Singapore Financial System

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SingaporeFinancial System

TheInterrelations between Financial System and Business Activities inSingapore

1.0Introduction

Afinancial system denotes a network of multifaceted and dynamicallyinterlinked or connected practices, establishments, agents,liabilities, financial markets, intermediaries, assets, systems, andtransactions in an economy that allows the formation and transfer ofcapital. In this regards, a financial system allows governments andhouseholds to meet their capital needs as well as mobilize savingsand venture into investments. A financial system has five componentsnamely: financial markets, money, financial instruments, the centralbank, and financial instruments (Dombret and Luciius, 2013 Azis andShin, 2015). On the other hand, business activities denote theactivities that a firm engages in productively in the course of itsbusiness. These activities must generate income for the firm andcreate value for investors. In this regards, it is essential toconstrue the interrelation between financial systems and businessactivities since financial systems open avenues for firms to promotetheir business activities. The analysis assesses the financial systemof Singapore and the way it facilitates business activities as wellas analyzes Comfortdelgro in the context of the financial system.

2.0Singapore financial system

2.1Components of Singapore financial system

Singaporefinancial structure consists of the five fundamental components asmentioned above, which help in facilitating business activities aswell help firms in accessing funds and services.

2.1.1Money

Moneyin every financial structure facilitates the purchase of goods,services, and functions as a unit of account. Singapore Dollar is thecurrency used in Singapore, which is coded as SGD. Singaporecorporate use money in undertaking business transactions, forming newbusiness opportunities for growth, financial transactions such aspayments such as bills, taxes and salaries (IMF, 2013).

2.1.2Financial instruments

Themost important financial instrument in Singapore is equity finance.Through equity, Singapore corporate creates specific interest inassets and investments. Other than using equity as a basis to valuecorporate organization in Singapore highly use equity financing tofinance growth cost effectively as opposed to high-interest bankloans. Corporate earn dividends and reinvested earnings from equitysecurities, reinvestment of earnings and security lending (IMF,2013).

Debtfinancing is also an important tool that Singapore corporate utilizeto raise funds for their business obligations. Debt in Singaporefinancial system takes the form of debt securities, which includelong and short term, bills, loans, and deposits. Debt types alsoinclude accounts receivables and payables all of which earn interestsand can be used in securities lending (Epstein, n.d). Other importantfinancial instruments in Singapore financial include net equity inreserves, financial and monetary gold, SDR, and annuity funds,financial spinoffs and employee bond options (Azis and Shin, 2015).

2.1.3Financial markets

TheSingapore financial system has evolved over the years making thecountry a regional business hub in the Asian Pacific region. TheSingapore financial market is comprised of the capital market. Stockmarkets enable corporate organizations to trade their stock as a wayto raise finance for their business activities. Many of Singaporecorporate organizations trade their stocks on the Singapore StockExchange (SGX) to raise significant funds from investors. TheSingapore financial market also comprises of the commodity market,which involves the distribution of commodity countrywide. Corporateearn profits and maintain continuous circulation of funds within thecommodity market (Santacrew, 2015 Mehran and Stulz, 2006). Moneymarkets provide debt financing packages to companies, derivatives andinsurance markets that have diversified products customized to suitvarious corporate needs in the market. Foreign exchange market inSingapore also provides an important financial opportunity tocorporate institutions to raise funds from investors directly(Williams, 2015).

2.1.4Capital Markets

Singaporehas a well-developed and secure capital market that comprises of debtcapital market that offers government securities and foreigncorporate bonds. It also consists of equity capital market such asthe SGX that provide listing opportunity for over 800 companiesacross Asia. Foreign exchange is also an important component ofSingapore capital market that offers corporate flexibility and thedeep liquid market for trading with a wide variety of currencies.Corporate undertake various investment options in capital markets toexpand its financial sources and attract investors. Trading in theSGX and through Foreign Exchanges provide profits that corporate needto reinvest in their growth.

2.1.5Financial institutions

Singaporefinancial system consists of a variety of financial institutions suchas insurance firms, trust companies, commercial banks, financecompanies, capital market intermediaries, financial advisers, andmoney changing businesses. These institutions provide financialopportunities for corporate organizations such as loans, insurancecoverage, brokerage services and financial advice in businessdecision-making processes in mergers and acquisitions (Dombret andLuciius, 2013 Mehran and Stulz, 2006). Financial institutionscushion corporate organizations during economic turbulence byproviding finances that drive economic growth. Banks also providelending incentives that boost corporate financial needs. Lenders andinsurers provide needed funding for business growth and protectionagainst loss.

2.1.6Central banks

TheSingapore central bank, which is also the Monetary Authority ofSingapore and financial regulatory institution, is accorded with themandate to oversee the country monetary issues, banking processes,insurance systems, securities offerings and currency management.Singapore central bank services enable the corporate to operate in asecure market environment that has well-managed oversight andsupervision. This increases investment trust and confidence in theSingapore financial market (Shrestha, 2012).

