Financial Institutions : Types & Importance

Financial Institutions : Types & Importance

Financial institutions are economic entities that provide a variety of financial services to individuals and businesses, allowing them to deposit, save, invest, and manage their monetary resources.

They also provide counseling services to consumers who want to know the advantages and disadvantages of making a certain investment. National authorities rigorously supervise these institutions in order to maintain the financial structure and market alive and efficient.

National and international financial institutions play an important role in maintaining a healthy economy. The flow of transactions remains balanced as a result of the give and take of monetary resources, which keeps the economy running.

Furthermore, such organizations in the country make the market liquid, resulting in increased economic activity in the respective nations. As a result, any harm to these financial firms might have a direct detrimental influence on the nation’s economic health.


Financial institutions are classified into two types: banking financial institutions and non-banking financial institutions. The primary distinction between banking and non-banking financial institutions is that banking institutions’ obligations are included in the total supply of money, whereas non-banking entities’ liabilities are excluded from the money supply.

Advantages and Disadvantages of Financial Institutions - GeeksforGeeks

Banking financial institutions include:

  • Central bank –  A central bank is a public institution that manages the currency of a country or group of countries and controls the money supply – literally, the amount of money in circulation. The main objective of many central banks is price stability.
  • Commercial banks–  commercial banks are widely available to serve the financial needs of individuals and businesses. From depositing money to borrowing amounts to buy property, these banks act as saviors for people in need to secure their future financially.
  • Merchant banks–  A merchant bank is a financial institution that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals (HWNIs).
  • Development banks– Development bank, national or regional financial institution designed to provide medium- and long-term capital for productive investment, often accompanied by technical assistance, in poor countries.
  • Mortgage bank  –  A mortgage bank is a bank specializing in mortgage loans. It can be involved in originating or servicing mortgage loans, or both. The banks loan their own capital to borrowers and either collect payments in installments along with a certain rate of interest or sell their loans in the secondary market.

Non-banking financial institutions

Non-banking financial institutions (NBFIs) are entities that do not have valid banking licenses and do not accept deposits from consumers. Customers can, however, benefit from alternative financial services such as investing, counseling, trading, transmission, and risk pooling provided by these businesses. These includes the following:

  • Traditional financial institution
  • Insurance companies –  These financial organizations let people and corporations to obtain insurance against monthly premiums that must be paid on a regular basis. Furthermore, these plans provide covering or protection for assets against any financial risk to which they are still exposed.
  • Hire purchase companies
  • Building societies
  • Cashier’s cheque issuers
  • Pawn shops
  • Payday lending companies
  • Currency exchange companies
  • Microloan organisations


Who regulates financial institutions?

Financial institutions are subject to stringent regulations in the countries. Although it varies by nation, each regulatory authority’s goal is to guarantee that these organizations maintain the financial market and the economy active and efficient. The following organizations oversee the institutions in the United States:

1. The Federal Deposit Insurance Corporation (FDIC) – Depository Institutions
2. National Credit Union Administration (NCUA) – Credit Union
3. Office of Thrift Supervision – Thrift Institutions or Savings and Loan Associations
4. Office of the Comptroller of the Currency – National Banks
5. Others

Why Are Financial Institutions Important?

Financial institutions are important because they provide a marketplace for money and assets, so that capital can be efficiently allocated to where it is most useful. For example, a bank takes in deposits from customers and lends the money to borrowers. Without the bank as an intermediary, any one individual is unlikely to find a qualified borrower or know how to service the loan. Via the bank, the depositor is able to earn interest as a result. Likewise, investment banks find investors to market a company’s shares or bonds to.

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