Types of Financial Institutions

Introduction

In the last unit, we discussed exhaustively the supply of money and now we want to focus on the Financial Institutions that are responsible for the supply of money. The Financial Institutions operate and function in an economic system. In its ordinary usage, the word “System” can be used to refer to “a group of related parts working together”. This is the sense in which it is used here – the financial institutions working together to provide the financial services required in an economy. The Nigerian Financial System comprises the banking system (all the banks) the non-bank financial institutions, the regulatory bodies, and other financial market participants, that play the role of financial intermediation in the Nigerian economy. 

The Central Bank of Nigeria Briefs (1996) defined a financial system as “a conglomerate of various institutions, markets, instru- ments, and operators that interact within an economy to provide financial services. Such services may in- clude resource mobilisation and allocation of financial intermediation and facilitation of foreign exchange transactions to enhance international trade.

Objectives

At the end of this unit, you should be able to:

• define Financial Institutions fully. 
• recognise the various types of Financial Institutions. 
• arrange Financial Institutions into bank and non-bank financial institutions. 

Definitions Financial Institutions

Financial institutions are institutions which serve the purpose of channelling funds from lenders to borrowers. They hold money balance of, or borrow from individuals and other institutions, in order to make loan or other investments. Finance has to do with money. It is an organised system of managing money i.e. a system of lending and borrowing money.

A Financial Institution acts as an intermediary between those individuals or firms who wish to lend and those who wish to borrow. The existence of financial intermediaries reduces the risks by allowing specialist institutions to evaluate the credit worthiness of borrowers. The risk reduction may encourage lending and thus reduces the interest rate of most individuals and risk averters.

Institutionally, it is common to distinguish between banks and non-bank financial institutions. The impor- tance of the former is that their liabilities enter the common definitions of the money supply. The liabilities of non-bank financial institution may enter some money supply definitions or they may be classed as “near money” depending on their liquidity. Examples of non-bank intermediaries/ institutions listed in terms of decreasing liquidity are: Building societies, Savings banks, Hire purchase, Insurance companies, Pension funds and Investment trusts

Types of Financial Institutions

Financial Institutions can be broadly classified into two: banks or bank financial institutions in the banking sector and non-bank financial institutions.

Commercial, Central, Merchant and Development banks are in the banking sector while Building Socie- ties, Hire Purchase Companies, Insurance Companies, Pension Funds and Investment Trust are non-bank financial institutions.

While liabilities of banks form part of the money supply, the liabilities of non-bank financial institutions do not for they are referred to as “near money”.

 Bank Financial Institutions

Structurally, the bank-financial institution is made up of:

1. The Supervisory and Regulatory Authorities: They comprise the Central Bank of Nigeria which is the Principal regulatory body, Federal Ministry of Finance. The Securities and Exchange Commission, Nigerian Deposit Insurance Corporation, Nigerian Insurance Supervisory Board (Now renamed Na- tional Insurance Commission) and to a lower extent the Federal Mortgage Bank and National Board for Community Banks. These Supervisory bodies are also referred to as monetary authorities. 
2. The Banking System (Banks): The banking system comprises all the banks that operate within the economy. This includes commercial banks, merchants banks, development banks and other specialised banks, such as the Community Banks and People’s Bank of Nigeria. Apart from few development banks, all these banks collect deposits, and give out loans. They are key actors in performing the role of financial intermediation. 

Non-Bank Financial Institutions

Apart from banks, there are other institutions that perform the role of financial intermediation. These other institutions are called non-bank financial institutions. At times, they are simply referred to as other financial institutions. These institutions include finance house, savings and loan institutions, insurance companies, the discount houses, Bureau de Change, Pension and other trust funds. There are also informal savings and loan associations like cooperative societies, ESUSU or Isusu groups known as “Ajo” and Alashie in Hausa lan- guage. An Isusu group is an association of like-minded individuals who contribute a pre-determined amount of money which is given to each member of the group one after the other after each collection. The amount may be contributed on weekly or monthly basis.

Conclusion

Financial Institutions are establishments that issue financial obligations such as demand deposits in order to acquire funds from the public. The institutions then pool these funds and provide them in larger amounts to businesses, governments or individuals. Examples are commercial banks, insurance companies, savings and loan associations. In some countries, financial institutions are also known as “Financial Intermediaries”.

 Principles of Economics

Financial Institutions can be classified into bank and non-bank Financial institutions. Bank Financial Insti- tutions include the central banks, the commercial banks and the development banks. Non-bank financial institutions include discount houses, issuing houses, insurance companies, building societies and the stock exchange. These institutions operate in markets with instruments to acquire funds from the public for invest- ment.

Summary

What you have learned in this unit concerns the definitions/meanings of financial institutions and the various types of Financial Institutions grouped into bank and non-bank financial institutions. It has served to introduce the functions and control of financial institutions. The two units that follow shall build upon this introduction.