SU Ch2 M.Sc AcFn551 FMI 2022 sem2 Depository Financial

1. M.SC.,ACCOUNTING AND FINANCE-2022
FINANCIAL MARKETS AND INSTITUTIONS
COURSE CODE-ACFN551-CREDIT-2HR
CHAPTER-TWO
DEPOSITORY FINANCIAL INSTITUTIONS
PROF. DR. CHINNIAH ANBALAGAN
PROFESSOR OF M.SC., ACCOUNTING & FINANCE
COLLEGE OF BUSINESS AND ECONOMICS
SAMARA UNIVERSITY, ETHIOPIA, EAST AFRICA
EMAIL ID: DR.CHINLAKSHANBU@GMAIL.COM

2. Contents
Definition and importance of
Depository institution
Types of depository institution
•Commercial Banks
•Microfinance Institutions (MFIs)
•Saving Banks
•Credit unions
•Other

3. Definition of Depository Institution
• The term depository refers to a facility in which
something is deposited for storage or safeguarding or
an institution that accepts currency deposits from
customers such as a bank or a savings association.
• A depository can be an organization, bank, or
institution that holds securities and assists in the
trading of securities.
• A depository provides security and liquidity in the
market, uses money deposited for safekeeping to lend
to others, invests in other securities, and offers a
funds transfer system.
• A depository must return the deposit in the same
condition upon request.

4. Importance Of Financial Institutions
• Financial institutions, like insurance companies, help
to mobilize savings and investment in productive
activities.
• In return, they provide assurance to investors against
their life or some particular asset at the time of
need.
• In other words, they transfer their customer's risk of
loss to themselves.
• the three most important factors that you would
consider that the fees charged, interests rates
offered, and the insurance.

5. Conti…
The top ten things you should consider when choosing a banking
institution are:
Security of your funds. Make sure that any bank or credit union
is insured by the Federal Deposit Insurance Corporation (for
banks) or the National Credit Union Association (for credit
unions.)
Fees. You should be able to find an account that does not
charge you any fees for basic account transactions. Examples
of fees to avoid include monthly fees, per check fees, and fees
for account assistance (talking to a representative, using in-
branch services.)
Ease of deposit. Even in this age of direct deposit, everyone has
an occasional need to deposit checks or cash. Even if your bank
does not have a physical location near you, they may offer
mobile or home deposit services to make check deposits fast

6. Conti…
• Interest rates. Interest rates work both ways: the rates
you receive on your money on deposit with the bank, and
the rates you pay when borrowing via credit card or
loan. Ideally, you will find an account that pays higher-
than-average interest on your deposits and charges lower-
than-average interest on your debts.
• Online banking features. Do you like to use online bill
pay? Choose an account where it is free. Need to transfer
money to others regularly? Make sure your bank is
equipped to process those transactions quickly and easily.
• Minimum balance requirements. Some accounts require
you to maintain a minimum balance before they begin
charging account fees. Make sure any minimum balance
requirement is something that you can comfortably afford.

7. Conti…
• Branch availability. Some people can not be
comfortable with a bank that doesn’t have a
physical location nearby. Think about your needs
and wants and see if this important to you.
• Customer service. When you have a problem or
question, the last thing you want is to sit on hold,
or get a customer service representative who is
unhelpful or not nice. Ask around to find out
what banks make your friends happy!
• Availability of funds. Some banks offer early
release of active duty pay deposits. This is a
feature that is popular with many customers.

8. What is a depository
• Depository is a place where financial securities
are held in dematerialized form.
• It is responsible for maintenance of ownership
records and facilitation of trading in
dematerialized securities.

9. Depository and Different from Depository Participant
• Depository Participant (DP) is described as an Agent (law) of the
depository.
• They are the intermediaries between the depository and the
investors.
• The relationship between the DPs and the depository is governed
by an agreement made between the two under the Depositories
Act.
• In a strictly legal sense, a DP is an entity who is registered as such
with SEBI under the sub section 1A of Section 12 of the SEBI Act.
• As per the provisions of this Act, a DP can offer depository-related
services only after obtaining a certificate of registration from SEBI.
• There are two depositories which are functional in India –
National Securities Depository Ltd (NSDL) and Central Securities
Depository Ltd (CDSL).
• Various Depository Participants linked to each one of them in
India.
• All the details in form of electronic records of equity and debt are
kept there.

