BACHELOR OF MANAGEMENT WITH HONOURS (BIM)

JAN/2020

BBPW3103

FINANCIAL MANAGEMENT I

NO. MATRIKULASI : 881122265027001

NO. KAD PENGNEALAN : 881122265027
NO. TELEFON : 0134392157
E-MEL : eyezat@ymail.com

PUSAT PEMBELAJARAN : IPOH

ASSIGMENT 1

The Definition Of Agency Problem

In simple words, Agency problem is the potential conflict between shareholders and
Management of a company.It has long been known that in the large companies, the interest
of managers may be different from the Interest of the shareholders profit maximization. In
such these companies, shareholders appoint the managers who will be worked on behalf of
their interest. And, he managers act as the agent for the shareholders and is supposed to
make decisions that will maximize shareholder wealth though their best interest to
maximize his own wealth. And at this point of time, Agency problem is occurred. Or, more
specifically, the agency problem is a disagreement of interest inherent in any relationship
where one party is expected to act in another's best interests.

Fig: 2.1The agency principal relationship

(Source: Investopedia)
Agency Problem: A Theoretical Overview

The principal and agent theory emerged in the 1970s from the combined disciplines of
economics and institutional theory. There is some contention as to who originated the theory,
with theorists Stephen Ross claiming its authorship. Ross is said to have originally described the

Fig: 2.2 Basic idea of agency theory (P: principal, A:

agent) (Source: Wikipedia)

dilemma in terms of a person choosing a flavor of ice-cream for someone whose tastes he does
not know (Ibid). The most cited reference to the theory, however, comes from William
Meckling. The theory has come to extend well beyond economics or institutional studies to all
contexts of information asymmetry, uncertainty and risk.

In the context of law, principals do not know enough about whether (or to what extent) a contract
has been satisfied, and they end up with agency costs. The solution to this information problem
—closely related to the moral hazard problem—is to ensure the provision of
appropriate incentives so agents act in the way principals wish.

In terms of game theory, it involves changing the rules of the game so that the self-interested
rational choices of the agent coincide with what the principal desires. Even in the limited arena
of employment contracts, the difficulty of doing this in practice is reflected in a multitude of
compensation mechanisms and supervisory schemes, as well as in critique of such mechanisms
 as e.g., Deming (1986) expresses in his Seven Deadly Diseases of managemen

Principal – Agent Relation & Problem

Basically, we have mentioned this term in above mentioned two topics. But, to define it
elaborately we have turned it into another topics. The principal-agent relationship is an
arrangement in which one entity legally appoints another to act on its behalf.

In a principal-agent relationship, the agent acts on behalf of the principal and should not have a
disagreement of interest in carrying out the act. The relationship between the principal and the
agent is called the "agency," and the law of agency establish guidelines for such a relationship.
But they, have also individual interest. They always try to refrain themselves from the
contradictory decision as fearing their accountability to the Directors. For this, they want to take
new project with low future inflows and low risk. By this way, they get into conflict with the
shareholders as the shareholders prefer the project with high Inflow and high Risk. Then, if the
managers show steady on their decision, they will have to lose their post. And they will be
replaced by new ones.

Fig: 2.3 The separation in interest between agent and principle

(Source: Investopedia)
What is Agency Problem?

Agency problem is a situation in which agents of an organization (for example: the management) use
their authority for their own benefit rather than that of the principals (for example: the shareholders).
The agency problem also refers to simple disagreement between agents and principals.

The agency problem is a conflict of interest inherent in any relationship where one party is expected to

act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of
interest between a company's management and the company's stockholders. The manager, acting as the
agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder
wealth even though it is in the manager’s best interest to maximize his own wealth.

The agency problem does not exist without a relationship between a principal and an agent. In this
situation, the agent performs a task on behalf of the principal. Agents are commonly engaged by
principals due to different skill levels, different employment positions or restrictions on time and
access. For example, a principal will hire a plumber — the agent — to fix plumbing issues. Although
the plumber‘s best interest is to collect as much income as he can, he is given the responsibility to
perform in whatever situation results in the most benefit to the principal.

