Financial Institution - What is it? characteristics, functions, types, and more

Financial institution

Group dedicated to offering financial services.

What is a financial institution?

A financial institution is defined as an organization that is dedicated to offering financial services. It carries out banking activities of financial intermediation, insurance, investment in securities, and others.

Financial institutions can provide services to natural or legal persons and their profits are based on commissions, interests, or rates that they charge for the activities they carry out.

For a financial institution to take place, there must first be a financial system in which it can act, mediating between those who have savings units (lenders) and those who have consumption units (borrowers).

Characteristics of a financial institution

The main characteristics of a financial institution are the following:

• Financial institutions are usually strictly regulated, this is due to the sensitivity of their functions and the problems that poor management of financial institutions can generate for a country (bankruptcy of a bank, for example).
• There is little differentiation. The financial services offered by the institutions are usually very similar to each other, which is why they compete in the interest rate and the commissions they charge (although these are also usually regulated).
• They add great value to the economy. The intermediation activity solves a great problem of inefficiency in the markets, by managing to satisfy the demand of those who require financing.

Functions of a financial institution

Financial institutions have passive and active functions.

passive

• Receive money deposit: people can deposit their money in a bank account, which can be saved or current.
• They issue and place shares issued to increase capital: The issue of shares is a mechanism used by companies to finance themselves. This issuance is made through financial institutions, which can also issue their own shares.
• They issue and place mortgage bonds and debt in order to cover financing needs.
• They can contract credits with the Central Bank of the country or with other financial institutions of the country or abroad.

Active

• Granting credits: when granting the financing, they charge an interest rate that represents their profit.
• Make transfers: carry out operations with other financial institutions.
• Maintain creditor debit card operations of people who have accounts in the institution.
• Carry out currency exchange operations: they can buy or sell one currency in exchange for another ( Forex ).
• Carry out operations with financial assets: they can buy titles in the stock market, gold, silver, or precious metals (they are generally titles backed by these values).

Types of financial institutions

Financial institutions can be credit or investment services and insurance activities.

credit institutions

Credit institutions are those capable of receiving funds from those who have surplus savings and lending them to those who have a deficit of said funds, with the promise of paying them to those who are lending the money.

Credit institutions carry out activities such as granting loans or mortgages, providing payment services, debit or credit cards or checks, advising companies on capital structure, mergers or acquisitions, participating in the issuance of securities, renting safe deposit boxes, etc.

Their services are very varied and are usually based on financial intermediation. Therefore, financial credit institutions are those that intervene in the market with the aim of matching deficits with surpluses, obtaining a profit from this intermediation.

Investment service institutions and insurers

These institutions have activities that are not related to credit activity, that is, they are not in charge of lending money. Its function is to provide services, such as creating a person's pension fund or offering insurance policies to individuals or companies, securities agencies, or brokerage firms.

Examples of financial institutions

An example of financial credit institutions is banks. These take deposits from people who have a savings surplus and lend it to people who need financing. The condition is that the bank pays the lender his money and makes a profit for this intermediation.

Savings banks, credit cooperatives, and electronic money institutions are also an example of credit financial institutions.

On the other hand, an example of a non-credit financial institution is a brokerage firm. This acts as an intermediary for the purchase and sale of securities; however, they do not provide financing for the purchase of assets.

The service of these companies is based on connecting those who need to sell with those who need to buy a security, and for this transaction, they charge a commission on the amount of the operation.

 

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