10. Demat Account
• A Demat account or dematerialised account
converts the shares from the paper form into an
electronic form.
• They are similar to pass books offered by the banks
where you have opened an account.
• You can easily buy or sell shares of different
companies using your Demat account.
• All the transactions are entered into it akin to the
bank passbook

11. How to open a Demat Account?
• In order to open a Demat Account the interested
candidate has to follow these general instructions:
• The interested candidate has to approach a Depository
participant (DP) who is registered with the National
Securities Depository Ltd. (NSDL) and the Central
Depository Services Ltd. (CSDL).
• The sole function of the DP is to act as an intermediary
between the investor and the depository.
• Then the relationship manager from the DP that you
have approached provides you with an application
form that you need to fill and deposit with them.
• Some documents like identity and address proof are
mandatory requirements and can’t be bargained with.
• The interested candidate needs to produce an original
PAN card during the process of account opening.

12. Advantages of trading through a demat account
• A Demat Account promises security in transactions,
timely delivery of shares, reduced fraudulent
transactions.
• As the paper use is limited in the process so costs
associated are reduced greatly and the cost per
transaction is also lowered than physical trading.
• The process has provided mobility and ease of
working from anywhere.
• In addition investors can invest in IPO’s, ETF’s of
gold and carry out trading at huge volumes that
was not possible earlier.

13. Functions of a Depository
• 1. Serves as a link between public companies and
investors/shareholders
• A depository functions as a connecting link
between the public companies that issue financial
securities, and the investors or shareholders.
• The securities are issued by agents associated
with depositories, who are known as depository
participants.
• The agents are responsible for transferring the
securities from the depositories to the investors.
• A depository participant can be a bank, an
institution, or a brokerage.

14. 2. Eliminates risk related to Owning Physical
Financial Securities
• A depository allows traders and investors to hold
securities in dematerialized form; thus, eliminating
the risk related to holding physical financial
securities.
• The buyers and sellers now do not need to check
whether the securities have been transferred
successfully without any loss or theft.
• The depository system reduces such risks by
allowing the securities to be held and transferred in
electronic form.

15. 3. Allows the provision of loans of mortgages to
interested parties
• A depository holds the securities of customers
and gives them back when the customers want.
• The customers receive interest on the deposits,
while the depository earns even more interest by
lending the deposits to other people or
businesses in the form of loans or mortgages.
•

16. 4. Reduced paperwork and accelerates the process
of transferring securities
• When a trade occurs, a depository transfers
the ownership of securities from the account
of one investor to another.
• It helps in reducing the paperwork associated
with the finalization of a trade and accelerates
the process of transfer of securities.
•

17. Types of Depository Institutions
• The following are the three main categories of depository
institutions:
• 1. Commercial Banks
• Commercial banks are for-profit organizations and generally
owned by private investors.
• The range of services offered by commercial banks depends on the
size of the banks.
• For example, the services offered by the smaller banks are limited
to consumer banking, small mortgages and loans, simple deposits,
banking for small-business, and other services. The market range is
also limited in the case of smaller banks.
• On the contrary, larger banks and global banks offer a wide range
of services such as foreign exchange-related services, money
management, and investment banking.
• Some larger and global banks may also offer services for other
banks and large organizations.
• The services offered by the large banks is the most diverse among
all depository institutions.

18. 2. Credit Unions
• Credit unions are financial cooperatives implying that
these depository institutions are owned by members of
a particular group.
• The profits earned are either paid to the members as
dividends or reinvested into the organization.
• The members of the credit unions are the ones that
own accounts in the institution; hence, the depositors
are also partial owners and receive dividends.
• Since credit unions are non-profit institutions, they pay
no federal or state tax.
• Hence, the interest rate charged by credit unions on
loans is lower, and they pay a higher interest rate on
deposits.

19. 3. Savings Institutions
• The banks serving a local community and loan
institutions are called savings institutions.
• The local residents deposit money in the banks,
and their money is offered back in the form of
mortgages, consumer loans, credit cards, and loans
for small businesses.
• Savings institutions can sometimes be set up as
corporations or as financial cooperatives allowing
the depositors to get an ownership share in the
organization.

20. 4. Micro Finance Institutions
• Muhammad Yunus is often considered the father
of microfinance.
• In 2006, he won the Nobel Prize for his "efforts
through microcredit to create economic and social
development from below."
• Microfinance refers to a broad range of financial
services made available to low-income clients,
particularly women.
• The services include loans, saving, insurance, and
remittance

21. Muhammad Yunus Net Worth
• Muhammad Yunus is a Bangladeshi
entrepreneur, bank, civil society leader, and
economist who has a net worth of $10 million.
Muhammad Yunus was born in Chittagong,
Bengal Presidency, British India in June 1940.