The agency problem arises due to an issue with incentives and the presence of discretion in task
completion. An agent may be motivated to act in a manner that is not favorable for the principal if the
agent is presented with an incentive to act in this way. For example, in the plumbing example, the
plumber may make three times as much money by recommending a service the agent does not need. An
incentive (three times the pay) is present, and this causes the agency problem to arise.

Agency problems are common in fiduciary relationships, such as between trustees and beneficiaries;
board members and shareholders; and lawyers and clients. These relationships can be stringent in a
legal sense, as is the case in the relationship between lawyers and their clients due to the Supreme
Court's assertion that an attorney must act in complete fairness, loyalty, and fidelity to their clients.
Conflict of Interest: Resolving the Agency Problem

The agency problem arises in business when one party, known as the agent, faces the expectation of
acting in the best interest of another party, known as the principal. Conflicts of interest can arise if the
agent personally gains by not acting in the principal’s best interest. You can overcome the agency
problem in your business by requiring full transparency, placing restrictions on the agent’s capabilities,
and tying your compensation structure to the well-being of the principal.

Illustrating the Agency Problem

Imagine receiving a windfall of money and hiring a financial advisor to invest it for you. In this
relationship, you’re the principal, and the advisor is the agent. The advisor has a fiduciary responsibility
to act in your best interest. Unfortunately, incentives may exist for the advisor to undermine your
interests and put his needs first.

Suppose the advisor, after learning your financial goals, knows that a growth stock mutual fund is the
best vehicle for your money. The advisor also knows they can make a higher commission by placing
your funds in an annuity, even though doing so compromises your goals. This is an example of the
agency problem. The conflict of interest stems from the financial advisor — the agent — having a clear
financial incentive to act in a manner not in the best interest of you, the principal.

Full Transparency

Agency problems are most prevalent when there’s a disparity in knowledge between the agent and the
principal. It’s too easy and too tempting for the agent to exploit the knowledge gap for personal gain.
When agent-principal relationships arise in your business, practising full transparency can help close
the knowledge gap and prevent the agency problem from emerging. The agent should educate you, the
principal, on everything that’s going on, rather than leaving you in the dark while the agent makes
decisions on your behalf.

Restrictions on the Agent’s Capabilities

Giving the agent too much power to act on your behalf opens the door for future challenges and can
lead the financial advisor to perhaps make poor choices. Most successful governments practice checks
and balances because it tempers the power of any one individual or entity, keeping corruption to a
minimum. You can practice the same principles in your business by limiting the power of the agent.

Commission and Bonus Structures

Perhaps the simplest method for eliminating the agency problem is to remove financial incentives that
encourage conflicts of interest. Returning to the financial advisor example, the agency problem exists in
that scenario because the advisor’s compensation is tied to the specific financial products he offers you.

The products that pay the highest commissions aren’t always the best choices for you, the client. Often
the advisor is forced to choose between doing right by his client and maximizing his paycheck. If the
advisor receives a set salary or earns commission based on total assets under management rather than
specific product sales, the agency problem disappears.

The agency problem happens when conflicts of interest keep one party from acting in the best interest
of another party. By taking specific steps and staying organized, you can minimize the chance of this
happening in your business. The QuickBooks Self-Employed app helps freelancers, contractors, and
sole proprietors track and manage your business on the go. 

Conclusion

The agency problem cannot be eliminated as long as there is an agent who is not the 100 percent
true owner of the company. Regulators have been recognizing this problem and trying to
safeguard listed companies by requiring them to comply with numerous regulations designed to
promote the independence of the board of directors. However, such compliance with regulations
is not sufficient to ensure that directors would act in the best interests of the company and it
shareholders. Companies need to develop more effective ways to minimize agency costs and
maximize the shareholders’ benefits, rather than relying on compliance with federal regulations.
ASSIGNMENT 2

INTRODUCTION OF COMMERCIAL BANKS

MAYBANK

Malayan Banking Berhad (doing business as Maybank) is a Malaysian universal bank, with

key operating "home markets" of Malaysia, Singapore, Philippines and Indonesia. According
to the Brand Finance report, Maybank is Malaysia's most valuable bank brand, the fifth top
brand in Asean and ranked 83rd in the world’s most valuable bank brands.

