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5524 - Lesson Note Financial Institutions

Financial institutions can be divided into banking and non-banking categories. Banking institutions include central banks, commercial banks, and mortgage banks. Their liabilities are counted as money supply. Non-banking institutions comprise insurance companies, hire purchase companies, and building societies. They provide services like collecting funds, offering loans, and supplying capital to businesses. Financial markets allow lenders and borrowers to exchange money. The money market facilitates short-term lending while the capital market involves long-term financing through instruments like stocks and shares.

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321 views4 pages

5524 - Lesson Note Financial Institutions

Financial institutions can be divided into banking and non-banking categories. Banking institutions include central banks, commercial banks, and mortgage banks. Their liabilities are counted as money supply. Non-banking institutions comprise insurance companies, hire purchase companies, and building societies. They provide services like collecting funds, offering loans, and supplying capital to businesses. Financial markets allow lenders and borrowers to exchange money. The money market facilitates short-term lending while the capital market involves long-term financing through instruments like stocks and shares.

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FINANCIAL INSTITUTIONS

DEFINITION: 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

FUNCTIONS OF NON-BANK FINANCIAL INSTITUTIONS (NBFI)


1. Collecting Funds
The collection of funds by non-bank financial institutions is carried out by means of securities
transactions. Examples of securities in question are house certificates, vehicles (BPKB), stocks,
bonds, and much more.
2. Location for the Community’s Loan Application
Non-bank financial institutions are a place for people to apply for loans. Loans will be processed
when the public provides goods or securities as collateral.
An example of this function is when people need quick funds to buy basic needs. They can get a
number of loans by providing a cell phone or TV as collateral.

3. Location for Goods Credit


Non-bank financial institutions also function as a place for credit for goods. It can be said that NBFI
provides credit procurement services for people who want to buy an item.
The goods purchased by the public are in the form of cell phones, vehicles, laptops, washing
machines, and many more. The credit application process through NBFI is almost the same as a
bank. Someone who applies for credit will be assessed for eligibility first.
Does the person have sufficient funds? Does the person applying for it have other expenses to cover?
Those are some of the feasibilities that must be tested first.
If it is found that there are many dependents and the circumstances do not allow for credit, it is
certain that the application will be rejected. On the other hand, if there are no dependents and the
financial condition is stable, then the credit application has the potential to be accepted.
Remember that in giving credit there is interest that must be returned along with the loan money.
So, make sure you have done the calculations regarding the monthly refund along with the interest.

4. As a Capital Provider
Capital provision services provided by non-bank financial institutions are specifically intended for
business actors, both Medium and Small-Scale enterprises and the private sector. The capital to be
given depends on each NBFI.
The capital provided came from two different sources, namely from within and outside the country.
However, both can still be used by business actors. NBFI is an alternative place for business actors
to get the capital they need.

5. As Financial Business Actors


You did not misread this last point. It is true that non-bank financial institutions can become financial
entrepreneurs.
Some examples of financial activities that can be carried out are the establishment of a credit
company, the establishment of a social security administering agency, and so on. This activity can
only be carried out when NBFI has obtained permission from the Minister of Finance.

MEANING AND SEGMENTS OF FINANCIAL SYSTEMS


DEFINITION: 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:
1. Money market
2. 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 CAPITAL MARKET


The capital market is made up of financial institutions which deal in long term financing.
The capital market provides medium and long-term loans for investment. They therefore, bring
long-term lenders and borrowers together. Loans given are usually for more than two years.

INSTRUMENTS USED IN CAPITAL MARKET


Instrument used in capital market are mainly stocks and shares.
Stocks and shares are securities purchased by individuals, which is an evidence of contributing part
of the total capital used in running an existing industry. At the end of a normal business year, stocks
and shareholders receive dividend as a reward for contributing the money in running of
the business.

INSTITUTION INVOLVED IN CAPITAL MARKET

1. Insurance Companies
2. Issuing Houses
3. Development Banks
4. Investment Bank
5. Building Societies Or Mortgage Bank
FUNCTIONS OF THE CAPITAL MARKET

1. Provision of long-term capital to investors both in the public and private sectors
2. Provision of long-term investment opportunities from which income may be earned
3. Mobilisation of savings for investment
4. Encourage the growth of merchant banking
5. Provision of investment advice
6. Provision of opportunity to the public to participate in running of the economy.

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