“Every Bank is a financial institution but every financial institution in not a Bank” Illustrate &Explain

Introduction

Financial institutions are the most important institution of a country’s economy. It is a privilege for a country to have many financial institutions because the presence of financial institutions facilitates the flow of money all the way through the economy which also provides service as intermediaries of the capital and debt markets. The most important financial service provided by financial institutions is acting as financial mediators. And among all the financial institutions banks are the most applicable, powerful and appropriate institution of an economy. Because, some extra powers given by the banking laws and regulations of the particular country along with some different criteria’s like acceptance of checking accounts (checks) or makes commercial loans, and its deposits  enables banks to serve people more facilities[1]. Banks also play a fundamental role in the spread of financial policy, one of the most important tools of government for achieving economic growth without increases in price. The central bank controls the money supply at the national level, while banks facilitate the flow of money in the markets within which they operate. Banks mainly collects money from different sources like short-term borrowings from other banks, equity capital and earns money by reinvesting these funds in longer-term assets.[2]

Types Banks and Financial institutions

Generally there are two major types of financial institutions are found in an economy[3]. They are

• Banks (i.e., deposit-type financial institutions)
• Nonblank (i.e., non-deposit-type financial institutions).

Where, most of the banks are mainly deposit type financial institutions with four different kinds of banks.

 Types of Banks[4]:

Central Bank: Financial solidity of a country highly depends on central banks to operate properly the economy. Central banks act as controller of their country’s interest rates by controlling the amount of money in flow and buying and selling currencies. They accumulate funds and act as lenders of last alternative. They act as a separate unit from all the other banks.

Retail Bank: Now a day Retail banks are the most familiar banks we know. They take deposits from individuals, provide saving facilities and pay interest on these accounts. They also give their customers the facility lend money as individual, in the form of loans and overdrafts, and charge interest on the money.

Commercial Bank: [5]Commercial banks mainly serves the business people to help them raise finance to expand their businesses and to maintain their cash flow, from small companies through to corporate banking directed at large corporations..

Investment Bank: [6]Investment banks distribute and guarantee share and bond issues; they trade securities on the financial markets and advise corporations on capital market activities such as mergers and acquisitions. Investment banks originally developed in the USA and these banks have now taken over many roles that were previously carried out by UK merchant banks.

Banks perform in Bangladesh:

Generally the central bank of any country controls the whole economy and in Bangladesh, “Bangladesh Bank” is the Central Bank of Bangladesh and the main dictatorial authority in the economy. According to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with demonstration effect from 16 December 1971.

There are four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks.

Central Bank of Bangladesh:

Bank Company Act, 1991, authorizes Bangladesh Bank to issue licenses[7] to carry out banking business in Bangladesh. According to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled that the company conforms to all valid requirements of Bank Companies Act, 1991. Licenses may be cancelled if the bank fails to fulfill with above requirements or ceases to carry on banking business in Bangladesh.

State-owned Commercial Banks

There are 4 Nationalized Commercial Banks in Bangladesh, which highly influence the banking system of Bangladesh and they all together controls all most all deposits the nationalized commercial banks performing in Bangladesh are:  Bangladesh Krishi Bank, Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank.

Private Commercial Banks of Bangladesh

Private Banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. BRAC Bank Limited, Eastern Bank Limited, Dutch Bangle Bank Limited, Dhaka Bank Limited, Islamic Bank Bangladesh Ltd are some private Banks.

Foreign Commercial Banks

Among foreign Banks there are: Citibank, HSBC, Standard Chartered Bank are some foreign banks performing in Bangladesh.

Types of Financial Institutions:

Generally nonbank financial institutions consist of two main categories

• mutual fund companies and
• Brokerage firms.

Now a day Mutual fund companies have converted them, into the banking field. Now many mutual fund companies provide checks against mutual fund account. Like mutual funds Brokerage firms have also gotten into the act. Many brokerage firms now allow you to write checks, issue credit cards and ATM cards, and make loans. Brokerage firms offer these and many other account features that were once reserved for traditional banks[8].

Financial institutions performing in Bangladesh:

Twenty-nine financial institutions are now operating in Bangladesh. Of these institutions, one is govt. owned, 15 are local and the other 13are established under joint venture with foreign involvement. To enable the financial institutions to gather together medium and long-term resources, Government of Bangladesh signed a project loan with IDA, and a project known as `law_article`Financial Institutions Development Project (FIDP)`law_article` has started its operation from February 2000. Bangladesh Bank is administering the project.[9]

Role of banks:

In her article, Jeanne Gobat said that although banks do many things, their main role is to collect deposits, pool them, and lend them to those who asked for funds[10]. Banks are mediators between depositors and borrowers. Depositors can be individuals and households, financial and no financial firms, or national and local governments also. Borrowers are, well, the same. Usually banks use shorter-term deposits to make longer-term loans. A bank’s most important role may be matching up creditors and borrowers, but another important task they need to perform is creating money and those amounts are usually reserves in the central bank which is mainly owned by the government of the country, such as the U.S. Federal Reserve, the Bank of Japan, and the European Central Bank.

