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MEANING OF FINANCIAL INSTITUTIONS
ECONOMICS

MEANING OF FINANCIAL INSTITUTIONS

Financial institutions refer to all business organisations which hold money for individuals and institutions and may borrow from them in order to give loans or make other investments. Financial institutions are very important for the economic development of a nation. They represent the main channel or medium by which funds can flow from lenders to borrowers.

 

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions may be divided into two major groups – banking and non-banking financial institutions. The major difference between the banking and the non-banking financial institutions is that the liabilities of the banking institutions are counted as part of the total supply of money while those of the non-banking institutions are excluded from the money supply.

 

Banking financial institutions include:

  1. Commercial banks.
  2. Central bank.
  3. Merchant banks.
  4. Development banks.
  5. Savings banks.

 

Non-banking financial institutions include:

  1. Insurance companies.
  2. Hire purchase companies.
  3. Building societies.

 

DEFINITION OF A BANK

A bank is a commercial institution which performs various financial activities, e.g. accepting and handling of deposits of its customers. It is a body of persons who carry on the business of banking. Banks are institutions that create money and give out loans to people. Bank is also a place where money and other valuables like will and jewellery are kept.

 

ORIGIN OF BANKING

Banking had its origin with the goldsmiths in London in the seventeenth century. The goldsmiths had facilities for storing valuables, therefore, they accepted money and other valuables from merchants for safekeeping.

The first banking function was accepting deposits of cash from merchants who had no safe place to keep their money. The second stage came when receipts for these deposits began to be used as means of payment by merchants. This made the early bankers to issue bank notes of fixed denominations, which were more generally acceptable.

The next stage in the development of the banking system was the development of money lending to customers with interest charged on it. This provided a profitable business, hence bankers began to offer the inducement of interest to encourage merchants and others to increase their deposits.

In recent times, banks have introduced more complex systems of banking into the industry.

 

Major types of banks include:

  1. Commercial banks.
  2. Central bank.
  3. Merchant banks.
  4. Development banks.
  5. Savings bank.

 

COMMERCIAL BANKS

Commercial banks are financial institutions which accept deposits and other valuables from the public for safe keeping, with the sole aim of making profit. In other words, commercial banks are financial institutions that perform the services of holding people’s money and accounts and using such money to make loans and other financial services available to customers. The loans are usually for short and medium terms. They are owned by private individuals, institutions or governments. Commercial banks are limited liability companies.

Some commercial banks in Nigeria are: First Bank of Nig. Plc ., Union Bank of Nig. Plc ., Zenith Bank Plc ., Access Bank Plc ., Diamond Bank Plc ., First City Monument Bank Plc ., Guaranty Trust Bank Plc ., Oceanic Bank Plc ., United Bank of Nig. Plc. and Wema Bank Plc.

 

CHARACTERISTICS OF COMMERCIAL BANKS

  1. Commercial bank is a limited liability company.
  2. The motive of its establishment is profit making.
  3. They are members of the money market.
  4. Commercial banks are incorporated.
  5. They accept deposits and other valuables.

 

FUNCTIONS OF COMMERCIAL BANKS

  1. Acceptance of deposit: Commercial banks accept deposits from the public for safe keeping. This is the oldest function of commercial banks, which helps in taking care of people’s money. Money can be kept in current, fixed and savings accounts.
  2. Lending of money: This is perhaps the most profitable function of commercial banks. Deposits from different customers are pooled together and given out as loans and overdrafts with interest to people and firms for profitable investment.
  3. Agent of payment: Commercial banks can act as agent of payment on behalf of their customers. They encourage and permit customers to have current accounts in which they can draw by cheque without notice. Money can also be transferred from one account to another, e.g. credit transfer.
  4. Safe keeping of valuables: One of the functions of commercial banks is to keep customers’ valuables such as jewellery, certificates, will, etc.
  5. Discounting bill of exchange: Creditors can be paid by the bank immediately by discounting bill of exchange for their customers. This enables the creditors to be paid instantly, and the debtor is allowed a period of credit.
  6. Issuance of bank statement: At regular intervals, the banks will prepare and send bank statements to their customers to show their transactions with them.
  7. Investment and stock exchange transactions: Banks act as agents for the customers in the purchase or sale of securities, e.g. shares in the stock exchange.
  8. Issuance of travellers cheque: Travellers cheques are often issued to those travelling overseas in order to facilitate their commercial transactions.
  9. Foreign exchange transaction: Commercial banks make foreign currencies available to their customers. They participate in foreign exchange market and help in solving any problem relating to foreign exchange.
  10. Provision of financial advice: Commercial banks encourage and advise businessmen on the type of projects they should invest their money in.
  11. Facilitate international trade: Commercial banks provide credits to exporters, and this facilitates payment in foreign trade.
  12. Act as executor for their customers: Commercial banks can act in the capacity to execute the will of their customers.
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