Australain Financial System
The Structure of the
Australian Financial System
1 Describe the difference between direct and indirect financing?
Savers (investors) can lend money (acquire financial assets) in two ways:
ľ Directly - lending funds to actual users of funds e.g. companies obtaining funds directly from a syndicate of lenders. In direct finance, financial institutions often provide financial services to the borrowers and lenders, such as, financial advice and broking services.
ƒæ Indirectly ¡V investors lend to financial institutions that in turn pool these funds to lend to various borrowers. The ultimate borrower and lender have no legal relationship or claim on each other, but each has a separate legal relationship with the financial intermediary involved.
2 What is meant by the term ¡¥Financial intermediary¡¦?
Financial intermediaries basically are the ¡¥middlemen¡¦ in the financial sector. They provide the link between those with money and those who need money. The funds are pooled and lent to borrowers with many different needs. For providing this service and assuming a number of risks, the intermediaries charge a fee.
3. Briefly describe seven (7) different non-bank financial intermediaries?
1. Finance companies - Offer hire purchase and instalment credit usually for motor vehicles, construction and large household appliances. Because of direct competition from other financial intermediaries, finance companies have tended to operate at the high-risk end of the market. Most finance companies are owned by the four major banks e.g. AGC, Esanda, CBFC, Custom Credit.
2. Credit Unions - They make up a small part of the financial picture in Australia. They are community based and provide loans to their members. Credit Unions are often work based offering facilities such as
„X Consumer finance
„X Housing loans
„X Small Commercial Loans
„X Investment and retirement advice
„X Insurance and travel facilities
3. Building Societies ¡V The main function is to mobilise funds for housing but since deregulation, with increased competition they have been forced to increase their range of services. Building Societies are very similar to Credit Unions.
4. Life insurance offices and superannuation funds ¡V They receive money from insurance premiums, superannuation contributions and general insurance. They lend and invest these proceeds in the capital markets.
5. Friendly Societies ¡V These are small non-profit intermediaries pooling the funds of small investors to earn higher returns, usually in capital-guaranteed securities to ensure the security of the fund.
6. Unit Trusts ¡V Enables small investors to pool funds to take advantage of larger, higher interest bearing markets. Types include
„X Cash Management Trusts-invest in STMM
„X Property Trusts-invest in real estate
„X Equity Trusts-invest in shares
7. Managed Funds ¡V Similar to Unit Trusts. Funds are investments where individual investors funds are pooled with those of other investors. Investment professionals manage these funds.
4. You are the Chief Financial Advisor of a small company that is in need of short term finance. Outline the various sources of finance that you would recommend as being the appropriate for your company.
For short term finance there are several various sources available for a small company that I would recommend, outlined below is a list with both advantages and disadvantages:
TRADE CREDIT
„X Relatively easy to obtain
„X Flexible ¡V fluctuates [next page]