Financial Institutions or intermediaries : Definitions and Types | Depository Institutions | Non-depository Institutions

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Financial Institutions or intermediaries : Definitions and Types | Depository Institutions | Non-depository Institutions


Financial Institutions/intermediaries

Financial markets bring the buyers and sellers of financial assets together. This is done with the help of financial institutions/ intermediaries. Financial institutions are organizations that deal with the transaction of financial claims and financial assets. They issue financial claims against themselves for cash and use the proceeds from this issuance to purchase primarily the financial assets of others. They primarily collect savings from people, businesses, and the government by offering accounts and by issuing securities. The savings are lent to the user of funds. They also work as the intermediaries between an issuer of securities and the investing public. Thus, financial institutions are the specialized firms that facilitate the transfer of funds from savers to borrowers. They offer accounts to the savers and in turn, the money deposited is used to buy the financial assets issued by other firms. 



Similarly, they also issue financial claims against themselves and the proceeds are used to buy the securities of other firms. Since financial claims simply represent the liability side of the balance sheet for an organization, the key distinction between financial institutions and other types of organizations involves what is on the•ssets side of the balance sheet. For example, a typical commercial bank issues financial claims against itself in the form of debt (for instance, checking and saving accounts) and equity; and so does a typical manufacturing firm. However, the structure of assets held by a commercial bank reveals that most of the bank’s money is invested in loans to individuals, corporations, and the government. 


On the other hand, a typical manufacturing firm has its money invested mostly in land, buildings, machinery, equipment, and inventory. Thus, the bank invests primarily in financial assets, whereas the manufacturing firm invests primarily in physical assets. Accordingly, banks are classified as financial institutions and manufacturing firms are not. Besides commercial banks, other examples of financial institutions are finance companies, insurance companies, credit unions, pension funds, mutual funds, savings and loan associations, and so on.

Types of Financial Institutions/intermediaries

Many types of financial institutions/intermediaries exist to facilitate the flow of funds in a financial market. Some are involved in the depositary type of transactions whereas others involve in a non-depository type of transactions.
The two types of financial institutions. One consists of depository institutions that accept deposits and lend to meet the credit needs while the other includes non-depository institutions that contract with the customers to render specific services.

1. Depository Institutions

The depository types of institutions include commercial banks, credit unions, saving and loan associations, and mutual saving banks.

a. COMMERCIAL BANKS. Commercial banks are those financial institutions, which help in pooling the savings of surplus units and arrange for their productive uses. They basically accept the deposits from individuals and institutions, which are repayable on demand. These deposits from individuals and institutions are invested to satisfy the short-term financing requirement of business and industry. By mid-July 2015, there were 30 commercial banks in Nepal. Among them, Nepal Bank Limited is the oldest commercial bank. Some other includes Rastriya Banijya Bank and joint-venture banks such as Bank of Kathmandu, NCC Bank, Himalayan Bank, Standard Chartered Bank, Nepal SBI Bank, Nabil Bank, NB Bank, and so on. Besides a collection of deposits and their investments, commercial banks perform services like collection of bills and cheques, safekeeping of valuable assets, issue of credit instruments, foreign currencies exchange, issue of guarantee, stock brokerage, etc.
b. CREDIT UNIONS. Credit unions are cooperative associations where large numbers of people are voluntarily associated for savings and borrowing purposes. These individuals are members of credit unions as they make share investments along with deposits. The savings generated from these members are used to lend to the members of the unions only. In the context of Nepal, cooperative associations involved in saving and credit transactions are the example of credit unions.
c. SAVING AND LOAN ASSOCIATIONS. Saving and loan associations are the financial institutions involved in collecting funds of many small savers and lending these funds to homebuyers and other types of borrowers.
d. MUTUAL SAVING BANKS. Mutual saving banks are more or less similar to saving and loan associations. They primarily accept savings of individuals and they are lent to the home users and consumers on a long-term basis.




2. Non-depository Institutions
Non-depository institutions are not banks in the real sense. They make contractual arrangements and investments in securities to satisfy the needs and preferences of investors. The non-depository institutions include insurance companies, pension funds, finance companies, and mutual funds.
a. INSURANCE COMPANIES. Insurance companies are the contractual saving institutions. They collect periodic premiums from the insured party and in return agree to compensate against the risk of loss of life and properties. Life insurance companies are important financial institutions by virtue of their collecting and investing large amounts of premium. They offer protection to the investors, provide means for accumulating savings, and channel funds to the government and other sectors of the economy. By mid-July 2015, there are 26 Insurance Companies in Nepal. Of them, 8 companies are life insurance, 17 are non-life insurance and 1 is both life and non-life insurance. Some of them are Rastriya Beema Sansthan, National Life, and General Insurance Company, LIC Nepal, Nepal Life Insurance Corporation, etc.
b. PENSION/PROVIDENT FUNDS. Pension funds are financial institutions that accept saving to provide pension and other kinds of retirement benefits to the employees of government units and other corporations. Pension funds are basically funded by corporations and government units for their employees, which make a periodic deposit to the pension fund and the fund provides benefits to associated employees on the retirement. The pension funds basically invest in stocks, bonds, and other types of long-term securities including real estate. The pension fund at a private level has not grown smoothly and there is no specialized pension fund company in Nepal. Recently, Citizen Investment Trust manages pension funds of public sectors companies in Nepal. Besides, some private sector banks also manage retirement funds with approval from Nepal Rastra Bank. One of such examples includes Siddhartha Retirement Fund managed by Siddhartha Development Bank.
c. FINANCE COMPANIES. Finance companies are the financial institutions that engage in satisfying individual credit needs and perform merchant banking functions. In other words, finance companies are non-bank financial institutions that tend to meet various kinds of consumer credit needs. They involve in leasing, project financing, housing, and other kinds of real estate financing. The finance companies are also performing depository functions in the case of Nepal. They are accepting deposits and providing loans instead of concentrating on consumer loans. By mid-July, 2015, there were 48 finance companies in Nepal. Some of them are Goodwill Finance Company Limited, ICFC Finance Limited, Manjushree Financial Institutions, Synergy Finance Company Limited, Siddhartha Finance Company Limited, Paschimanchal Finance Company Limited, and so on.
d. MUTUAL FUNDS. Mutual funds are open-end investment companies. They are the associations or trusts of public members and invest in financial instruments or assets of the business sector or corporate sector for the mutual benefit of its members. Mutual funds are basically large public portfolios that accept funds from members by selling their shares called units. They use these funds to buy common stocks, preferred stocks, bonds, and other short-term debt instruments issued by governments and corporations. Small investors, who cannot form a well-diversified portfolio of investment, can hold an investment portfolio through the investment in mutual funds’ shares. Some examples of mutual fund managers in Nepal are NMB Mutual Fund, NIBL Mutual Fund, and Laxmi Mutual Fund. Besides, NIDC Capital Market and Citizen Investment Trust are also operating mutual funds in Nepal.

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