22. Conti…
• The obstacles or challenges in building a sound
commercial microfinance industry include:
• Inappropriate donor subsidies
• Poor regulation and supervision of deposit-taking
microfinance institutions (MFIs)
• Few MFIs that meet the needs for savings,
remittances or insurance
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more dissemination and adoption of
rural, agricultural microfinance methodologies
• Members' lack of collateral to secure a loan

23. Women Microfinance
• Microfinance provides women around the world with
financial and non-financial services, especially in the most
rural areas that do not have access to traditional banking
and other basic financial infrastructure.
• It creates opportunities for women to start-up and build
their businesses using their own skills and talents.
• Utilizing savings, credit, and micro insurance, Microfinance
helps families create income-generating activities and better
cope with risk.
• Women particularly benefit from microfinance as many
microfinance institutions (MFIs) target female clients.
• Most microfinance institutions (MFIs) partner with other
organizations like Water.org and Habitat for Humanity to
provide additional services for their clients.

24. Benefits of Microfinance
• Micro financing produces many benefits for poverty stricken and low-
income households. One of the benefits is that it is very accessible.
• Banks today simply won't extend loans to those with little to no assets,
and generally don't engage in small size loans typically associated with
micro financing.
• Through micro financing small loans are produced and accessible.
• Micro financing is based on the philosophy that even small amounts of
credit can help end the cycle of poverty.
• Another benefit produced from the micro financing initiative is that it
presents opportunities, such as extending education and jobs.
• Families receiving micro financing are less likely to pull their children
out of school for economic reasons. As well, in relation to
employment, people are more likely to open small businesses that will
aid the creation of new jobs.
• Overall, the benefits outline that the micro financing initiative is set
out to improve the standard of living amongst impoverished
communities

25. Principles of Microfinance
• Principles that summarize a century and a half of
development practice were encapsulated in 2004
by CGAP and endorsed by the Group of
Eight leaders at the G8 Summit on 10 June 2004:
• Poor people need not just loans but also
savings, insurance and money transfer services.
• Microfinance must be useful to poor households
helping them raise income, build up assets and/or
cushion themselves against external shocks.
• Microfinance can pay for itself.
• Subsidies from donors and government are scarce
and uncertain and so, to reach large numbers of
poor people, microfinance must pay for itself.

26. Conti…
• Microfinance means building permanent local institutions.
• Microfinance also means integrating the financial needs of
poor people into a country's mainstream financial system.
• The job of government is to enable financial services, not to
provide them.
• Donor funds should complement private capital, not compete
with it.
• The key bottleneck is the shortage of strong institutions and
managers.
• Donors should focus on capacity building.
• Interest rate ceilings hurt poor people by preventing
microfinance institutions from covering their costs, which
chokes off the supply of credit.
• Microfinance institutions should measure and disclose their
performance both financially and socially.

27. Microfinance Networks and Associations
• There are several professional networks of microfinance institutions, and
organizations that support microfinance and financial inclusion.
A. Micro Finance Network
• The Microfinance Network is a network of 20 to 25 of the world's
largest microfinance institutions, spread across Asia, Africa, the
Middle East, Europe and Latin America.
• Established in 1993, the Microfinance Network provided support
to members that helped steer many industry leaders to
sustainability, and profitability in many of their largest markets.
• Today as the sector enters a new period of transition, with the
rise of digital financial technology that increasingly competes
with traditional microfinance institutions, the Microfinance
Network provides a space to discuss opportunities and challenges
that arise from emerging technological innovations in inclusive
finance.
• The Microfinance Network convenes once a year. Members
include Al Majmoua, BRAC, BancoSol, Gentera, Kamurj, LAPO,
and SOGESOL.

28. B.Partnership for Responsible Financial Inclusion
• The Partnership for Responsible Financial, previously known as the
Microfinance CEO Working Group, is a collaborative effort of leading
international organizations and their CEOs active in the microfinance
and inclusive finance space, including direct microfinance
practitioners, and microfinance funders.
• It consists of 10 members, including Accion, Aga Khan Agency for
Microfinance, BRAC, CARE USA, FINCA Impact Finance, Grameen
Foundation, Opportunity International, Pro Mujer, Vision Fund
International and Women's World Banking.
• Harnessing the power of the CEOs and their senior managers, the PRFI
advocates for responsible financial services and seeks catalytic
opportunities to accelerate financial access to the unserved.
• The network is made up of the CEO working group, that meet
quarterly and several subcommittee working groups dedicated to
communications, social performance, digital financial services, and
legal and human resources issues.

