Money and banking
Assignment 1
Mahmoud alrashid
200700710
1. List Commercial Banks in Saudi Arabia
Al-Baraka Investment & Development Co.
Al Inma Bank
Al Rajhi Bank
Alinma Bank
Arab National Bank
Bank Al-Jazira
Bank Albilad
Bank Muscat
Banque Saudi Fransi
BNP Paribas
Deutsche Bank
Federation of GCC Chambers
Gulf International Bank
International Islamic Trade Finance Corporation
Islamic Corporation for The Development of
Private Sector
Islamic Development Bank
National Bank of Bahrain
National Bank of Kuwait
Riyad Bank
SABB Bank
Samba Financial Group
Saudi Arabian Monetary Agency
Saudi Credit & Saving Bank
Saudi Hollandi Bank
Saudi Investment Bank
The National Commercial Bank
2.
Get an annual report of one of the commercial banks and write a half a page summary on
the bank’s activities and services.
(Note: submit the annual report with your homework)
( Bank’s annual reports can be got from the bank’s websites)
In my paper research I will talk about Banking in Saudi Arabia. Economists agree to define
Banking in Saudi Arabia as "a system of Banking or Banking activity which is consistent with
Islamic Law principles and guided by Islamic economics. Banking in Saudi Arabia is becoming
now the most growing economics sectors in the country. Banking in Saudi Arabia use the Islamic
deals that accepted by "Shariah". The most important Bank is "CNB" which is the leader with the
Islamic transactions. Now, approximately all the Saudi Banks become an Islamic Banks.
Benefits become a matter of great argument and discussion among investors, economists,
financial officials, and banks owners. Some Saudi banks declare that they introduce some system
of benefits to attract more investors, while public people are arguing for how these benefits can
be legal according to the Islamic law. In addition, religious authorities, cooperate with public to
face illegal transactions in banks in Saudi Arabia.
3. List and explain the types of credit market instruments.
Common types of credit instruments
1. The vast majority of credit instruments involve a mixture of standard t yp e s .
W e c a n b r o a d l y c l a s s i f y t h e c r e d i t i n s t r u m e n t s u s e d b y t h e lender as
follows2. Credit instruments which are used for meeting wo rking capital requirements
3. Credit instruments used for meeting capital expenditure
4. Negotiable instruments like bill of exchange
5. Non-funded credit instruments like L/C and B.G.
6. Credit derivatives for risk mitigation
7. Other instruments
4. What is the distinction between interest rates and returns?
The amount charged, expressed as a percentage of principal, by a lender to a borrower for
the use of assets. Interest rates are typically noted on an annual basis, known as
the annual percentage rate (APR). The assets borrowed could include, cash, consumer
goods, large assets, such as a vehicle or building. Interest is essentially a rental, or
leasing charge to the borrower, for the asset's use. In the case of a large asset, like a
vehicle or building, the interest rate is sometimes known as the “lease rate”. When the
borrower is a low-risk party, they will usually be charged a low interest rate; if the
borrower is considered high risk, the interest rate that they are charged will be higher.
Simple Interest = P (principal) x I (annual interest rate) x N (years)
Borrowing $1,000 at a 6% annual interest rate for 8 months means that you would owe $40 in
interest (1000 x 6% x 8/12).
Here, the reader has made a glaring error. The returns shown are not monthly returns. Neither are
they returns for seven days. They are annual returns.
That means, if she invests Rs 5,00,000 at 4% per annum, she will be entitled to Rs 20,000 per
annum. That will be only Rs 1,666 per month (Rs 20,000 / 12 months).
Now, if we take it for a 14-day deposit, it will boil down to Rs 767 (Rs 5,00,000 x 4% x 4/365).
Similarly, let's say you are being offered 5% on a two-year deposit of Rs 5,00,000. That means
you get 5% per annum.
You will earn an interest of Rs 25,000 at the end of the first year.
At the end of the second year, you will get interest on Rs 5,25,000 (Rs 5,00,000 + Rs 25,000). So
the interest for the second year will be Rs 26,250.
On maturity after two years, you will land up with Rs 5,51,250.
Calculation = Rs 5,00,000 (principal) + 25,000 (interest for the first year) + 26,250 (interest for
the second year)
5.
What is the distinction between real and nominal interest rates?
(Note: Your answer must be in words and equations please)
5. List and explain the determinants of Asset demand.
WEALTH :
SIZE EFFECT: THE QUANTITY OF ASSETS DEMANDED INCREASES
WITH WEALTH -- OTHER THINGS THE SAME.
DISTRIBUTION EFFECT : WHICH
ASSETS INCREASE THE MOST RELATIVELY DEPENDS ON THEIR WEALTH
ELASTICITY OF DEMAND.
Ew < 1
NECESSITY ASSET
Ew > 1
LUXURY ASSET
Ew < 1
Ew = [% CHANGE IN QUANTITY
OF THE ASSET]/ % CHANGE
IN WEALTH
= .5
(% CHANGE IN QUANTITY
DEMANDED) = .5 (% CHANGE IN
WEALTH )
•
FOR THIS CASE, WHAT HAPPENS TO
THE RELATIVE POSITION OF THIS
ASSET IN THE PORTFOLIO AS WEALTH INCREASE ?
GOES DOWN
Ew > 1
Ew = (% CHANGE IN QUANTITY
DEMANDED)/(% CHANGE IN
WEALTH) = 1.5
6. State the Theory of Asset Demand.
Demand For An Asset Depends On Four Factors:

Wealth: As wealth increases, demand for financial assets increases
Two types of financial assets:



a. Necessity assets: Ex: cash & checking accounts – demand grows slower.
b. Luxury assets: Ex: stocks & bonds – demand grows faster.
Expected Return (RETe): Is relative to RETe (real, after tax expected return) on other
assets. Higher RETe => increase in demand (and demand for other assets goes down).

