Financial Institutions

Financial institutions (Intermediaries)
Financial institutions are the formal and legal institutions that conduct various types of financial transactions and also provide financial services to its customers and members like accepting voluntary deposits, compulsory deposits, providing loans against collateral, investment on financial assets, discounting financial assets, exchange and transfer of foreign currencies, transfer of home currency within the nation, issue of travel cheque, bank draft, letter of credit, debit card, credit card, etc.

Hence, financial institutions work as a bridge between/among the ultimate savers and ultimate lenders, exchange of goods/s, transfer of currencies etc. There are two broad categories of financial institutions like banking and financial institutions BFIs and non-banking financial institutions NBFIs.

BFIs                                          NBFIs
a) Central bank                        a) Development banks
b) Commercial banks              b) Finance companies
c) Investment banks                c) Micro finance development banks
                                                d) Postal saving services
                                                e) Insurance companies
                                                f) Provident fund
                                                g) Mutual fund
                                                h) Citizen investment trust (CIT)
                                                i) Credit Unions (co-operatives)
                                                j) Leasing companies
                                                k) Discount houses
                                                l) Stock exchange limited
                                                m) Market brokers
                                                n) Market maker (Dealer)
                                                o) Money transfer agencies
                                                p) Money changer
                                                q) Pension fund
                                                r) Mortgage housing

Banking and financial institutions are those institutions that have a license of full-fledge of banking transactions and services which mainly focused on accepting public deposit and also extending credit. So, banking and financial institutions can accept unlimited deposits from public through any kind of accounts, flows of loans through the process of credit creation against collateral, transaction of financial assets, exchange and transfer of foreign currencies, issues of letter of credit etc.

Besides, banking and financial institutions are supervised by the central bank and international banking regulatory agencies like IMF, bases committee of banking supervision share are basically three types of banking and financial institutions.

a) Central bank is a supreme or apex monetary institution of a country that formulate, control, supervise and implement the monetary policy. It is the service-oriented but not the profit-oriented banks. The major functions of central banks are:
i) Issue of currency/notes

b) Commercial bank is an intermediaries to banking institutions between ultimate savers and lenders. It is the profit oriented not the service oriented bank. The first three important functions of commercial banks are:
i) Collection of deposits
ii) Providing loan
iii) Credit creation, etc

c) Investment banks are such financial institutions that help other companies for increasing financial capital through issuance of new stocks and bonds in the capital market. It also trades stocks, bonds and foreign currencies at brokers. It also provides advisory services for individuals and companies for trading to foreign currencies and other financial assets, high value commodities (gold, silver), merger of acquisition. But, it does not accept deposits from and provide loans to public.

Non-banking and financial institutions that have only limited and conditional license for banking and financial transactions. It does not have full-fledge of license for banking and financial transaction. The given limited and conditional transactions are:
        -          Limited deposit collection (only 20 times of its core capital)
        -          Geographical area
        -          Limited accounts
        -          Financial consultation
        -          Risk pooling and market brokering 
        -          Transaction of foreign currencies
        -          Limited flow of loans on limited sectors
        -          Limited clients, etc

There are heterogeneous nature of non-banking and financial institutions operating in an economy.


Popular posts from this blog

Neo-Keynesian Approach to Inflation: The Phillips Curve

Decomposition or sources of high-power money

Money Supply