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Advanced Corporate Finance Case Essay

A financial system is a vital contributor to an economy’s development. This is because it helps it run smoothly. Without funding, how can development projects take place? A financial system serves several different types of clients such as consumers, businesses, and the government as well. But what is a financial system? A financial system is a part of the economy which includes all the institutions involved in moving savings from savers (households and firms) to borrowers, and in transferring, sharing, and insuring risks; it includes banks, insurance markets, bond markets, and the stock market.

A well functioning financial system performs its principles roles of effecting payments, facilitating the investment of accumulated wealth, making funds available to finance viable new projects, and providing risk management facilities (Neave, 1998). A financial system performs roles such as creating a payments system, store of wealth, primary and secondary transactions in the financial flow accounts, risk management, and finance and economic activities (Neave, 1998). There are two main markets in the financial industry, and they are the capital market which deals with long term investments and borrowings and the money market which deals with short term funds.

In addition, there is also the foreign exchange market and derivative

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market as well as financial intermediaries. Financial intermediaries fall into two categories: Banks and Non-Bank Financial Intermediaries (NFBI). These two categories of the financial system will be focused on in this research essay to fulfill our aim of comparing and contrasting Malaysia and Japan’s banking and non-banking financial intermediary sector.

Financial intermediaries are institutions that accept deposits and make loans. They deal with households, firms, and governments. Most financial intermediaries exist to make a profit for their shareholders. They to this by paying an interest rate to owners of deposits and charge borrowers a higher interest rate. The difference after paying overheads is their profit. The roles of financial intermediaries are to transfer money from lenders to borrowers, mobilization and pooling of savings, spreading and minimizing the risk for lenders, have efficient allocation of resources, specializing in certain areas of finance, credit creation and providing other services such as bills paying, insurance, and investment advice. Now let’s take a look at the financial intermediaries of Malaysia.

Malaysia The banking sector in Malaysia consists of the Central bank and Banks. These Banks is divided into commercial banks, which are the main players in the banking system, merchant banks, and two Islamic Banks as Malaysia is an Islamic country. The central bank in Malaysia is known as Bank Negara Malaysia. Bank Negara Malaysia was established in 26th of January 1959, which is under the Central Bank of Malaya Ordinance 1958.

The government owns it. Bank Negara Malaysia plays very important roles in the financial system of Malaysia. The first role that it plays is to ensure monetary stability and a stable financial structure. In this role, Bank Negara Malaysia is holding the responsibility of ensuring monetary stability and promotes a durable financial structure in the country. The important factor of keeping the monetary stable is price has to be stable which means the inflation rate must be kept in check and the ringgit’s purchasing power has to be in steady level. In order to manage the monetary stability, Bank Negara Malaysia had employed a variety of tools such as open market operations, direct intervention and usage of the statutory reserve requirement (SRR).

Secondly, Bank Negara Malaysia plays the role as the government’s banker and financial advisor. The bank is advising the government that is related to finance matters such as loan programs, particularly on the terms and conditions of specific loan agreements. Besides that, the central bank also delivers a twice-yearly report to the Finance Minister. Basically, the report is about detailing the state of the economy and requisite recommendations on how best to meet future developments. Moreover, the central bank is also handled the government securities through its trading and settlements account.

Thirdly, Bank Negara Malaysia plays the role as the sole authority issuing currency in the country and to maintain appropriate currency reserves. Bank Ordinance 1958 gave the right to Bank Negara Malaysia to be the sole issuer of currency in the country. Therefore, the bank has the right to issue all legal tender currency for use in the country. Furthermore, it also plays an important role in maintaining the proper amount of currency reserves for the particular country, kept in the form of gold and foreign currency assets as well. It means that it has been ensures that the Malaysian ringgit has the necessary gold and foreign exchange backing.

Lastly, Bank Negara Malaysia plays the role as the bank that has the opportunity to influence the credit situation so as to benefit the country’s economy. In other words, the central bank has to ensure that the general money supply and credit volume have the appropriate ‘elasticity’ to meet the demands of the domestic economy, while not making unjustified demands on the country’s resources at the same time. In relation, fundamental financial resources and apparatuses must be well managed so that maximize benefits to the country’s banking system can be achieved. The central bank has to make certain that local financial institutions adopts the applicable policies and practices from time to time to make them more sustainable in the face of international competition.

In meeting this objectives, the Bank is guided by the principle that is should act only in the economic interest of the nation and without regard to profit as a primary consideration (Bank Negara Malaysia, 2003). Hence, the roles of the banks are basically carried out within the context of the broader goals of promoting economic growth, high level of employment, price stability, and a reasonable balance in the country’s international payments position.

As banks in Malaysia are divided into commercial banks, merchant banks, and Islamic Banks, we will only discuss one commercial bank and one Islamic bank. An example of a commercial bank would be Malayan Banking Berhad. Malayan Banking Berhad or better known as Maybank, is the most popular bank in Malaysia nowadays. Malayan Banking Berhad is the largest banking group in Malaysia currently and has been in the banking industry for over three and half decades. During this time, the group’s achievements have risen to parallel Malaysia’s ascent to international recognition and acclaim (Maybank, 2004).

The Malayan Banking Berhad plays the role as a dynamic change -agent in financing business expansion and assisting national economic growth in Malaysia. For example, Maybank groups is playing the role in the financial solutions, services and products ranging from banking, insurance, factoring, asset management, stock broking, trustee services, nominee services, discount-house business, property trust fund management, unit trust fund management, venture capital and auto finance services. Additionally, to help accelerate the nation’s growth, the Malayan Banking Berhad involves itself in mergers and acquisitions, and these measures are taken to increase its capital and strengthen its hold onto the corporate world due to the current trend of globalization. Furthermore, the Malayan Banking Berhad is one of the representatives of the Bank Negara Malaysia.

An example of an Islamic Bank in Malaysia is the Bank Islam Malaysia Berhad. Bank Islam Malaysia Berhad started out their operations as the first Islamic bank on 1st of July 1983, and its establishment was primarily to serve for the financial needs of Muslims in the country. Apart from it, it is also to further extend its services to the whole population at large. Furthermore, Bank Islam was directly involved in developing the Islamic financial sectors such as dealing in banking, takaful, stock broking, leasing, research and training and other related Islamic banking services. The synergistic relationship between Bank Islam and its subsidiaries in dealing with all these services have complemented the overall growth on the Islamic financial system in Malaysia.

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