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Objective 1 Identify various financial institutions
What is a financial institution?
A financial institution is a company that primarily focuses on dealing with financial
transactions such as investments, granting loans and deposits.
Different types of financial institutions:
Central Bank
Commercial Bank
Non-bank financial institutions:
(i) Credit Unions
(ii) Insurance Companies
(iii) Building societies
Micro-lending agencies
Government agencies
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Objective 2 Describe the functions and services offered by financial institutions
Functions offered by financial institutions:
a) Loans/credit facilities
b) Savings and deposits
c) Making payments
d) Investments
Services offered by financial institutions:
a) Night safe deposits
b) Online banking
c) Advisory services
d) Credit and debit cards
e) Deposit boxes
f) E-trade
g) Settlement services
h) ATM/ABM machine services
i) Remittance services
Objective 3 Describe the role and functions of financial regulatory bodies
Financial regulatory bodies are government organizations such as:
(i) Central bank
(ii) Jamaica Deposit Insurance Company (JDIC)
(iii) Financial Services Commission (FSC)
Role of financial regulatory bodies:
To monitor, control and guide various industry sectors to protect consumers.
Functions of financial regulatory bodies:
To enforce regulations and licences of various financial activities, including
lending, depository, collect and money transmission activities.
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Objective 4 Describe the relationship between financial institutions and regulatory
bodies
The regulatory role:
a) Central Bank ways in which a Central Bank may regulate commercial banks:
(i) Variations in liquid assets ratio (a ratio of a
to its total liabilities)
(ii) Vary or adjust the bank rate and lending rates
(iii) Changing the minimum reserve requirements (a specified minimum
fraction of total deposits which commercial banks have to hold to reserve)
b) Financial Services Commission supervises certain financial areas such as
insurance and pension.
c) Supervisor of insurance
Objective 5 Outline the functions of the Central Bank
The functions of the Central Bank:
1. Responsible for issuing notes and coins to commercial banks
2. Banker directly to the government
3. Banker to commercial banks. This involves holding the cash reserves of the
commercial bank
4. Management of foreign exchange reserves of a country
5. Regulator of the activities of the commercial banks
6. Lender of last resort
lender of last resort
the commercial banks with loans when necessary.
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Objective 6 Outline ways used by individuals to manage personal income
Ways of managing personal income:
1. Allocation of income relative to commitments through the use of a budget
2. Savings
3. Investment
4. Financial advising
Objective 7 Differentiate between savings and investments
What is savings?
Savings is known as means of deferred income. It is the difference between
consumption expenditure and disposable income.
Forms of saving:
a) Sou Sou (meeting-turn, partner, box hand)
b) Deposits in financial institutions
c) Short term fixed deposits
What is an investment?
Investment is known as means of being risk bearing to make a profit.
Forms of investment:
a) Stock market
b) Credit Unions
c) Government securities such as bonds and debentures
d) Mutual funds
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Objective 8 Explain the concepts of short-term and long-term financing
Types of short-term financing:
a) Trade credit
b) Commercial bank loans
c) Promissory notes written promise to pay a sum at a specified date
d) Instalment credit
e) Indigenous credit or private money lenders
f) Advances from customers
g) Factoring accounting factoring; sells its invoice to a third party at discount
h) Venture capitalist
i) Crowdfunding funding a product by raising a small amount from a large
number of people usually through the internet
j) Angel investors an affluent individual who provides capital for a start-up
business in exchange for ownership or some equity
Types of long-term financing:
a) Loans from government agencies
b) Mortgages, debentures, shares, insurance, investment and unit trusts
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Objective 9 Identify personal sources of capital for setting up a business
Sources of personal capital:
1. Friends and family
2. Personal savings
3. Bank loans
4. Government grants
5. Equity
6. Venture capital
Objective 10 Identify purposes of basic financial records for sole traders
Types of bookkeeping systems:
Single and double entry
The purpose of basic financial statements:
Income statement (profit and loss)
- To show how much profit and loss an organization generated during a
period.
- To show the viability of the business for investing purposes.
- For borrowing purposes.
Statement of financial positions (balance sheet)
- Gives investors an insight into a company and its operations.
- Gives an idea of the business financial positions showing what the company
owns (assets) and owes (liabilities).
Statement of cash flow
-
payments for a specified period.
- Disclose other information such as the amount of income taxes paid,
interest paid and any significant investing and financing activities which did
not require the use of cash.
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Objective 11 Differentiate between money market and capital market
What is the money market?
Money market refers to the trading in very short-term debt investments (loans)
between banks and other financial institutions.
What is the capital market?
The capital market is part of the financial system which is concerned with raising
capital funds by dealing in shares, bonds and other long-term investments.
Objective 12 Discuss the role of the stock market
What is the stock market?
The stock market is a collection of markets and exchanges where regular
activities of buying, selling and issuing of shares of public companies take place.
Concept of the stock market:
Stocks and shares may be bought and sold on the stock exchange, which serves the
stock market. This can be done through a broker.
A certificate shows the type of shares and value stated or name on the share in the
nominal or par value. Whenever the owner sells his or her shares, the price at the sale is
the market value at the time.
The stock market plays an important role in financing companies that rely on it to raise
money. This continued investment allows businesses to grow and create wealth and
employment.
The risk however lies in whether or not the purchase price of the share will increase or
at least remain stable. There is no guarantee it will and therefore the investor will lose
his or her money if the price of shares falls drastically.
Stock market terminology:
Bull Market high confidence among investors, motivated to buy shares
Bear Market low confidence, motivated to sell shares
Stag an investor who buys shares intending to sell them quickly