“Discuss the key difference between banks and financial institutes”


Financial institutions play exceptionally important role in the economy. First and foremost is in the structure of catering to the requirement of credit for all the sections of society. The present economies in the world have developed primarily by making best use of the credit availability in their systems.  The role of financial institutions is vital to modern, functional economies throughout the contemporary world. Different financial institutions may accomplish different roles in an economy; even allocation of different kinds of financial institutions can help make sure that the needs of consumers and investors are met throughout the geographic range of an economy. At first, we should have proper understanding of functions of financial institutions.

Definition of Financial Institutions:

A financial institution is an institution that provides financial services for its clients or members. Possibly the majority financial services provided by financial institutions are substitute as financial intermediaries. Most financial institutions are regulated by the government.

In broader sense, there are three major types of financial institutions[1].

  1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans , including banks, building societies, credit unions, trust companies and mortgage loan companies
  2. Contractual Institutions : Insurance companies and pension funds and
  3. Investment Institutions : [ Investment Banks – underwritings/underwriters], [ Security  Firms – Brokers]

So, banking is a financial institution but all financial institutions are not banks.

 Definition of Banks:

The Bank Holding Company Act of 1956 defines [2]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. The dealing of banking is in many English common law countries not defined by statute but by common law. When looking at these meaning it is important to keep in minds that they are explaining the business of banking for the purposes of the legislation, and not necessarily in general. Particularly, most of the definitions are from legislation that has the purposes of entry amendable and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions:

  • “banking business” means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).[3]
  • “banking business” means the business of either or both of the following:
  1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] … or with a period of call or notice of less than that period;[4]
  2. Paying or collecting checks drawn by or paid in by customers.

 There are several types of banks. The most common type of banks is:[5]

  1. Investment Banks
  2. Central Banks
  3. Credit Unions
  4. Online Banks
  5.  Savings and loans
  6. Islami Banks
  7. Retail Banks
  8. Commercial banks

 Functions of Banks:

A bank connects clients that have principal deficits to customers with capital surpluses. Banks, usually a company, that accepts deposits, makes loans, pays checks, and does related services for the public. A bank  also acts as a middleman stuck between suppliers of funds and users of funds, substituting its own credit decision 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 makes money by reinvesting these funds in longer-term resources. A Commercial Bank invests funds gathered from depositors and other sources mainly 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.

 Different roles of Banks[6]

Banks play different roles. Like

Intermediary role:
Transforming saving received mostly from household into credit for business firm and others in order to make investment in different goods.

The payment role:
Carrying out imbursement for goods and services for their clients.

The guarantor role:
positioning behind their clients to pay off debts, when those clients are unable to pay.

The risk management role:
Supporting customer in preparing financially for the risk of lost to property and persons.

The saving / investment advisers’ role: 
Helping customers in satisfying their long rang goals for a better life by building, managing, and protecting savings.

The safekeeping/certification of value role:
Protecting a customer’s valuables and appraising and certifying their true market

The agency role:
Acting in support of clients to manage and protect their property or issue and transfer their securities.

The policy role:
Saving as a means of expression for govt. policy in attempting to regulate the growth of the economy and follow social goals.

Financial Institutions Functions:

In many regions, government updates fiscal policy rules, such as regulations and interest rates on a reasonably customary basis. Fiscal policy is an instrument which is used by national governments to control the route of the economy, generally with the goal of promoting economic health and growth. The fundamental factor of the fiscal policy is the government’s budget which determines how much it will spend on various goods and services. Legal financial institutions can assist direct the economy in a preferred direction by adhering to government-created fiscal policy. Government can also acquire a more direct role in the guidance of fiscal policy by creating state –run financial institutions. Another of the most important roles of financial institutions is as a liaison role of financial institutions is as an agent in the investment market. Financial companies are able to be consistent with potentially lucrative businesses with appropriate investors, in order to permit both sides greater opportunity for financial advancement. Financial institutions also offer consumers and commercial clients with an extensive range of services and different types of banking products. The significance of financial institutions provides the financing that drives economic growth.  Money lenders and insurance companies have been lending money to people and insuring aligned with loss for centuries but in the 20th century, governments around the world began to distinguish the importance of financial institutions and passed legislation that made it easier for more people to obtain products and services from these entities. According to The Financial Institution Act,1993

‘Financial institution’ means a non banking institution which a  lending company or a financial institutions from which financial accommodation of facility has been received on the basis of participation in profit and loss, mark-up in finance, hire purchase lease or otherwise “private company” carries the same meaning as per the company act 1913 (VII of 1913)[7]

The basic difference between Bank and Financial Institutions may include:-

  • A Bank is an organization that receives 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 recognize customer cash deposits but provides all financial services except bank accounts.
  • A bank communicates directly with customers while an NBFI communicates with banks and governments
  • A bank indulges in a number of activities linking to finance with a range of customers, while an NBFI is mainly worried with the term loan needs of large enterprises
  • A bank deals with both internal and international clients while an NBFI is mainly alarmed with the finances of foreign companies
  • ·                A bank’s main interest is to help in business transactions and savings/investment actions while an NBFI’s main interest is in the stabilization of the currency

There are certain laws that differs bank from Non-bank financial institutions.