BACKGROUND

Maybank is Malaysia's largest bank by market capitalisation and total assets and one of the
largest banks in Southeast Asia, with total assets exceeding US$165 billion and having a net
profit of US$1.75 billion for 2015,

Maybank is also ranked 91st in The Banker's 2015 Top 1000 World Banks (as at July 2015)
and is ranked 362 in the Forbes Global 2000 Leading Companies (as at June 2016).

Maybank is the largest public listed company on Bursa Malaysia, the Malaysian stock
exchange, with a market capitalisation of US$19.1 billion as of 31 December 2015.

Maybank's Islamic banking arm, Maybank Islamic, is ranked as the top Islamic bank in Asia
Pacific and fifth in the world in terms of assets.

Maybank's network spans across all 10 ASEAN nations as well as key Asian countries and
global financial centres with a network of 2,400 offices worldwide with more than 45,000
employees.
MAYBANK OVERVIEW

Established in 1960, Maybank is the largest financial services group in Malaysia with an
established presence in the ASEAN region. They provide a full suite of conventional and
Shariah-compliant products and services in commercial banking, investment banking and
insurance.

THEIR VALUES

Their T.I.G.E.R values are the guiding principles for all Maybankers to serve their mission
of Humanising Financial Services.
 
THEIR MISSION

They fulfil their customers ambitions by building trusted relationships that last for
generations through thick and thin. They believe in treating all their stakeholders fairly and in
simplifying financial solutions.

 
 THEIR ASPIRATION

As they grow together with customers, the Maybank brand has reached all 10 ASEAN
countries, Greater China and other key global financial markets. Their aspiration is to be the
top ASEAN bank, fulfilling their customers ambitions in the region and linking them to Asia
and beyond.In serving their mission, they provide an array of financial products and services
through three key business pillars, supported by shared corporate functions across our global
network of 18 countries.
BUSINESS PILLARS

Group Community Financial Services

For:
Individuals, retail SMEs and mid-sized corporates.

Offers:
Retail banking services such as wealth management, mortgage, auto financing, credit cards,
short-term credit and long-term business loans.
47.5%
Share of Group's PBT
Group Global Banking

For:
Large corporates and institutions.

Offers:
Wholesale banking services such as transactional banking, investment banking, corporate
banking, global markets and treasury, and asset management.
45.7%
Share of Group's PBT
Group Insurance & Takaful
For:
Individuals and corporates.

Offers:
Conventional and Islamic insurance (Takaful) solutions including long-term savings and
investment products.
6.8%
Share of Group's PBT

CIMB BANK

CIMB Group Holdings Berhad is a Malaysian universal bank headquartered in Kuala

Lumpur and operating in high growth economies in ASEAN. CIMB Group is an indigenous
ASEAN investment bank. CIMB has a wide retail branch network with 1,080 branches across
the region.

The group operates under several entities, which include CIMB Investment Bank, CIMB
Bank, CIMB Islamic, CIMB Niaga, CIMB Securities International and CIMB Thai. The
group's business activities are primarily in the areas of Consumer Banking, Wholesale
Banking, comprising Investment Banking and Corporate Banking, Treasury & Markets, and
Group Strategy & Strategic Investments, with its core markets being Malaysia, Indonesia,
Singapore and Thailand. CIMB Islamic operates in parallel with these businesses, in line with
the group's dual banking model.

The group has over 40,000 employees located in 18 countries, covering ASEAN and major
global financial centres, as well as countries in which its customers have significant business
and investment dealings.

The group's geographical reach and its products and services are complemented by
partnerships. Its partners include the Principal Financial Group, Bank of Tokyo-Mitsubishi
UFJ, Standard Bank and Daewoo Securities, among others.

VISION

According to the annual report in 2011,this group vision is to be the leading ASEAN
franchise in 2015 ( corporate report , 2011)
MISSION

This group mission is “ We want in our people to driven a culture driven by innovation to
deliver quality service whilst providing superior returns and value to our skateholders.The
core values of CIMB employees are ; Integrity,Innovation,Client,Orientiation,Teamwork and
Efficiency” (About us , 2011)

Businesses

Consumer banking

CIMB Group has full-fledged consumer banking services across its main operating markets
in Malaysia, Indonesia, Singapore, Thailand, Cambodia and Philippines. The divisions which
comprise Consumer Banking are:

 Consumer Sales and Distribution which oversees the sales network including
branches and mobile sales teams
 Retail Financial Services which is responsible for most of the retail banking as well as
enterprise banking products
 Commercial Banking which is responsible for SME and mid-size companies
 Group Cards and Personal Financing which is responsible for credit cards businesses
and personal loans portfolio

Wholesale banking

The wholesale banking business comprises two divisions: Investment Banking and Corporate

Banking, Treasury & Markets.

