Bank is an organization, usually a corporation, chartered by a state or central government, but all financial institution is not bank-Illustrate &explain
A financial institution is basically any organization in the dealing of moving, investing or lending money, trade in financial instruments or providing financial services, includes profitable banks, thrifts, federal and state savings banks, savings and loan associations and credit unions. Refers to any bank, credit unions or other entity are that distribute cash. A financial institution can be a bank or an investment company.
However, bank is an organization, usually a corporation, chartered by a state or central government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor’s checks; and issues drafts and cashier’s checks.
The key difference between banks and other financial institutes is the facility of cash deposits. This unique facility is provided by the banking sector to all its customers through means of saving accounts and current accounts. This is an easy and effective way of handling all the personal as well as business finances. Apart from this, banks also serve as financial intermediaries offering a host of financial services to all customers.
One has to first understand what financial institutions are, because bank in itself is one of the various financial institutions that exist in an economy. Basically, the term financial institutions encompass several economic setups which provide financial services to its members or clients. This includes various deposit taking institutions such as banks and credit unions, as well as non-banking institutions such as insurance companies, investment funds, brokers, etc. Most of these financial institutions are regulated by the government. The most important function of these financial institutions is to canalize funds between lenders and borrowers indirectly.
Common types of financial institution are:
* Commercial Banks
* Credit Unions
* Stock Brokerage Firms
* Asset Management Firms
* Insurance Companies
* Finance Companies
* Building Societies
Role of Financial Institutions:
* The various financial institutions generally act as an intermediary between the capital market and debt market. But the service provided by a particular institution depends on its type.
* The financial institutions are also responsible to transfer funds from investors to the companies.
* Typically, these are the key entities that control the flow of money in the economy.
Services Offered by Various Financial Institutions:
The services provided by the various types of financial institutions may vary from one institution to another.
For example, the services offered by the commercial banks are –
- insurance services,
- loans and
- credit cards.
The services provided by the brokerage firms, on the other hand, are different and they are –
- credit cards,
- money market and
- check writing.
The insurance companies offer –
- insurance services,
- buying or selling service of the real estates,
- credit cards and
- check writing.
The credit union is co-operative financial institution, which is usually controlled by the members of the union. The major difference between the credit unions and banks is that the credit unions are owned by the members having accounts in it.
The stock brokerage firms are the other types of financial institutions that help both the corporations and individuals to invest in the stock market.
Another type of financial institution is the asset management firms. The prime functionality of these firms is to manage various securities and assets to meet the financial goals of the investors. The firms also offer fund management advice and decisions to the corporations and individuals.
Financial institutions provide service as intermediaries of financial markets. They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. To do so, savings are brought to provide funds for loans.
As we mentioned earlier in this write-up, a bank is a financial institution in itself – a deposit taking financial institution to be precise. As with most of the other institutions listed above, even banks acts as financial intermediaries. Basically, banks allow consumers deposit money in savings accounts and lend the same money in form of various loans. Banks are among the most strictly regulated financial institutions in any economy. While the basic concept of a bank is same in all the countries, the restrictions on these banks may differ from one country to another.
Type of banks:
1. Saving Banks: Saving banks are established to create saving habit among the people. These banks are helpful for salaried people and low income groups. The deposits collected from customers are invested in bonds, securities, etc. At present most of the commercial banks carry the functions of savings banks. Postal department also performs the functions of saving bank.
2. Commercial Banks: Commercial banks are established with an objective to help businessmen. These banks collect money from general public and give short-term loans to businessmen by way of cash credits, overdrafts, etc. Commercial banks provide various services like collecting cheques, bill of exchange, and remittance money from one place to another place.
3. Industrial Banks / Development Banks: Industrial / Development banks collect cash by issuing shares & debentures and providing long-term loans to industries. The main objective of these banks is to provide long-term loans for expansion and modernization of industries.
4. Land Mortgage / Land Development Banks: Land Mortgage or Land Development banks are also known as Agricultural Banks because these are formed to finance agricultural sector. They also help in land development.
