A financial institution offer financial services for its clients. They are offer service as intermediaries of financial markets. They are responsible for moving funds from investors to business in require of supports. Financial institutions smooth the progress of the flow of money through the economy. Savings are carrying to offer funds for finance.
There are many different types of financial institutions that offer the various cash management alternatives. The distinction between which services are offered by traditional banks and which services are reserved for non-bank financial institutions is blurring
Three major types of financial institutions are:
- Depository institution: Accept deposits from surplus units and provide credit to deficit units through loans and purchases of securities. Ex: banks, building society, credit unions, mortgage loan companies and trust companies.
- Contractual institutions: Contractual institution including insurance companies and pension funds.
- Investment institution: investment institution including investment bank like underwriting or underwriter and broker.
Choosing a financial institution is a challenge. The key is to consider what you want to accomplish your goal and then to consider what the financial institution can provide. So, what do you look for in a financial institution? Your choices should ultimately and most importantly reflect your understanding of yourself and your investment needs. Consider these questions:
- Are you looking for low costs, low fees, and high returns on deposits?
- What services are important to you?
- Do you need loans, mortgages, or working capital for a small business?
- How important is safety for your deposits?
- Do you require government insurance? If so, know that this factor limits the types of institutions you can choose.
- What services does the financial institution provide? If all you require is a high return on your cash management assets, then your choices are much broader. (Sudweeks, 2011)
Accounting for trillions in assets worldwide, the banking system is a key component of the worldwide economy. While money-changing and money-lending may be as old as money.
Banks are just one element of the world of financial institutions, position along side investment banks and managers, finance, insurance and other companies that revenue from the making and flow of money. As financial intermediaries, banks set between investors who provide assets and borrowers who require assets. Given how much commerce and individual capital rests on strong banks, banks are as well among the most deeply regulated businesses in the world.
Banks as well offer safety and ease to their customers. Part of the original function of banks, to offer clients secure keeping for their currency. Of course, this was back in a time when a person’s wealth consisted of actual gold and silver coins, but to a large extent this function is still relevant. By keeping physical cash at home, or in a wallet, there are risks of loss due to theft and accidents, not to mention the loss of possible income from interest. With banks, consumers no longer need to keep large amounts of currency on hand; transactions can be handled with checks, debit cards or credit cards, instead. Banks also provide often under-appreciated jobs as payment agents within a country and between nations. Not only does banks issue debit cards that allow account holders to pay for goods with the take of a card, they can also organize line moves with other institutions. Banks essentially underwrite financial transactions by lending their status and reliability to the operation; a check is basically just a security note between two groups, but without a bank’s name and order on that note, no merchant would accept it. As payment agents, banks make profitable business much more suitable; it is not necessary to carry around large amounts of money when merchants will accept the checks, debit cards or credit cards that banks offer.
- A Bank is an organization that accepts clients cash deposits and then offers financial services like bank accounts, loans, share trading account, mutual funds, etc.
- A non banking financial company is an organization that does not accept client cash deposits other than offers all financial services apart from bank accounts.
- A bank cooperates directly with clients whereas an non banking financial institute cooperate with banks and governments
- A bank treats in a number of actions connecting to finance with organize of clients, while an NBFI is mainly concerned with the term loan needs of large enterprises
- A bank agreements with both domestic and worldwide clients at the same time as an non bank financial institute is generally alarmed with the finances of foreign companies
- A bank’s main attention is to help in dealing business and savings or investment activities while an non bank financial institutes main attention is in the established of the money
Banks are formed under Banking Regulations Act and such other applicable legislations and Non Banking Financial Companies are formed and governed by Non Banking Financial Companies Act. Banks are more reliable than Non Banking Financial Companies, provided that the bank is a reputed or a nationalized bank. A savings bank offers loans but they don’t offer as much money as a private financial company. Non banking financial companies are doing functions similar to that of banks; however there are a few differences: Non banking financial institute cannot accept demand deposits. It is not a part of the payment and settlement system and as such cannot issue checks to its customers. Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.
