Financial Institutions and Bank

Meaning of Financial Institution

Financial institution refers to all business organisations which hold money for individuals and institutions and may borrow money from them in order to give loans or make other investments.

Types of Financial Institutions

Financial institutions may be divided into two major groups- banking and non-banking financial institutions. The major difference between the banking and the non-banking financial institutions is that the liabilities of the banking institutions are counted as part of the total supply of money while those of the non-banking institutions are excluded from the money supply.

Banking Financial Institutions

Banking financial institutions include:

  1. Central bank
  2. Commercial banks
  3. Merchant banks
  4. Development banks
  5. Saving banks
  6. Mortgage bank

Non-banking Financial Institutions

Non-banking financial institutions include:

  1. Traditional financial institution
  2. Insurance companies
  3. Hire purchase companies
  4. Building societies

Definition of a Bank

A bank is a commercial institution which performs various financial activities, e.g. accepting and handling of deposits of its customers. Bank is also a place where money and other valuables like will, jewellery, etc. are kept

Types of Banks

  1. Commercial banks
  2. Central bank
  3. Merchant banks
  4. Development banks
  5. Savings bank

Meaning and Segments of Financial Systems

Meaning of Financial System

A financial system or market is where money and near money instruments exchange hand between lenders and borrowers. That is, the market deals in money.

Financial market provides opportunities for financial institutions to make facilities available for borrowers and lenders. Therefore, financial institutions trade in money and money worth.

Segments/Types of Financial Markets

Financial markets are broadly divided into two categories and they are as follows:

  • Money market
  • Capital market

The Money Market

Money market may be defined as a financial market for the lending and borrowing of short-term loans. This type of market aids all forms of business transactions.  A lot of financial institutions are involved in this type of market, purchase and sale of funds on short-term bases and it is controlled by the Central Bank.

Uses/Importance/Functions of the Money Market
  1. Provision of short-term capital to investors in both the private and publics sectors
  2. Provision of short-term investment opportunities from which income may be earned
  3. Mobilization of saving for investment.
  4. Provision of investment, technical and managerial advice.
  5. Provision of opportunity for the public to participate in the management of the economy.
Institutions Involved in the Money Markets
  1. The Central Bank: It makes money available to money market and capital market as a lender of the last resort.
  2. Commercial Banks: They offer short term loans to individuals, organizations, governments, etc.
  3. Discount Houses: These are institutions that offer discount, by buying and selling bills of exchange and treasury bills.
  4. Acceptance Houses
  5. Financial Companies
  6. Hire purchase companies

The money market uses certain financial instruments to transfer money from lenders to borrowers. These are treasury bills, treasury certificates, bills of exchange and money at call.

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