Investment Banking comprises Corporate Client Solutions, which covers the bank's
institutional and corporate clients and Sector Specialists in real estate and agribusiness; the
Advisory business unit which consists of Corporate Finance and Project Advisory; the Group
Equities business unit comprising Equity Capital Markets (ECM), Institutional Sales,
Research, Retail Equities, Futures Broking and Securities Services; and the Group Asset
Management business unit which is the bank's retail and institutional fund management arm.
Corporate Banking, Treasury and Markets is responsible for corporate banking; transaction
banking; the group's markets, sales and trading businesses in interest rates, credit, foreign
exchange, commodities, equities and their derivatives; debt capital markets; fixed income
investments; and treasury and funding operations for the group.

Group Strategy and Strategic Investments

Group Strategy and Strategic Investments consists of Group Strategy, Private Equity and
Strategic Investments. The division is responsible for undertaking the bank's initiatives in
important regional markets.

Islamic banking

CIMB Islamic is CIMB Group's global Islamic banking and finance franchise. It offers the
full complement of Shariah-compliant financial solutions, operating in parallel with the
group's universal banking franchise.

CIMB Group's Brands

 CIMB Group represents its universal banking franchise.

 CIMB represents its investment banking services, asset management and private
banking franchise.
 CIMB Bank represents its consumer bank and corporate banking franchise in
Malaysia, Singapore, Cambodia and Philippines.
 CIMB Niaga represents its consumer and corporate banking franchise in Indonesia.
 CIMB Thai represents its consumer and corporate banking franchise in Thailand.
 CIMB Islamic is its Islamic banking franchise, incorporating products and services in
compliance with Shariah principles.
Corporate profile

CIMB Group Holdings Berhad

CIMB Group Holdings Berhad has been listed on the Main Market of Bursa Malaysia since
1987 with a market capitalisation of RM38.7 billion. Total assets at the end of 2015 were
RM461.6 billion, with total shareholders’ funds of RM41.1 billion and total Islamic assets of
RM70.7 billion.

CIMB Group

The group is a regional universal bank with ASEAN as its core market. The group is
headquartered in Kuala Lumpur, Malaysia. It has 1,080 branches across eight out of the 10
ASEAN nations. Its wholesale division encompasses its indigenous investment bank in
ASEAN plus corporate banking, treasury and markets, and group strategy and strategic
investments. Products and services are complemented with partnerships with various
companies including the Principal Financial Group, Bank of Tokyo-Mitsubishi UFJ, Daewoo
Securities, Sun Life Assurance, Allianz Insurance, Thai Life Insurance, Sri Ayudhya General
Insurance, Kotak Mahindra Group, Mapletree Investments, and TrustCapital Advisors.
Outside ASEAN, CIMB Group has representation in China (mainland and Hong Kong), the
United States, Bahrain, the United Kingdom, India and Sri Lanka.

CIMB Bank

The group has full-fledged consumer banking services across its four main operating markets
of Malaysia, Indonesia, Singapore and Thailand, plus a growing presence in Cambodia and
the Philippines. CIMB Bank's Authorized Agent Banks (AAB's) directly cover Malaysia and
Singapore. BDO Universal Bank Inc. directly covers the Philippines and is an (AAB)
Authorized Agent Bank for International Treaty Tax Collection. Malaysia is the largest
market for CIMB Bank and there were 294 branches, 7.8 million customers, 2,199 ATMs,
and over 20,000 staff at the end of 2011. CIMB Bank in Singapore had two branches,
277,000 customers, six ATMs and over 1,300 staff at the end of 2011. CIMB Bank in
Cambodia had seven branches, 3,100 customers, 10 ATMs and over 90 staff at the end of
2011.
CIMB Investment Bank

CIMB Investment Bank is the investment banking arm of CIMB Group with offices in

Malaysia, Singapore, Indonesia, China (Hong Kong and Shanghai), Thailand, Australia,
Korea, India, the United Kingdom, the United States, Sri Lanka, and Myanmar.
The investment banking products and services offered by CIMB Investment Bank cover
corporate advisory, corporate finance, equity markets, debt markets, research, private equity,
real estate investment management, fund management, wealth management and private
banking services. CIMB has remittance tie ups with BDO Universal Bank in the Philippines
for secure cross border money transfers.