Most customers don’t know the dissimilarities between commercial banks and savings & loans. By law, savings and loan companies must have 65% or more of their lending in residential mortgages, though other types of lending is allowed. (Simpson)
Saving and loans started mostly in response to the exceptionality of commercial banks. There was a time when banks would only recognize deposits from set of relatively high funds, with references, and would not lend to normal hands. Savings and loans usually proposed lesser borrowing rates than commercial banks and upper interest rates on deposits; the narrower profit margin was a by creation of the fact that such savings and loans were confidentially owned. Like savings and loans, credit unions typically offer upper rates on deposits and charge lesser rates on loans, in contrast to commercial banks. There is one exacting limit on credit unions; membership is not open to the public, but rather limited to a particular membership group.
In Bangladesh currently different commercial banks and the non banking financial companies are working there business. And each company at this time concerned catch the attention of the retail clients that means the middle income group citizens of the country. To represent their awareness the sells people of different institute attempt to knock each achievable door. These behaviors of different institute raise the importance about this area. As both commercial banks and the non banking financial organizations are in the marketplace, so it makes misunderstanding to the broad citizens about the actions of these institutes.
Banks, usually a company, that allows deposits, pays checks, formulates loans and makes associated services for the community. The Bank Holding Company Act of 1956 classifies a bank as any depository financial institution that allows checking accounts or composes commercial loans, and its deposits are covered by a federal deposit insurance agency. A bank acts as a middleman between dealers of funds and clients of funds, alternating its own credit decision for that of the final suppliers of money, collecting those money from three foundation: short-term borrowings from other banks; time deposits, checking accounts, and savings; and equity capital. A bank makes money by reinvesting these funds in longer-term properties. A Commercial Bank invests money collected from depositors and other resource principally in loans. An investment bank controls securities for customers and for its own dealing account. In creating loans, a bank takes for granted both interest rate risk and credit risk.
The commercial banks are explained now a day by many mediators of economic development and social change. Their purposes and roll are undergoing innovatory changes customer reporting and unlimited away from thoughts. While many community consider that banks play only contracted roll in the economy attractive deposit and creating loans the up to date banks has bad to take on new roles to stay behind aggressive and quick to respond to public needs. Baking’s main roles nowadays are as follows:
- helping customers in fulfilling their long rang goals for a better life by building, managing, and protecting savings
- Standing behind their customers to pay off customer debts, when those customers are unable to pay.
- Saving as a conduit for govt. policy in attempting to regulate the growth of the economy and pursue social goals.
- Transforming saving received primarily from household into credit for business firm and others in order to make investment in new building, equipment and other goods.
- Assisting customer in preparing financially for the risk of lost to property and persons.
- Acting on behalf of customers to manage and protect their property or issue and redeem their securities.
- Carrying out payment for goods and services on behalf of their customers
- Safeguarding a customer’s valuables and appraising and certifying their true market. (Rahman, 2010)
Non-bank financial organizations stand for one of the most key parts of a financial system. The non banking financial institutions division in Bangladesh consisting mainly of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. In Bangladesh, non banking financial organizations are latest in the financial system as contrast to banking financial institutions (BFIs). A total of 25 non banking financial institutions are now working in the country. The financing styles of the non banking financial organizations are long term in life. Usually, our banking financial institutions are concerned in time lending activities, which are generally unknown products for them. Ineffectiveness of banking financial organizations in long-standing loan management has already leaded a huge amount of exceptional loan in our country. At this setting, in order to make sure flow of period loans and to meet up the credit gap, non banking financial organizations have huge importance in the economy. In adding, non-bank financial division is important to increase the recruitment of period of savings and for the sake of as long as provide support services to the money market.
The fundamental variation may include: A bank work together directly with clients at the same time, non banking financial organization work together with banks and governments. A bank’s main notice is to help in business dealings and savings and investment behaviors at the same time as a non banking financial organizations main interest is in the stabilization of the money. A Bank is an organization that allows clients cash deposits and then offers financial services like loans, bank accounts, mutual funds, share trading account. 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 NBFC (Non Banking Financial Company) is an organization that does not accept clients cash deposits but offers all financial services apart from bank accounts. A bank transactions with both inner and global clients at the same time as a non banking financial organization is mostly alarmed with the finances of foreign corporation. In addition the variations 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.
Banking and Non Banking Financial Institution’s Basic Differences [Journal] / auth. Rahman M. Md.. – [s.l.] : BankInfo, dec 13, 2010.
Know the Different Types of Financial Institutions [Journal] / auth. Sudweeks L. B.. – CFA : marriot school, 2011. – personal finance.
The Banking System: Non-Bank Financial Institutions [Journal] / auth. Simpson D. S.. – CFA : [s.n.].