3.0Roles of financial intermediaries: products and services offered

Financialintermediaries in Singapore link creditors to debtors in the financemarket through transforming assets and liabilities into other formsof tradable valuables. Insurance firms offer businesses variousinsurance coverage that is packaged in different ways to suitdifferent business. As such, insurance provides corporateorganizations with financial coverage during uncertainties inbusiness (Duffie, 2013). Insurance firms also offer corporateopportunities to save and investment incentives. In the case offailures in the market, corporate organizations can get protectionfrom conflicts between lenders and borrowers are eliminated.Financial and investment advice to corporate enables organizations toinvest wisely getting to know risk-free opportunities of investmentsor ways to spread investment risks in Singapore market (OECD, 2013).Financial incentives provided by financial intermediaries enablecorporate organizations to lend and borrow cost effectively directlyfrom financiers. Credit advantages offered by intermediaries offerthe corporate opportunity to match the deposits they make with theloans they need in their business operations. Banks and otherfinancial institutions have access to large volumes of money makingit easy for them to lend at lower rates. Many other avenues ofraising find such as Foreign Exchange and security bond issuanceprovide corporate with diversified opportunities to raise sufficientfunds without incurring high costs repayment costs (Duffie, 2013OECD, 2013).

3.1Conflict of interest in agent

Conflictof interest in the financial system arises due to the magnitude ofinformation that financial institutions collect from their customers.This magnitude of information makes it easy for companies to use theinformation in many ways to develop multiple products to theircustomers and this may be conflicting with other providers of thesame service (Williams, 2015). Financial institutions can use thesame information resource in other ways to achieve economies ofscope. Conflict of interest is prevalent in institutions that providemultiple financial products in the same market. When a firm isinvolved in depository services at the same time offeringnon-depository products, conflicts may arise when all these differentservices are offered to the same client. Conflict of interest is andfactor that destroys the quality of information in the market. Wheninformation is systemized, funds are likely to be channeled tononproductive investment opportunities making the market ineffective(Bel and Hindmoor, 2015).

4.0Comfortdelgro Business activities

ComfortdelgroCorporation is an international business based in Singapore operatingin the transport sector. With over 21, 600 employees, Comfortdelgrois an investment holding firm that deals in the running of landcarriage services and operates through eight divisions (automotive,bus station, rail, taxi, bus, inspection and testing services,driving center, engineering services, leasing and car rental0. Thecompany owns a fleet of over 46,000 vehicles operating in sevencountries with 5,000 taxis in Singapore alone. Comfortdelgro handlesover 35.6 million booking per year (Comfortdelgro, 2015). The drivingcenter division operates driving schools car rental offers leasingservices, inspection, and testing offers vehicular testing andconsultancy services while the taxi division offers taxi services andancillary adverts. In addition, the rail division engages inauxiliary advertisements and rail fare collection, engineeringservices offer vehicle care, repair, and assembly while bus and busstation divisions deal with bus fare collection and rental services.

5.0Accessing financial system

5.1Financial markets

Investingin the transport sector is costly and involves large sums offinances. Comfortdelgro is a big firm thus, any investment or cashinjection would require a huge commitment and a strong financialmanagement. One way Comfortdelgro can raise these funds to increaseits fleet is going public by selling the company initial publicoffering (IPO) of their stock. This will provide an unlimited sourceof capital for the company to be able to grow into the markets itdesires with secured funding at no cost of repayment. The company canalso issue bonds to its investors to raise enough capital forexpansion. Bonds offer a lower interest rate, and repayment can benegotiated in a flexible arrangement than loans from banks ((IMF,2013). Increasing its sales and expanding into new markets is alsoone way Comfortdelgro can increase sales volume to attain higherprofits, which can be reinvested to expand the company. When the needarises to acquire short term loans, Comfortdelgro has an option ofreaching out to money market instruments such as repurchaseagreements, commercial papers to acquire funds. Covering the companythrough insurance offering is also critical to ensure that thecompany property and assets are secured and can be compensated whendisasters occur (Duffie, 2013.

5.2Financial intermediaries

Comfortdelgrofinancial transaction highly depends on banks. The company can accessloans and credit facilities from commercial banks at competitiverates. Financial banks also offer investment advice and act asmediators during negotiation. Comfortdelgro can collaborate with aninvestment to undertake new M&ampA in new markets. Investment banks,commercial banks and financial advisors in the banking and investmentsector can provide the investment and special financial advice thecompany required. This provides a deeper understanding of all marketintricacies to be able to make best investment decisions. Insurancecover for Comfortdelgro employees and physical assets is important.The company can choose a number of insurance policies in theSingapore insurance market that will provide high protection andassured compensation in case of damages. Insurance also offersincentives such as insurance cover against the risk of default.Credit unions also can be used to provide Comfortdelgro withfinancing facilities through lending and depositing in highperforming markets.

