Banks and non bank financial institution all are instances of financial intermediation –Illustrate & explain.
INTRODUCTION:
Banks and non bank financial institution all are instances of financial intermediation. However in spite of this fundamental similarity there are some major differences exist between these institutions. Obtaining funds by both bank and non bank FI are almost same but the use and collection process are quite different. On the other hand bank’s formation process, operating system, regulation process etc are not the same. Where banks main business are collecting money and lending money from the depositors, financial institutions main activities are leasing although they are now diversifying some other business now a days. The difference between bank and non bank FI clearly state that Banking is a financial institution but not every financial institution are bank.
In Bangladesh now different commercial banks and the non banking financial organizations are operating their business. And every organization now involved attracting the retail customers that means the middle income group people of the country. To draw their attention the sells persons of different organization try to knock every possible door. These activities of different organization increase the interest about this sector. As both commercial banks and the non financial institutes are in the market, so it makes confusion to the general people about the activities of these organizations. This article helps the customers to makes differentiate between these.
Banks, usually a corporation, that accepts deposits, makes loans, pays checks, and performs related services for the public. The Bank Holding Company Act of 1956 defines a bank as any depository financial institution that accepts checking accounts (checks) or makes commercial loans, and its deposits are insured by a federal deposit insurance agency. A bank acts as a middleman between suppliers of funds and users of funds, substituting its own credit judgment for that of the ultimate suppliers of funds, collecting those funds from three sources: checking accounts, savings, and time deposits; short-term borrowings from other banks; and equity capital. A bank earns money by reinvesting these funds in longer-term assets. A Commercial Bank invests funds gathered from depositors and other sources principally in loans. An investment bank manages securities for clients and for its own trading account. In making loans, a bank assumes both interest rate risk and credit risk.
“A bank is an institution, usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business.”
Difference that Indicate that every FI’s are not bank:
Bank is an organization that accepts client 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.
The basic differences between bank and non bank FI are:
a) A bank interacts directly with customers while an NBFI interacts with banks and governments
(b) 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
(c) A bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companies
(d) 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
Other important differences are:
1. 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.
2. 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
3. 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
4. A bank deals with both internal and international customers are while an NBFI is mainly concerned with the finances of foreign companies
5. 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
BY law banks and FI’s activities:
BANK:
The main functions of the Bank shall be:
(a) To formulate and implement monetary policy;
(b) To formulate and implement intervention policies in the foreign exchange market;
(c) to give advice to the Government on the interaction of monetary policy with fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions;
(d) To hold and manage the official foreign reserves of Bangladesh;
(e) To promote, regulate and ensure a secure and efficient payment system, including the issue of bank notes;
(f) To regulate and supervise banking companies and financial institutions.
Non Bank Financial Institution:
In first world there are different types of non-bank financial institutions like insurance companies, finance companies, investment banks and those dealing with pension and mutual funds, though financial innovation is blurring the distinction between different institutions. In some countries financial institutions have adopted both banking and non-banking financial service packages to meet the changing requirements of the customers. In the Bangladesh perspective, NBFIs are those institutions that are licensed and controlled Financial Institutions Act of 1993.
NBFIs give loans for manufacturing, business, agriculture, accommodation and real estate, carry on underwriting or acquisition business or the investment and re-investment in shares, stocks, bonds, debentures or debenture stock or securities issued by the government or any local authority; carry on the business of hire purchase transactions including leasing of machinery or equipment, and use their capital to invest in companies.
Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as Bond and Securitization.
The major difference between banks and FIs are as follows:
- FIs cannot issue cheques, pay-orders or demand drafts.
- FIs cannot receive demand deposits,
- FIs cannot be involved in foreign exchange financing,
- FIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.
Difference in law:
1. Bangladesh bank order 1972:
Banks in Bangladesh are under the Bangladesh bank order 1972 and and Bank Company act 1991.
(1) This Order may be called the Bangladesh Bank Order, 1972.
(2) It extends to the whole of Bangladesh.
(3) It shall come into force at once and shall be deemed to have taken effect on the 16th day of December, 1971.
2. the bank Company act, 1993
The bank company act came into power on 19 April 1993. An Act made to modify the Banking Companies Act, 1991.