Banking laws are[8]:

(i)      A new bank, means the managing director as defined in the Bangladesh Bank (Nationalization) order 1972 ( Po No 26 of 1972)

(ii)    Banking company means any company conducting the business of Bangladesh Bank comprise a new bank and a specialized bank

(iii)   “banking” means offering of loan or to take deposits of money from the public to encourage investment payable on demand or otherwise and deserves withdrawal through cheque, draft, order or otherwise

(iv)  “time liabilities” means other financial liabilities except demand liabilities

(v)    The drawing, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, railway receipts, warrant, debentures, certificates, participations term certificate, musharika certificates, moderate certificates and other instruments and securities whether transferable or negotiable or not.

(vi)  The buying and selling of scripts or other form of securities, participating term certificates, term finance certificates [Mudaraba] certificates musharika certificate and such other instruments as may be approved from Bangladesh bank in constituents or others, the negotiating of loans and advances.

Restriction of the use of the word ‘Bank’ or any other words arising out of it[9]:

Every company doing 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 bnaking company shall utilize its name word calculated to signify that it is a banking company provided that noting of this section shall apply in the case following:

a)Subsidiary of banking company composed for one or more of the objects referred to, in sub-section (I) of section 26 whose name signifies that it is a subsidiary of that banking company and

b) Any association of banks formed for the upkeep of their mutual interests and registered under section 26 of the companies Act. Provided further that the Government, if any , as it may seem fit through notification in the official gazette, authorize a company in whole or owned partly or regulated by the Bangladesh bank not being a banking company to utilize in its name the word ‘ Bank’ or any of its derivatives.

Restriction of trading:

Without as authorized under section 7 no banking company shall directly or indirectly deal in the purchase or selling or bartering of goods except in connection with the realization of security given to or held by it or engage in any business or purchase, sell or barter goods, for others, otherwise than in matters of bills of exchange received for collection or negotiation.

Requirement of minimum paid up capital:

 Provided that the Bangladesh Bank may, if it thinks fit in any particular case, extend the period referred to in this sub-section by a further period not exceeding one year.”

i) For the words “the amount of paid-up capital and reserves of all banks (except new banks

 and special banks) shall not be less than one hundred million Takas” shall be substitutes words

“The amount of paid-up capital and of the reserve fund of all banks incorporated in

Bangladesh (except new banks and special banks) shall not be less than two hundred million

Takas”; In sub-section (4), for the words and the comma “the amount of (its paid-up capital and) reserves shall not, at the close of any working day of such company be less than one hundred million Takas” shall be substituted the words “the amount of (its paid-up capital and of its reserve) fund shall not at the close of any working day of such company be less than

One hundred million Takas”;

Financial institution means a non banking institution which[10]

(i)            Gives loans or advances for industry, commerce, agriculture or housing, or

(ii)          Carries on business of the underwriting or acquisition of, or the investment or re-investment in, shares, stock, bonds, debentures or debenture stock or securities issued by the Government or any local authority, or

(iii)          Carries on business of hire purchase transactions including leasing of machinery or equipment;  or

(iv)        Finances venture capital, and includes merchant bank, investment company, mutual association, mutual company, leasing company or building society;

(a)    ‘financing business’ means the business carried on by a financial institutions ;

(b)   ‘ investment company’ means a company or trust that uses its capital to invest in other companies;

(c)    ‘leasing company’ means a company which carries on as its business or part of its business the leasing of machinery or equipment or financing of such leasing operations;

Licensing of Financial Institutions[11]:

 No person shall carry on financing business in Bangladesh unless he holds a license of financial institutions issued by the Bangladesh Bank.

Minimum Capital:

The Bangladesh Bank shall determine capital of any financial Institution if the issued capital and paid up capital of a financial institutions falls of the minimum capital determined under sub section (1), it shall not be granted license under this act, and the existing license, if any, shall be liable to be cancelled.


In  Bangladesh, represent one of the most important parts of a financial system NBFIs  ( Non Banking Financial Institutions) are new in the financial system as compared to banking financial institutions (BFIs). A total of 25 NBFIs are now working in the country. The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. The financing modes of the NBFIs are long term in nature. Traditionally, our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them.


[1] Financial Institutions’ available from http://en.wikipedia.org/wiki/Financial_institution [ Accessed from 14 October]

2Carmichael,  Jeffrey, and Michael Pomerleano. Development and Regulation of Non-Bank Financial        Institutions. World Bank Publications, 2002

The world’s second oldest bank—and its plans for the future, thegatewayonline.com

4 Christopher Hibbert (1975. The house of Medici.:Its rise and fall,Morrow.

5 Types of banking available from http://banking.about.com/od/businessbanking/a/typesofbanks.htm

6 Banking and non banking financial institutions basic differences’ available from http://bankinfobd.com/blog/banking-and-non-banking-financial-institutions-basic-differences [ Accessed from 15 October]

7 Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 1438

8 Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House,pp15-33

9 Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, pp 21-29

10Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 143

11Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 145

[1] Financial Institutions’ available from http://en.wikipedia.org/wiki/Financial_institution [ Accessed from 14 O[2] Carmichael,  Jeffrey, and Michael Pomerleano. Development and Regulation of Non-Bank Financial        Institutions. World Bank Publications, 2002

[4] Christopher Hibbert (1975). The House of Medici: Its Rise and Fall. Morrow.
[6] Banking and non banking financial institutions basic differences’ available from http://bankinfobd.com/blog/banking-and-non-banking-financial-institutions-basic-differences [ Accessed from 15 October]
[7] Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 143
[8] Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House,pp15-33
[9] Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, pp 21-29
[10] Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 143
[11] Hossain, A. (1998) The Bank Companies Act 1991,Dhaka: Amin Book House, p 145