What is Financial Institution, What are the Different types of Financial Institutions, What are the functions of financial institutions

Financial institutions are institutions that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. FIs include commercial banks, savings and loan associations, investment companies, insurance companies and pension fund. Every modern economy has FIs, which perform key financial functions for individuals, households, corporations, small and new business, and government.

 What are the Different types of Financial Institutions?

Different types of FIs are:

1. Depository Institutions: These are the FIs, those accepts deposits. These deposits represent the liabilities of the deposit-accepting institution. Their

income is derived from two sources: a) the income generated from the

loans they make and the securities they purchase, and b) fee income. The various types of depository institutions are:

a. Commercial  Banks:  It  provides  numerous  services  in  financial

system.  The  services  can  classify  into  i)  individual  banking,  ii)

institutional banking, and iii) global banking.

b. Credit unions: They are commonly known as cooperative societies.

The purpose of credit union is to service their members’ saving and borrowing needs.

2. Insurance companies: it provides insurance policies, which are legally

binding contracts for which the policy holder pays insurance premium and the company promise to pay to policy holder on the occurrence of future events.

3. Mutual Funds: These are the portfolios of securities, mainly stocks, bonds, and  money  market  instruments.  The  investment  manager  actively

manages the portfolio i.e. buy and sell securities.

4. Pension funds: It is a fund that is established for eventual payment of retirement benefits financed by contribution by the employer. A pension is

a form of employee remuneration for which the employee is not taxed until funds are withdrawn.

 

 

What are the functions of financial institutions?

The main functions of financial institutions of this nature are as follows:

1.   Accepting Deposits

2.   Providing Commercial Loans

3.   Providing Real Estate Loans

4.   Providing Mortgage Loans

5.   Issuing Share Certificates

Finance companies provide  loans, business inventory financing  and  indirect consumer loans. These companies get their funds by issuing bonds and other obligations.

The functions of financial institutions, such as stock exchanges, commodity markets, futures, currency, and options exchanges are very important for the economy. These institutions are  responsible for  maintaining liquidity in  the market and managing price change risks. As part of their various services, these institutions provide investment opportunities and help businesses to generate funds for various purposes.

The functions of financial institutions like investment banks are also vital and related to the investment sector. These companies are involved in a number of

financial activities, such as underwriting securities, selling securities to investors,

providing brokerage services, and fund raising advice.