Risk relative to other assets: When risk goes up, demand for one asset goes down, thus
increasing demand for other assets.

Liquidity relative to other assets: If liquidity goes up, then demand goes up for that
asset, thus falls for the other assets.
The Demand Shifts When:

Wealth increases



RETe increases
Riskiness decreases
Liquidity increases
The Supply Shifts When:

Increase in expected profitability on capital investment opportunities

Increase In expected inflation relative to what other people expect

Increase in federal government deficits or state/local government willingness to spend on
capital projects.
Three Factors That Move Both Supply & Demand:

Economic Fluctuations (investment opportunities increase in a boom, wealth increases )

Changes in expected inflation

Tax cuts
Theory of Asset Demand or also known as Theory of Portfolio Choice
7. List and explain the factors that shift the demand curve for bonds.
1. Wealth
A. Economy grows, wealth ↑, Bd ↑, Bd shifts out to right
2. Expected Return
A. i ↓ in future, Re for long-term bonds ↑, Bd
shifts out to right
B. πe ↓, Relative Re ↑, Bd shifts out to right
C. Expected return of other assets ↑, Bd ↓, Bd shifts in to left
3. Risk
A. Risk of bonds ↓, Bd ↑, Bd shifts out to right
B. Risk of other assets ↑, Bd ↑, Bd shifts out to right
4. Liquidity
A. Liquidity of Bonds ↑, Bd ↑, Bd shifts out to right
B. Liquidity of other assets ↓, Bd ↑, Bd shifts out to right
9. List and explain the factors that shift the supply of bonds.
A change in supply (a shift in the supply curve) occurs whenever some factor that affects the
supply of the good, other than its price, changes. Such variables include:
1. Prices of productive resources. A rise (fall) in the prices of resources shifts the supply
curve leftward (rightward).
2. An increase in technology shifts the supply curve rightward.
3. An increase (decrease) in the number of suppliers shifts the supply curve rightward
(leftward).
4. Prices of other goods produced, which have two possible relationships:
a) When the price of a substitute in production rises (falls), the supply curve for the good
shifts leftward (rightward).
b) A rise (fall) in the price of a complement in production shifts the supply curve rightward
(leftward).
5. If the expected future price of the product rises (falls), the supply curve in the present
period shifts leftward (rightward).
A change in supply also affects the price and quantity of the product.
1. An increase in supply (a shift rightward of the supply curve) causes the price to fall and
the quantity to increase.
2. A decrease in supply (a shift leftward in the supply curve) causes the price to rise and the
quantity to decrease
10. List and explain the factors that shift the demand for and supply of money
Whereas the loanable funds framework determines the equilibrium interest rate using the supply
of and demands for bonds, an alternative model developed by John Maynard Keynes, known as
the liquidity preference framework, determines the equilibrium interest rate in terms of the
supply of and demand for money. Although the two frameworks look different, the liquidity
preference analysis of the market for money is closely related to the loanable funds framework of
the bond market.1The starting point of Keynes’s analysis is his assumption that there are two
main categories of assets that people use to store their wealth: money and bonds.
Therefore, total wealth in the economy must equal the total quantity of bonds plusmoney in the
economy, which equals the quantity of bonds supplied B s plus the quantity of money supplied
Ms. The quantity of bonds Bd and money Md that people want to hold and thus demand must
also equal the total amount of wealth because people cannot purchase more assets than their
available resources allow.
The conclusion is that the quantity of bonds and money supplied must equal the quantity of
bonds and money demanded:
Bs+ Ms= Bd+ Md
(1)
Collecting the bond terms on one side of the equation and the money terms on the other, this
equation can be rewritten as
Bs Bd= Ml Ms
(2)
The rewritten equation tells us that if the market for money is in equilibrium (Ms= Md), the
right-hand side of Equation 2 equals zero, implying that Bs= Bd, meaning that the bond market
is also in equilibrium.
11. List and explain the risk structure of interest rates.
The best combination to observe the risk structure is option B: a 30 year Treasury bond and a
corporate Aaa bond. The reason for this is simple. A 30 year Treasury bond and a corporate Aaa
bond have similar terms so the term structure is constant, therefore, the primary difference is the
risk structure. To further explain this answer I'll eliminate the other options.
Option A does not work because they are the same type of security--government securities--so
they have the same risk (which, by the way, is virtually zero).
Option C does not work because those bonds of vastly different terms--6 months vs. about 30
years
Option D does not work because those bonds are also of vastly different terms--6 months vs. 7
years
Option E does not work because they are both vastly different terms and they are the same type
of security--corporate debt
Therefore, Option B is the correct choice because it compares different types of securities
(government vs. corporate) of similar terms (about 30 years).
12. List and explain the term structure of interest rates.
Usually, longer term interest rates are higher than shorter term interest rates. This is called a
"normal yield curve" and is thought to reflect the higher "inflation-risk premium" that investors
demand for longer term bonds. When interest rates change by the same amount for bonds of all
terms, this is called a "parallel shift" in the yield curve since the shape of the yield curve stays
the same, although interest rates are higher or lower "across the curve". A change in the shape of
the yield curve is called a "twist" and means that interest rates for bonds of some terms change
differently than bond of other terms.
A small or negligible difference between short and long term interest rates occurs later in the
economic cycle when interest rates increase due to higher inflation expectations and tighter
monetary policy. This is called a "shallow" or "flat" yield curve and higher short term rates
reflect less available money, as monetary policy is tightened, and higher inflation later in the
economic cycle.