Financial Institutions and Markets

The institutions in such markets can be very simply defined as an establishment that deals with all the financial transactions that take place in an economy ranging from depositing, taking loans, exchanging currencies to buying bonds, securities or other investments, with a sole purpose of collecting funds from public or other sources and placing them in financial assets (Investopedia). Financial institutions are also commonly referred to as financial intermediaries as they act as the middle man between savers and borrowers. It is imperative to understand how financial institutions serve as intermediaries. Individuals deposit funds at commercial banks, purchase mutual funds or insurance premiums, and contribute to pension plans and the financial institutions then channel these funds towards the borrowersCategorization of FI varies from country to country, changes over time and is largely governed by the current financial customs and legal system (GOLDSMITH, Raymond W, 1958). Financial intermediaries are divided into 2 major categories. Banks (deposit-type) and nonbanks (non-deposit-type). The deposit-type institutions are further divided into commercial banks, savings and loan associations and credit unions, whereas the non-deposit-type institutions are divided into mutual fund companies and brokerage companies (Know the Different Types of Financial Institutions). Furthermore, there exist some differences and commonalities between these institutions. One element that is common to all financial institutions is that they all function by channeling funds from the savers to the borrowers. Moreover, they are all regulated by the Central Bank. On the other hand the differences between these institutions are many, the basic difference being that some institutions accept deposits and others don’t. Within deposit-taking institutions, there exists a difference in ownership and governance as in the case of banks and credit unions.