These are some narrow rolls of banks. But besides these the modern banks has to adopt new roles to remain competitive and responsive to public needs. Baking’s principal roles today are as follows:

• The intermediary role[11]: Transferring money to the creditors
• The payment role: [12]Carrying out payment for goods and services on behalf of their customers.
• The guarantor role: Pay on behalf of the customers when they are not able to pay the loan.
• The risk taker role[13]: support customer in financially for the risk of lost to property in danger.
• The investment advisers’ role:  Financing customers in fulfilling their needs for a better life by building, managing, and protecting savings.
• The charity role: Acting on behalf of customers to manage and protect their property or issue and redeem their securities.
• The policy role: Acting as a medium for govt. policy in trying to control the growth of the economy.

Roles of Non-bank financial institution

Non-bank financial institutions are the most important elements of a financial system of a country. In Bangladesh, Non bank financial institutions are the new addition in the financial system compared to the traditional banking systems. Almost 25 Non bank financial institutions are now working in the country and they are working as the development of financial institutions, leasing enterprises, investment companies, merchant bankers etc. besides in order to guarantee the flow of loans and to meet the credit gap, Non bank financial institutions have huge importance in the economy. In addition, non-bank financial sector is important to increase the enrollment of support services to the capital market.

Measuring Performances of Non-Bank Financial Institutions in other countries and in Bangladesh

In most of the developing countries none banking financial institutions has become popular for its services. Primarily, with a new act titled ‘Financial Institution Act,1993’ in 1993 (Barai et al. 1999).Industrial Promotion and Development Company(IPDC) introduces as the  first private sector Non Banking Financial institutions in Bangladesh, started its operation in 1981. Since then the number has been increasing. The major business of most NBFIs in Bangladesh is leasing, though some are also diversifying into other lines of business like term lending, housing finance, merchant banking, and equity.  Gradually Non-Bank Financial Institutions are gaining popularity in Bangladesh in recent times. As they are diversifying into other lines of business like term lending, housing finance, merchant banking, equity finances and venture capital financing[14].

Rules Followed by the banks of Bangladesh

• The Bangladesh Bank Order, 1972;
• The Bank Companies Act, 1991;
• The Companies Act, 1994;
• The Financial Loan Court Act, 1990;
• The Financial Institutions Act, 1993;
• Foreign Exchange Regulation Act, 1947;
• The Money Loan Court Act, 1990;
• The Contract Act, 1872;
• The Negotiable Instrument Act, 1881;
• The Partnership Act, 1932;
• Rules & Regulations issued by Bangladesh Bank;
• The Securities and Exchange Rules, 1987;
• The Securities and Exchange Ordinance, 1969;
• The Securities and Exchange Commission,1993;
• The Securities and Exchange Commission (Public Issue) Rules, 2006;
• Dhaka & Chittagong Stock Exchange listing regulations;
• The Income Tax Ordinance, 1984;
• The VAT Act, 199

The basic difference of Banks and Non bank financial institutions

Sometimes Non-banking financial institutions act and serve similar like banks. They mainly take account of a wide variety of businesses, from investment banks to small businesses. The main thing distinguishing them from banks is that they are not allowed to take deposits form customers. Other differences are as follows:

A Bank is a financial institution that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc. where a Non Banking Financial Company is an organization that cannot take or collect cash deposits but they provides all financial services like banks does except providing any bank account.

• A bank deals directly with customers while an Non Banking Financial Company interacts with banks and governments
• A bank provides a number of activities linking to finance to a wide range of customers, while a Non Banking Financial Company is mainly focused on less related services like loan needs of large enterprises.
• A bank deals with both internal and international customers while an Non Banking Financial Company is mainly concerned with the finances of foreign companies.[15]
• A bank’s main interest is to help in business transactions and savings/investment activities while an Non Banking Financial Company  main interest is in the stabilization of the currency

Conclusion

After all the discussions above we can definitely say that though banks and financial institutions are two important elements of any countries economy, along with that they sometimes act similarly but they have some differences in their functions as well as some bindings and limitations of financial institutions that make them a bit different from the banks those strictly dominates the countries financial systems, because businesses, households and the public sector all rely on the banking system for a wide range of financial products to meet their financial needs. Which, the financial institutions cannot provide to them. However, by provide additional and other financial services, nonbanking financial institutions have already gained considerable popularity both in developed and developing countries. In one hand these institutions help to facilitate long-term investment and financing, which is often a challenge to the banking sector. An efficient nonbanking financial institution also acts as a complete risk manager and contributes to the overall goal of financial stability in the economy. So, non banking financial institutions should given more power and lessen the limitations so that they can spread their ranges of services and serve more customers along with the banks to lessen the pressure on the banks and run the economy more smoothly.

Bibliography 

1)      Articles:

Ahmed,N.(2007) Non-Bank Financial Institutions in Bangladesh: An Analytical Review

Allen, F & Carletti,E (March 21, 2008)The Roles of Banks in Financial Systems

Janee Gobat, (March 2012) Finance & Development, Vol. 49, No. 1

2)      Internet:

http://www.asiatradehub.com/bangladesh/banks8.asp

http://personalfinance.byu.edu/?q=node/583

http://www.risksandrewards.org.uk/background_banks_152.htm