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.