Financial institutions or banking institutions are banking entities that provide amazing services/offers for different money/finance-related exchanges. These transactions can be in the form of deposits, loans, investments, raising capital, and exchange of currencies.
Financial institutions deals in a wide range of business transactions, within the financial markets which include banks, trust companies, insurance companies, brokerage firms, and investment dealers. In a developed economy everyone has an ongoing or time to time need for the use of financial institutions.
Why are financial institutions important?
Financial institutions provide several financial services to the customers according to their needs. Financial Institutions accumulate money that comes from the money deposited by the customers to earn interest on their deposited money. Financial institutions then use this accumulated money to lend them to borrowers or businesses and earn a higher interest on their lent money. By doing that they facilitate transactions in a financial market. Financial institutions also help individuals or organizations by providing investment and advice whenever they need it. Financial institutions also provide insurance services to individual customers and organizations in the form of life insurance, property insurance, health insurance, etc.
Types of financial institutions
Financial institutions offer a wide range of services to various needs of financial markets for individuals as well as companies or entities.
A commercial bank is part of a financial institution that accepts deposits from the general public, accumulates the money, and gives loans to individuals and entities to earn profits. These banks are formed for the sole purpose of profit-making. Commercial banks can be privately owned or public sector banks governed by the government.
In an insurance company, insurance policies are sold. These companies are formed to create financial security for the customers. The services offered by insurance companies include life insurance, health insurance, mortgage, and property insurance.
Investment banking is also a part of financial institutions. Investment banks help individuals or organizations raise capital and also provide consultancy services to them. Investment banks do not deal with customer deposits, but instead, they deal with financing individuals or organizations through securities such as bonds and stocks. Investment banks work with governments and financial institutions and provide capital whenever required.
Brokerage firms provide their services to facilitate transactions related to securities such as stocks, mutual funds, and bonds. They also provide financial advice to individuals and organizations.
Regulation of financial institutions
Financial institutions are highly regulated in most economies because they are a critical part of the country’s economy. Every other country has different regulatory structures for financial institutions. Some countries in the world have one agency that regulates all financial institutions while some countries have separate agencies for different types of institutions.