Non-bank
Financial institutions
1. Investment and Merchant Banks
Money market corporations who provide niche Off-balance sheet services and
primarily deal with wholesale finance.
- Sources of funds
Offshore money market activities. They do not have a deposit base
- Uses of funds
Short term lending to:
Governments
Corporations
Little or no involvement in the retail sector.
- Other activities
Off-balance sheet
Operating as forex dealers
Providing risk management products to their clients such as
derivatives
Consulting services to:
Venture capitalists
Corporate mergers and acquisitions
Type Explanation
Horizontal Company merges with another competitor
Vertical Company merges with supplier or to one
that it suppliers to.
Conglomerate Company merges with another company in a
different industry or business
Hostile Target company takes over another company
Takeover against the wishes of the managements and
its board, and goes, and arranges the merge
with shareholders. Example, twitter
Project finance and structured finance
Project finance
Lending for large projects where loan repayments are
based on the projected cash flows.
Structured finance
Funding for major infrastructure projects such as
hospitals, bridges etc.
Securitization
Conversion of non-liquid asset into new assets-backed
securities that are serviced through cash flows from the
original asset.
Investment banks issue bonds or other financial instruments
to generate income, which will cover the risk of keeping
additional assets, thus leveraging risk.
2. Life Insurance Offices
Life insurance is longer term in nature.
Sources of funds
Type Explanation
Whole life insurance Covers the policyholder for their entire life. Provide payout to your
beneficiaries when you pass away.
Endowment insurance Pays out a lump sum either when the policyholder dies or after a
set period.
Term life Provides coverage for only a specific period or term.
Total and permanent Pays out if the insured becomes totally and permanently disabled,
disablement insurance preventing them from working.
Trauma insurance Provides a lump sum payment if the policy holder suffers from a
critical illness.
Income insurance Replaces a portion of your income if you are unable to work due to
injury or illness.
Business overheads Helps you cover essential business expenses.
insurance
Uses of funds
- Largest % of their funds are held in equities and unit trusts.
- % is invested in long term securities
- % invested overseas.
Regulation
- In South Africa, they are regulated by the Long Term insurance Act (no.52
of 1998)
- There is a registrar that monitors the insurance industry (including
companies) for the benefit of public and policy holders.
- The registrar authorizes the validity of long term insurance business and
lay down conditions for long term insurance business.
3. General insurance Offices
- Company pays the insured a predetermined amount, when a pre-
specified event happens.
- Sources of funds:
Premiums paid in advance
Their source of funds is not as stable as the life insurance office.
Example of policies:
Motor vehicle (for 3rd party, fire, theft, accident)
- Uses of funds
Funds are typically invested in shorter term and easily traded
financial instruments such as money market securities.
Why?
risks covered are less predictable and
Might require quick access to cash to pay out claims.
Examples of money market securities
Bills of exchange, commercial paper, certificate of deposit
and treasury notes.
- Regulation
Short term insurance act (no. 53 of 1998).
Insurance companies must be registered with the FSB.
Role of FSB:
To intervene only during disputes between insurance
companies and their clients and
Also to educate consumers.
Reasons for regulation
Solvency: To ensure that insures stay solvent so that they
will be able to pay money in future on some eventuality.
Consumer protection: To protect the client because insurers
have more knowledge and thus greater bargaining power.
4. Superannuation funds
- Financial plans set up to help people save money for their retirement and
fund their lifestyle.
- Who provides superannuation funds?
Life insurance offices
Specialist superannuation funds
Private businesses
Public corporations
Governments
- Sources of funds
Funds for superannuation funds come from contributions made by
the individuals themselves or their employers. Type of
contributions:
Contribution Type Explanation
Employer sponsored Set up by employers to help their employees save up for
funds retirement, for example Provident fund.
Defined benefit scheme A superannuation amount upon retirement is paid based on
a defined formula, example Pension Fund
Private superannuation Individuals can also have their own superannuation funds,
fund such as savings plans or single premium schemes
Reasons for compulsory superannuation funds:
1) Increasing lifespan
People are working and living much longer and will need
money when they retire.
2) Tax base challenges
There might not be enough working people to support
retirees through taxes, which is why compulsory savings are
important.
- Uses of funds
Highly diversified investments
Most of their funds are invested in Equities and unit trusts.
Approximately 20% is invested overseas.
- Types of superannuation funds
Capital guaranteed
Low
Guarantees your initial investment and contributions.
Capital stable
Guarantees your initial investment and subsequent
contributions but does not explicitly promise growth.
Risk
Balanced growth
Focuses on growing your investment over the long term. It
aims for both capital growth and providing income.
Investment strategies are aggressive with great emphasis on
diversification.
High Capital growth
Seeks higher return through capital growth, and less
through income stream.
Highly invested in equites which increase their risk
exposure.
5. Finance companies and general financiers
- They were established because of the high regulation in the banking
sector.
- Sources of funds
Borrowings from related corporations
Loans from banks
Issue of debentures and unsecured notes
Borrowings from overseas
- Uses of funds
Lease financing
Loans to businesses.