29. C. European Microfinance Network
• The European Microfinance Network (EMN) was
established in response to many legal and political
obstacles affecting the microfinance sector in Europe.
• The Network is involved in advocacy on a wide range of
issues related to microfinance, micro-enterprises,
social and financial exclusion, self-employment and
employment creation.
• Its main activity is the organisation of its annual
conference, which has taken place each year since
2004. The EMN has a wide network of over 100
members.
D. Microfinance Centre
• The Microfinance Centre (MFC) has a membership of
over 100 organizations, and is particularly strong in
Eastern Europe, the Balkans and Central Asia.

30. E. Africa Microfinance Network (AFMIN)
• The Africa Microfinance Network (AFMIN) is an
association of microfinance networks in Africa
resulting from an initiative led by African microfinance
practitioners to create and/or strengthen country-level
microfinance networks for the purpose of establishing
shared performance standards, institutional capacity
and policy change.
• AFMIN was formally launched in November 2000 and
has established its secretariat in Abidjan (Republic of
Côte d'Ivoire), where AFMIN is legally recognized as an
international Non-Governmental Organization
pursuant to Ivorian laws. Because of the political
unrest in Côte d'Ivoire, AFMIN temporarily relocated
its office to Cotonou in Benin

31. Other Types of Depository Institutions
1. Central Banks
• Central banks are the financial institutions
responsible for the oversight and management of
all other banks.
• In the United States, the central bank is the Federal
Reserve Bank, which is responsible for conducting
monetary policy and supervision and regulation of
financial institutions.
• Individual consumers do not have direct contact
with a central bank; instead, large financial
institutions work directly with the Federal Reserve
Bank to provide products and services to the
general public.

32. 2. Retail and Commercial Banks
• Traditionally, retail banks offered products to
individual consumers while commercial banks
worked directly with businesses.
• Currently, the majority of large banks offer deposit
accounts, lending, and limited financial advice to
both demographics.
• Products offered at retail and commercial banks
include checking and savings accounts, certificates
of deposit (CDs), personal and mortgage loans,
credit cards, and business banking accounts

33. 3. Internet Banks
• A newer entrant to the financial institution market
is internet banks, which work similarly to retail banks.
• Internet banks offer the same products and services
as conventional banks, but they do so through online
platforms instead of brick-and-mortar locations.
• Under internet banks, there are two categories:
digital banks and neo-banks.
• Digital banks are online-only platforms affiliated with
traditional banks.
• However, neobanks are pure digital native banks with
no affiliation to any bank but themselves.

34. 4. Investment Banks
• Investment banks are financial institutions that
provide services and act as an intermediary in complex
transactions, for instance, when a startup is preparing
for an initial public offering (IPO), or in merges.
• They can also act as a broker or financial adviser for
large institutional clients such as pension funds.
• Investment banks do not take deposits; instead, they
help individuals, businesses and governments raise
capital through the issuance of securities.
• Investment companies, traditionally known as mutual
fund companies, pool funds from individuals and
institutional investors to provide them access to the
broader securities market.

35. 5. Brokerage Firms
• Brokerage firms assist individuals and
institutions in buying and selling securities
among available investors.
• Customers of brokerage firms can place trades
of stocks, bonds, mutual funds, exchange-
traded funds (ETFs), and some alternative
investments.

36. 6. Insurance Companies
• Financial institutions that help individuals
transfer the risk of loss are known as insurance
companies.
• Individuals and businesses use insurance
companies to protect against financial loss due
to death, disability, accidents, property
damage, and other misfortunes.

37. 7. Mortgage Companies
• Financial institutions specialized in originating or
funding mortgage loans are mortgage companies.
While most mortgage companies serve the
individual consumer market, some specialize in
lending options for commercial real estate only.
• Mortgage companies focus exclusively on
originating loans and seek funding from financial
institutions that provide the capital for the
mortgages.
• Many mortgage companies today operate online
or have limited branch locations, which allows for
lower mortgage costs and fees.

38. END OF THE CHAPTER-TWO
THANKS