CHAPTER TWO
FINANCIAL ENVIRONMENT
OUTLINES
• 1-The Egyptian Financial System.
• 2-The role of the Financial markets and Financial
institutions in the flow of funds process.
• 3- Classification of Financial Markets.
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1-The Egyptian Financial System
Financial System is a system that allows the exchange of funds between savers
(saving sectors) and borrowers (deficit sectors).
The term System in Financial System indicates a group of complex and closely
linked financial institutions, financial processes, financial markets, and financial
instruments within an economy.
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financial markets
financial institutions
financial instruments
Saver
transfer
Savings Borrowers
Saver
The Egyptian Financial System is composed of two main sectors :
➢The first sector is the banking financial sector which includes all banks
preforming banking activities operating in the Egyptian market.
➢The second sector is the non-banking financial sector, which includes all
non-banking financial institutions preforming non-banking financial
activities in the Egyptian market such as capital market, insurance, mortgage
financing, financial leasing, factoring, pension funds, microfinance activities
and securitization activities.
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2-The role of the Financial markets and Financial
institutions in the flow of funds process
Firms that have Financial needs (Financial requirements) can get them
from external sources through three ways:
1. Financial institutions.
2. Financial markets.
3. Private placements.
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Flow of funds for financial institutions and financial
markets
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Financial institutions:
• Financial institutions are intermediaries that channel the savings of
economic sectors (individuals, businesses, and governments) into loans or
investments and providing other financial services.
• Financial institutions facilitate smooth working of the financial system by
making investors and borrowers meet.
• They mobilize the savings of investors either directly or indirectly via
financial markets, by making use of different financial instruments as well
as in the process using the services of several financial services providers.
Individuals are suppliers of funds, while businesses and governments are net
demanders of funds.
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❖ Financial Markets :
Financial markets are forums in which suppliers of funds and demanders of funds can
transact business directly. Whereas the loans and investments of institutions are made
without the direct knowledge of the suppliers of funds (savers), suppliers in the financial
markets know where their funds are being lent or invest.
To raise money, firms can use either private placements or public offerings.
❑A Private placement involves the sale of a new security (stocks or bonds) directly to an
investor or group of investors,
❑A Public offering involves the sale of a new security to general public (not exclusive
offering).Most firms, however, raise money through a public offering of securities.
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3- Classification of Financial Markets
There are several classifications of financial markets. The most
popular classifications of financial markets are :
1. Money Market and Capital Market.
2. Primary market and the secondary market.
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1. Money Market and Capital Market.
a-The Money Market:
-The money market is created by a financial relationship between suppliers and demanders of short-term
funds (funds with maturities of one year or less).
- Most money market transactions are made in marketable securities—short term debt instruments, such as
U.S. Treasury bills, commercial paper.
- Marketable securities are generally considered by investors to be among the least risky and in the same time
the most liquid available investments.
- Money market transactions can be executed directly or through an intermediary.
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b-The Capital Market
-The capital market is a market that enables suppliers and demanders of long-term funds to make
transactions. Such long-term securities have maturity more than one year.
-The key capital market securities are bonds (long-term debt) and both common and preferred stock (equity,
or ownership).
- Bonds are long-term debt instruments used by business and government to raise large sums of money,
generally from a diverse group of lenders.
- Common stock is units of ownership interest, or equity, in a corporation.
- Preferred stock is a special form of ownership that has features of both a bond and common stock.
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The money market is for short-term fund raising and is represented by current liabilities on the
balance sheet.
The capital market is for long-term fund raising and is reflected by long term debt and equity on
the balance sheet
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2. The primary market and the secondary market :
a-The Primary Market (Issuing Market) :
is a market for financial transactions in new issued securities (new issues),that is
securities issued for the first time whether they are short term securities or long term
securities.
The Primary Market facilitates the issuance of new shares and bonds by companies
about to be listed (IPOs) and listed companies.
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B-The Secondary Market (Trading Market) :
Secondary Market (Trading Markets) are Financial market in which pre-owned /pre-
issued securities (not new issues) are traded.
Once issued, securities are then traded on the secondary market such as the New York
Stock Exchange….
In general, Stock Exchanges are broker markets on which the two sides of a transaction,
the buyer and seller, are brought together to trade securities.
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