Financial Institutions Meaning

Financial institutions are entities that help individuals and businesses fulfill their
monetary or financial requirements, either by depositing money, investing it, or
managing it. Some of the institutions labeled under this category include – banks,
investment firms, trusts, brokerage ventures, insurance companies, etc.

As the financial institutions enable individuals and companies to save, manage,

invest, and use the funds productively, the administrative authorities of a nation
take due care of their regulations. If not dealt with well, these institutions might
collapse, damaging the economy to a great extent. In short, a properly regulated
financial entity will mean a healthy economy.
How Do Financial Institutions
Work?
Financial institutions, as the name implies, are entities that deal in finances. They offer a
wide range of monetary or financial services to individuals and businesses. From helping
individuals save money to enabling them to invest in stocks, such institutions serve
different functions simultaneously.

There are various types of financial institutions to fulfill different requirements of

customers. They look into the customer’s financial needs, be it an individual or a
company, and offer relevant services. These entities provide customers with valuable
pieces of advice while choosing appropriate financial investment or savings options. The
professionals explain the pros and cons of each alternative for their customers to decide
which investment they should spend on.
Functions
Though the financial institutions aim to ensure a healthy economy, there are other minor and major roles they play to
ensure they achieve their final goal.

The primary function of these institutions is to regulate the money supply. With the regular flow of money, the financial
entities keep the financial ecosystem active. The money supply process must be efficient, given the wide use of money
in carrying out transactions.
Types of Financial Institutions
There is a wide range of such institutions operating around the world. However, the commonly
identified types are as follows:

#1 – Central Banks
These are the financial entities that monitor and oversee the procedures of the other financial or
banking institutions in the nation. They do not deal with individual customers directly. Instead, they
finance other retail banks. In short, these are banks for the banks. Every economy has a separate
central bank and is named differently. For example, in the United States, the Federal Reserve Bank is
the central bank.

#2 – Commercial Banks
Retail and 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. Some of the products that these banks
offer include savings accounts, personal loans, mortgage loans, certificates of deposits (CDs), credit
cards, etc.
#3 – Non-Banking Institutions
Non-banking financial institutions (NBFIs) are entities that neither acquire a valid banking license
nor do they allow customers to deposit amounts. However, these entities can offer alternative
financial facilities to customers, including investment, consultation, brokerage, transmission, and
risk pooling services.
#4 – Credit Unions
The institutions offer traditional banking services but are not publicly traded entities. They
are established and operated by the members, the ultimate shareholders. These
associations use and reinvest the money received as an interest to keep the costs low. As
a result, they become the better choices for members to fulfill their financial needs. These
entities enjoy tax-exempt status as not-for-profit organizations.

#5 – Investment Entities
The investment banks and brokerage firms fall under this non-depository category. The
investment firms help corporations, governments, and other entities build capital, raise
funds, and gain financial advice. These entities, as brokerage ventures, let customers
acquire finances by investing in securities, like stocks, mutual funds, bonds, and
exchange-traded funds (ETFs). In addition, it acts as a guide to startups or companies in
conducting complex transactional processes. They also offer advice for initiating fruitful
mergers and acquisitions (M&A).
#6 – Thrift Institutions
Also referred to as savings and loan associations, these entities allow
up to 20% of total lending to customers, who are also their owners.
They help individuals enjoy opening accounts and acquiring personal
loans and home mortgages.

#7 – Insurance Companies
These financial institutions allow individuals and businesses have
policies against monthly premiums, which they are subject to pay at
regular intervals. In addition, these schemes offer coverage or
protection to assets against any financial risk they remain exposed
to.