CIMB Islamic

CIMB Islamic is the global Islamic banking and finance arm of CIMB Group. It
offers Shariah-compliant financial solutions in investment banking, consumer banking, asset
management, takaful, private banking and wealth management. CIMB Islamic products and
operations are managed in strict compliance with Shariah principles under the guidance of the
CIMB Islamic Shariah Committee.

CIMB Niaga

Established in 1955 as Bank Niaga, CIMB Niaga is the group's consumer banking arm in
Indonesia and as at end 2011, it was the fifth largest bank in terms of assets and the third
largest mortgage provider. It has been listed on the Indonesia Stock Exchange since 1989 and
had a market capitalisation of about Rp30,660.6 billion at the end of 2011 with shareholders'
funds of Rp18.3 trillion and total assets of Rp166.8 trillion.CIMB Niaga offers a
comprehensive range of conventional and Shariah compliant products and services. At the
end of 2011, it had 901 branches, 4.2 million customers, 1,749 ATMs, and nearly 14,000
staff. CIMB Group Holdings Berhad had a 97.93% stake in CIMB Niaga, including 1.02% of
PT Commerce Kapital, at the end of 2011.

CIMB Thai

Established 1949 as The Union Bank of Bangkok and later changed name as BankThai (since
1998), CIMB Thai is the group's consumer banking arm in Thailand. It was the 10th largest
listed commercial bank in Thailand in terms of assets and the seventh largest in terms of
market capitalisation at the end of 2011. It had a market capitalisation of about THB47.0
billion at the end of 2011, with shareholders' funds of THB13.32 billion and total assets of
THB168.02 billion. CIMB Thai offers a range of financial products and services to
customers, both corporate and retail. At the end of 2011, CIMB Thai had 157 branches, 2.2
million customers, 533 ATMs and over 4,000 staff. CIMB Group Holdings Berhad has a
93.15% stake in CIMB Thai since 2009.

THE AMOUNT ANNUITY OF TWO COMMERCIAL BANKS SELECTED

RM300,000 per year

CIMB BANK= 1.80%

MAYBANK = 0.60%

Fv of annuity = P[(1+r)ⁿ-1]

P= periodic payment

r = rate per period

n = number of periods

CIMB calculation

= 300 000 [ (1+1.80)¹º - 1]

1.80 %

TOTAL ANNUITY FOR 10 YEARS =RM 3,255,039.47

MAYBANK calculation

=300 000 [(1+0.60%)¹º - 1]

0.6%

TOTAL ANNUITY FOR 10 YEARS=RM 3,082,309.71

From the interest rates of this two commercial banks,shown that if choosing CIMB BANK is
more savings in 10 years than MAYBANK.It is because the percentage rates of CIMB
BANK is higher than MAYBANK which is CIMB BANK offer 1.8% than MAYBANK
which is only 0.6%.
References

Borad, S. B. (2018, June 15). Agency Theory in Corporate Governance.

Retrieved from E Finance Management:
https://efinancemanagement.com/financial-management/agency-theory

Chen, J. (2018, March 20). Agency Problem. Retrieved

from Investopedia:
https://www.investopedia.com/terms/a/agencypro
blem.asp

Jones, C. P. (1992). Introduction to Financial Management. IRWIN.

Kim, Y. A. (2016, April 16). The Agency Problem of Lehman Brothers’ Board of
Directors. Retrieved from Illinois Business Law Journal:
https://publish.illinois.edu/illinoisblj/2016/04/28/the-agency- problem-of-
lehman-brothers-board-of-directors/

Principal–agent problem. (n.d.). Retrieved from

Wikipedia: https://en.wikipedia.org/wiki/Principal
%E2%80%93agent_problem

Wilkinson, J. (2013, July 23). Retrieved from The Strategic CFO:

https://strategiccfo.com/agency-costs/