
It is a financial institutions in which securities that have been previously issued (and are thus
second hand) can be resold. The KSE is the best example of secondary market, Securities
brokers and dealers are crucial to well functioning secondary markets.
 Broker is the agents of investor who match buyers with sellers of securities.
 Dealer link buyers and seller by buying and selling securities at stated prices.
Secondary markets can be organized two ways….
 One is organize exchange where buyers and seller of the securities (or their agents or
brokers) meet in one central location to conduct trades (Stock exchange for stock and the
commodities, wheat, corn, cotton, silver, and other raw material) are examples of
organized exchanges.
 Second method of organizing secondary markets is to have an over-the-counter (OTC)
market, in which dealers at different location have inventory of securities and stand ready
to buy and sell securities “OTC” to any who comes to them and is willing to accept their
prices b/c OTC dealer are computer contact and know the prices set by one other it is
very competitive market.

MONEY MARKET
It is financial market in which only short-term debt instruments (original maturity of less then 1
year) are traded.

pg. 5
CAPITAL MARKET
It is the financial market in which long-term debts(original maturity of 1 year or grater) and
equity instruments are traded.

2- INDIRECT FINANCING
 The alternative process to direct financing is intermediation. This occurs when financial
institution acts as the borrower to surplus units and the lender to deficit units. The process
creates two set of assets and liabilities. Intermediary’s deposits are both its liabilities and
the assets of the lenders.
 An intermediary transforms assets acquired through the market into a more widely
preferred asset (which becomes their liability).
 The intermediary is then holding a direct claim in terms of their assets. The participants
holding the claims issued by the intermediary are said to have an indirect claim.

EXAMPLES

• Commercial Bank: Accept Deposits and uses the cash to make loans to other participants
(both households and businesses)
• Mutual Fund Firm: Pooling Funds of individuals and uses them to buy a portfolio of
securities.

Indirect Financing

Supply Funds Supply Funds

Financial
Leander’s Intermediary
Borrowers
Repayment Repayment
Obligation Obligation

OR

pg. 6
INDIRECT FINANCING
Funds moves from lender to borrower by a second route called indirect financing because it
involves a financial intermediary that stands b/w the lender-sever and the borrower-spender and
help transfer funds one to the other. For example A bank might acquire funds by the issuing a
liability in the form of saving deposit (an assets for the public).it might then use the funds to
acquire on assets by making a loan to Toyota Motors or buying a TM bond in the financial
markets the ultimate result is that funds have been transferred from public (lender-sever) to TM
(the borrower-spender) with the help of financial intermediaries(bank).the process of indirect
financing using financial intermediaries called financial intermediaries.

Primary assets and Liabilities of Financial Intermediaries

Type of Intermediary Primary Liabilities (Sources of Primary Assets (Uses of
Funds) Funds)
1-Depository Institutions (Bank)
Commercial banks Deposit Business & consumer loans,
mortgages PAK Govt:
securities & municipal bonds
Saving & Loan Associations Deposit mortgages
Mutual Saving banks Deposit mortgages
Credit Unions Deposit Consumer loans
2-Contractual Saving Institutions
Life Insuring Companies Premiums from Policies Corporate bonds & mortgages
Fire & Casualty insurance Premiums from Policies Municipal Bonds, corporate
companies bonds & Stock, Govt:
Securities
Pensions funds, Govt Employer & employee Corporate bonds & Stock
retirements Funds Contributions
3-Investment Intermediaries
Financial Companies Commercial Papers, Stocks, Consumer & Business Loans
Mutual Funds Shares Stocks, Bonds
Money Market Shares Money Market Instruments

1- DEPOSITORY INSTITUTIONS (BANK)

Accept deposits from individual and institutions and make loans. These include commercial
banks, saving and loan association, mutual saving banks and credit unions.
Commercial Banks: These financial institution raise funds primarily by issuing checkable
deposit (which cheek can be written), saving deposits (deposit that are payable on demand but do
not allow their owner to write cheek) and time deposit (deposits with fixed terms to maturity)

pg. 7
Saving & loan association/Mutual saving banks: These depository institutions obtain funds
primary through saving deposits (shares) and times and checkable deposits.
Credit Unions: These depository institutions very small corporate any institutions organized
around a particular group, union members, employees of a particular firm.

2- CONTRACTUAL SAVING INSTITUTIONS

Such as financial insurance companies, and pension funds are financial intermediaries that
acquire funds at periodic intervals on a contractual basis. i.e they tend to invest their funds
primarily in long0term securities such as corporate bond, stock and mortgage.
Life insurance companies: It insure peoples against financial hazards following a death and sell
annuities (annual income payments upon retirement).the acquire funds from the premiums that
people pay to keep their polices in force and use them mainly to buy corporate bonds and
mortgage.
Types of Annuities
• Fixed annuity: A financial instrument, typically issued by an insurance company that
pays regular, constant installments to the owner beginning at a specific future date.
• Variable annuity: A financial instrument, typically issued by an insurance company, that
beginning on a specific future date pays the owner a stream of returns that depends on the
value of an underlying portfolio of assets.
Fire & Casualty insurance companies: The companies insure their polices holders against loss
from theft, fire and accidents, they are very much like life insurance companies, recovery funds
through premiums fir their policies, but they have a greater probability of loss of funds if major
disasters occurs.
Pensions funds, Govt retirements Funds: Pension funds and state and local government
retirement funds provide retirement income in the form of annuities to employees who are
covered by a pension plan. Funds are acquired by contributions from employees or from
employers, or either have automatically deducted from their paychecks or contribute voluntary.

3- INVESTMENT INTERMEDIARIES
This category of financial institution includes…
Financial Companies: They raised funds by selling commercial papers(short-term debt
instruments) and by issuing stock and bonds, the land those funds to consumer, who make
purchase of such items as furniture, automobiles, and home investment, and to small business,
some finance companies are organized by a prevent corporation to help sell its products. For
example Motor credit companies make loans to consumer also purchase automobiles.

pg. 8
Mutual Funds: The financial institutions acquires funds by selling shares to many individuals
and use the proceeds to purchase diversified portfolios of stock and bonds, mutual funds allow
pool their recourse so that they can take advantage of transaction costs where buying large
blokes of stock or bonds.
Money Market: These relatively new financial institutions have the depository institutions
because they offer deposit type events, like most of mutual funds, they sell shares to acquires
funds that are the used to buying money market instruments that are both safe and very liquid,
the interest ate theses assets is then paid out to the shareholder.

DIRECT VERSUS INDIRECT FINANCING

• Direct: Savers and borrowers link directly
• Indirect: An intermediary channels funds from saves to borrowers.

Text References
∗ Financial Markets and Institutions 5th Edition by Frederic S.Mushkin,Stanley G.Eakins.

Web References
 www.google.com
 www.docstoc.com

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