Bank company act 1991 is concerned the following aspects of banking companies:
1. Operations;
2. Prohibited activities;
3. Acquisition of the undertakings;
4. Suspension of business, winding up and disposal of winding up proceedings.
In the bank company act 1991 some guidelines for bank, some of –
1.”Banking Company” means any company transacting the business of banking in
Bangladesh, and includes all new banks and special banks.
2. Every company carrying on the business of banking in Bangladesh shall use the word “bank” or any of its derivatives as part of its name and no company other than a banking company shall use in its name any word calculated to indicate that it is a banking company
3. In the case of new banks and special banks the amount of the paid-up capital and reserves shall not be less than the amount determined in or under the Act under which the said banks have been established, or an amount representing 6 per cent. Of the total demand and time liabilities of such company at the close of the last working day of the previous financial year, whichever is higher etc?
Financial Institution Act, 1993:
Non Bank Financial Institutions (FIs) are those types of financial institutions which are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank.
BY financial institution Act its define that Unless there is anything repugnant in the subject or context, in this Act-
a) “financing business” means the business carried on by any financial institution;
b) “financial institution” means such non-banking financial institutions, which-
i) make loans and advances for industries, commerce, agriculture or building construction; or
ii) carry out the business of underwriting, receiving, investing and reinvesting shares, stocks,
bonds, debentures issued by the Government or any statutory organization or stocks or securities or other marketable securities; or
iii) carry out installment transactions including the lease of machinery and equipments; or
iv) finance venture capital.
Licensing of financial institutions.-
No person shall carry on any financial business without a licence to run a financial institution issued by the Bangladesh Bank.
Initially, NBFIs were included in Bangladesh under the Companies Act, 1913 and were synchronized by the condition relating to Non-Banking Institutions as contained in Chapter V of the Bangladesh Bank Order, 1972. But this regulatory framework was not sufficient and NBFIs had the span of carrying out their business in the line of banking. Later, Bangladesh Bank promulgates an order titled Non Banking Financial Institutions Order, 1989’ to endorse improved regulation and also to remove the vagueness relating to the permissible areas of operation of NBFIs. But the order did not cover the whole range of NBFI activities. It also did not mention anything about the statutory liquidity requirement to be maintained with the central bank. To remove the regulatory lack and also to define a wide range of activities to be enclosed by NBFIs, a new act titled ‘Financial Institution Act, 1993’ was enacted in 1993.
Difference In Int. Rate:
There are some basic difference in Bank and non bank FI regarding int. rate. FI’s int. rate is usually higher then banks int. rate. Under the Financial sector reform program, banks are free to charge/fix their deposits and lending rate. Banks int. rate in Bangladesh are usually vary from bank to bank, but according to BB there are some rules and regulation about banks int. rate. Usually 10 to 15 % and the lending rates are approximately 15 to 18%… on the other hand FI int. rate are varying from 12 to 16%.
Basel Committee on Banking Supervision:
The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. In recent year banking regulators who form the so called Basel Committee have been working on a new accord called Basel II. What will refine the risk measurement and increase the transparency of a bank’s risk to its customers.
Fundamentals Of Bank and Non bank FI by law:
For starting a bank every commercial bank need to deposit 400 corers in BB and for financial institution, they don’t have to deposit money in Bangladesh bank but they have to get license from the ministry.
Conclusion:
In conclusion we can say that the differences between the both commercial banks and the non banking financial institutions they play both for the development of the economic structure of the country. If the both play positively than it can be said that, the development of the country is sure.
The main benefit of banks over non-banking companies is that they offer a wide variety of financial services under one roof. On the other hand, non-banking financial companies focused on one or just a few connected services, often offer more aggressive rates than banks. Also, they are willing to work with customer who is riskier for them but on the other hand banks are more conscious. And after all we conclude my assignment with the statement that Banking is a financial institution but not every financial institution is bank
Bibliography
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<href=”#_ftnref1″ name=”_ftn1″ title=””>[1] The Bank Holding Company Act of 1956
<href=”#_ftnref2″ name=”_ftn2″ title=””>[2] The United States Supreme Court
<href=”#_ftnref3″ name=”_ftn3″ title=””>[3] http://www.bangladesh-bank.org/mediaroom/baselii/baselII.php
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