In the modern-day and age, it can be seen that the importance of financial institutions can be gauged by the fact that consumer lending and borrowing is highest than it ever has been.
This is predominantly because of the high degree of emphasis that is placed on financial transactions to ensure that the circular flow of resources within the economy continues at an accelerating pace.
Given the fact that numerous financial institutions, it can be seen that different financial institutions are specialized in different domains, and cater to different needs of the customers.
Types of Financial Institutions
As a matter of fact, it can be seen that there are 9 types of major financial institutions that predominantly provide a variety of services from mortgage loans to investment vehicles.
Therefore, some of these financial institutions have specialized offerings, and cater to a specific purpose, whilst others are more general and are directed towards the general public. The description of the different types of financial institutions is given below:
- Central Bank: Central Banks are referred to as the main financial institutions in an economy. This is because of the reason that the Central Bank is primarily responsible for overseeing the operations and managing all other banks within the company. In most cases, the Central Bank is also responsible for drafting the monetary policy and supervising the regulation of existing financial institutions.
- Retail and Commercial Banks: Retail banks offer products to retail customers, whereas commercial banks work directly with businesses. In this regard, this particular financial institution is seen to serve both commercials, and individual account holders, so that they are able to offer financial services in accordance with the policies that are set forth by the Central Bank.
- Internet Banks: Internet Banks are a fairly new addition to the financial institution market. They work on a similar domain as retail and conventional banks. However, the underlying difference between internet banks, and typical banks, is the fact that internet banks rely on the virtual presence and virtual functioning, as opposed to typical brick and mortar structures.
- Credit Unions: Credit Unions are mainly established to extend financial services to a particular demographic. They operate like retail banks but offer lesser services in comparison. Additionally, it can also be seen that credit unions are mainly owned by the members of the respective demographic, and therefore, they work for the benefit of the members only.
- Savings and Loan Associations: Savings and Loan Associations are held mutually, and they mainly rely on collaborative efforts to reach respective financial goals. Furthermore, individual consumers also make use of savings and loan associations for deposit accounts, personal loans, as well as mortgage lending.
- Investment Banks and Companies: Investment Banks do not accept deposits. They are mainly formed with the objective of helping businesses, individuals as well as governments to raise capital, with the help of securities. They are also referred to as mutual fund companies. They pool funds from individual and institutional investors in order to provide them access to considerably larger avenues in the securities market.
- Brokerage Firms: Brokerage firms mainly help individuals to buy and sell securities from the existing available investors. In this regard, users of brokerage firms have exposure to different types of stocks, securities as well as mutual funds.
- Insurance Companies: Insurance Companies are mainly Financial Institutions that are formed with the objective to mitigate the inherent risk involved. Therefore, individuals and companies mainly use it to protect against the financial loss because of health, or any other unprecedented action.
- Mortgage Companies: Mortgage Companies are financial institutions that are formed with the basis to originate or subsequently fund mortgage loans. Some of these mortgage companies are established with the basis to serve clients who are in between real estate transactions only.
Therefore, it can be seen that there are numerous types of financial institutions that are established to cater to different clients based on their requirements.
In this regard, it is also rudimentary to highlight the fact that all of the financial institutions are mostly formed, and subsequently looked after by the governments. Hence, all financial institutions are supposed to comply with the government to ensure that they work and operate under the law.
The importance of financial institutions can not be denied because of the important role they play in a given economic scenario. This is essential because of the fact that they contribute immensely in building investor trust, as a result of which people do not hesitate to invest their savings into the options that suit them best.