5.3Financial Instruments

Somefinancial instruments that various financial institutions inSingapore offer can facilitate Comfortdelgro daily financial needs.Letter of credit can be used in undertaking large purchases ofequipment or motor vehicle. Commercial banks provide a letter ofcredit at competitive rates hence, the company can requestcommercial banks for the letter. The company can also lease itsassets to earn profits over time. Commercial banks offer Long termand short term leasing facilities for products being imported such asmotor vehicle spare parts and new cars. The banks represent thecompany and sign a leasing agreement with the importers.Comfortdelgro can also use inventory financing to reduce warehousingcosts in its supply chain. This will transfer storage costs to thesuppliers. The Singapore financial system also allows the use ofwarehouse receipts that commercial banks accept and can offer securedand unsecured loans against the inventories a company possesses(Epstein (n.d).

6.0Comfortdelgro Cash Flow Analysis

ComfortdelgroCash Flow Statement, In millions of SGD (Comfortdelgro, 2015)

Acash flow is an important tool for gauging the inflows and outflowsof cash thus, the assessment of the company’s cash flow will helpillustrate the overall performance of the company.

Cashflow from operations

Thiscomponent of a cash flow shows how a firm generates cash internallyhence, it does not assess funds generated outside or those generatedfrom financial activities. In addition, the component adjusts the netincome for non-cash charges. The company’s net income grew from 396million in 2012 to 414.3 million in 2013 to 436.3 million in 2014while net operating cash or cash from operations grew from 673.9million in 2012 to 686.3 million in 2013 to 728.5 million in 2014.Thus, for the period under review, net income growth stood at 4.43%,4.62%, and 5.31% in 2012, 2013, and 2014 respectively while netoperating cash flow growth stood at -11.13%, 1.84%, and 6.15% for thesame period. This trend shows that the company’s cash fromoperations is constantly greater than net income hence, it has highquality earnings or net income. Although these positive cash flows donot mean that the firm can pay all its bills, it means that thecompany generates enough cash to increase its dividend, reduce debt,acquire another form, or buy back part of its stock, which signifiesgood tidings for shareholders. Since cash flow from operations,illustrate a firm’s capacity to produce cash from within,Comfortdelgro has the capacity to meet current funding requirementsas illustrated by the net income and cash flows growth.

Cashflow from investing

Thiscomponent reports the acquisitions and sale of long-term investments,equipment, plants, and property. Capital expenditures stood at527million, 502million, and 517million for years 2012, 2013, and2014. It is worth noting that capital expenditures describe the sumexpended for all tangible assets that are not levied to outflow whenacquired, but which are recorded on a firm’s balance sheet. In thisregards, these expenditures are exploited and then depreciated overthe sum of the period that a firm uses them. Capital expenditures bythe company decreased in 2013 but rose in 2014, but investments incapital signify that the company is growing and undertaking capitalexpansion.

Financing

Activitiesin this component involve the inflow of cash from venture capitalistssuch as stockholders and banks as well as outflow to investors asdividends or bank debts as a firm produces income. In this regards,this part deals with all activities that influence the equity andlong-term liabilities of a firm. Issuance of debt indicates that thecompany finances some its assets through debt while the issuance ofstock means that the company pays dividend. Issuance of dividendincreased in from 130 to 138, to 168 million from 2012, to 2013, to2014. Net change in cash stood at 188million, 136million, and(4.80)million in 2012, 2013, and 2014 respectively and although thisdecreased in 2014 it should not cause alarm to investors andcreditors since profitability increased and some of the cash was usedfor dividend payments and capital expansions. In fact, during 2014,the company paid high amounts of dividends.

Supplementalincome

Forthe supplemental income, the firms’ depreciation have increased forthe period under review from 319million in 2012 to 333million in 2013to 349million in 2014 while cash interests paid and cash taxes paiddecreased from 31, 27, to 22 and increased from 76, 78, to 83 from2012, 2013, and 2014 respectively. From the cash flow analysis of thecompany, it is worth noting that the company’s performance andutilization of cash are above board and aligned with its objectivesof expanding its business further. Huge capital investments, high netincome and high cash flows show that the company is dedicated toproductivity, expansion, and the creation of value to the investors.

7.0Conclusion

Singaporepresents investors with a vibrant unparalleled access to globalmarkets. Its financial system comprises of financial markets, money,financial instruments, the central bank, and financial instruments.This provides cooperate organizations and investors a wide variety offinancial platforms that make the country’s financial system highlyflexible and competitive. Organizations such as Comfortdelgro havecontinued to benefit from products that financial institutions suchas investment banks, insurance banks, stock markets and commercialbanks offer in the Singapore market. Despite the possible conflict ofinterest among financial institutions, which provide similarservices, the Singapore system as a whole is structured to helpbusiness organizations to access easily funds through diversifiedproduct range in the financial system. The analysis of the companyhas reflected the importance of a vibrant financial system in drivingthe performance and productivity of a firm. Today, Singapore is oneof the leading financial and business centers worldwide with acomprehensive and vibrant financial market, sector, and money markethence, it is worth noting that most companies have performed wellregarding productivity and profitability because of this vibrancy.

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