5. Indigenous Banks: Indigenous banks mean Money Lenders and Sahukars. They collect deposits from general public and grant loansto the needy persons out of their own funds as well as from deposits. These indigenous banks are popular in villages and small towns. They perform combined functions of trading and banking activities.
6. Central / Federal / National Bank: Every country of the world has a central bank. In India, Reserve Bank of India, in U.S.A, Federal Reserve and in U.K, Bank of England. These central banks are the bankers of the other banks. They provide specialized functions i.e. issue of paper currency, working as bankers of government, supervising and controlling foreign exchange. A central bank is a non-profit making institution. It does not deal with the public but it deals with other banks. The principal responsibility of Central Bank is thorough control on currency of a country.
7. Co-operative Banks: o-operative banks are registered under the Co-operative Societies. They generally give credit facilities to small farmers, salaried employees, small-scale industries, etc. Co-operative Banks are available in rural as well as in urban areas. The functions of these banks are just similar to commercial banks.
9. Consumers Banks: Consumers bank is a new addition to the existing type of banks. Such banks are usually found only in advanced countries like U.S.A. and Germany. The main objective of this bank is to give loans to consumers for purchase of the durables like Motor car, television set, washing machine, furniture, etc. The consumers have to repay the loans in easy installments.
Difference between Bank and Other Financial Institutions:
It is a tough job to compare bank and financial institutions owing to the fact there exist several financial institutions, and each of these differ from banks by a significant extent. Basically, differentiating between banks and financial institutions is similar to comparing a deposit taking financial institution with a non-deposit taking financial institution. (If that criterion is taken into consideration both financial set-ups differ from each other on the basis of depositing facility, which is only provided by banking institutions as opposed to their non-banking counterparts.) That’s true to a certain extent, but it is by no means complete.
Even though banks are deposit taking financial institutions themselves, they can at times differ from other deposit taking financial institutions as well. For instance, credit unions also allow consumers to deposit (or borrow) money, but in order to avail this facility you need to be a member of this credit union and by becoming a member of the credit union you automatically become one of its owner. Yet another noteworthy difference between a bank and a finance company is the fact that former indulges in various business transactions, savings as well as investment, while the latter mainly focuses on investment and stabilization of currency. Though all the components have a common role to play in the country’s economy, there is a significant difference between the banking and non-banking sectors. The banking sectors include commercial banks including private banks, public sector banks, and foreign banks that are mainly responsible for ensuring fiscal stability in the country. On the other hand, the non-banking sector includes all the other components like credit card agencies, investment companies, and insurance companies that are responsible to regulate and monitor lending as well as borrowing of funds.
The basic difference between Banking financial institution (BFI) and Non-Banking Financial System (NBFI):
- A Bank is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc.
- A NBFC (Non Banking Financial Company) is an organization that does not accept customer cash deposits but provides all financial services except bank accounts.
- A bank interacts directly with customers while an NBFI interacts with banks and governments.
- A bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprises.
- A bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companies.
- A bank’s main interest is to help in business transactions and savings/investment activities while an NBFI’s main interest is in the stabilization of the currency.
In any given economy, there are numerous financial institutions – including banks, insurance companies, credit card companies, investment funds, consumer finance companies, etc. Even though a bank is a financial institution in itself, it differs from other financial institutions mentioned above by a significant extent. The most prominent difference between banks and other financial institutions is the fact that they provide the facility of depositing cash by resorting to savings account – something which most of the non-banking financial institutions are not entitled to do. So as simple we can state that banking institution is a financial institute but every financial institute is not a bank.
Volume 615 of Wiley Finance, John Wiley & Sons, 2011
 See Anjali Kumar, The sale of goods carried by sea (2nd edition), The Regulation of Non-Bank Financial Institutions: The United States, the European Union, and Other Countries, Parts 63-362
 see Md. Mahfuzur Rahman,Article banking and non Banking financial Institution’s basic differences, available at http://bankinfobd.com/blog/banking-and-non-banking-financial-institutions-basic-differences