Updated August 5, 2023
Introduction to Financial Institution
A financial institution is a company that deals in all types of finance-related businesses. They are different from banks and play an essential part in broadening the financial services in the country.
They provide a desirable rate of returns to the customers in comparison to any government-centric banks. It deals in loans and advances and specializes in specified sectors like hire purchases, leasing, etc.
The financial institution deals with finance-related services. These are gaining popularity day by day nowadays. The attractive rate of returns on the customer’s investment is very demanding. It also provides specialized services like hire purchase and leasing, etc. The simple and organized procedure of the institutions is becoming very complementary. It offers a broad range of business opportunities. There are different types of financial institutions. All the institutions’ goals differ; they provide other services and have different risk levels. All financial institutions have unique features that work in a specialized way. The financial institution is gaining immense popularity in broadening the finance-related services in the country.
Role of Financial Institution
- The financial institution provides varied kinds of financial services to the customers.
- The financial institution provides an attractive rate of return to the customers.
- Promotes direct investment by the customers and makes them understand the associated risk.
- It helps form the stock’s liquidity in an emergency in the financial markets.
- It provides a high rate of return to the customers who have invested in the financial institution.
- Reduces the cost of financial services provided.
- It is considered very important for developing financial services in the country.
- It also advises the customers on dealing with equity and the other securities bought and sold in the market.
- It helps to improvise decision-making because it systematically calculates all the risks and rewards.
How Does it Work?
Financial institutions work like banks in some ways. They give loans and advances to the customers and set a platform for them to make some investments. Customers get exciting offers and returns from them, so these institutions are gaining popularity. It also provides consultancy services to clients on their investments related to the financial markets where considerable risk is involved. Moreover, the customers handing over their hard-earned monies to such institutions should check for the history and origin of this financial institution.
Types of Financial Institutions
- Investment Banks
- Commercial Banks
- Internet Banks
- Retail Banking
- Insurance companies
- Mortgage companies.
- The financial institutions provide loans and advances to the customers.
- The rate of return is very high in the case of investments made in this type of institution.
- It also gives customers a highly rated consultancy for their beneficial investments.
- Serves as a depository for its customers.
- It can also make an effort to minimize the monitoring cost of the company.
- All the finance-related work is done by the financial institution or on behalf of the customers.
Financial Institution vs. Banks
- The bank does the functions of payments of various services, but the financial institutions will not be able to do so.
- It cannot accept the demand deposit, whereas the banks can get the customer’s demand deposit.
- Banks guarantee the deposit’s repayment, whereas financial institutions may fail to do so.
Advantages and Disadvantages
Below are the advantages and disadvantages:
- The financial institutions help in the upliftment of the economies of our country.
- It has been proven to be more successful regarding customer returns since the return rate is higher than in any other place.
- Provides financial services to customers.
- It is also an intelligent way to invest money and keep it rotated in the finance market.
- The repayment facility is also very well managed in financial institutions.
- It also provides underwriting facilities.
- The process is very complex for some customers because they try to indulge in various businesses, creating confusion for themselves.
- In case of default by the management of the financial institutions, the customers will have to face significantly worse circumstances. The money which they have invested may not be recovered. Sometimes the principal amount is not assured to be retrieved because the government, in case of default, announces a certain sum of money that will be repaid. Most of the time, the amount of government declared to be repaid is much less than the principal amount of the investment made.
Financial institutions provide the best way to invest money and earn good returns. It tries to help our nation in building up economies. They provide a very unique and advanced way to keep money safe. The customers should also understand that the institutions carry some risk factors associated with their services. The customers should very carefully understand the institutions’ policies and check the Non-performing Asset of the company before investing their money in the financial institutions. In this case, the default is a panic situation because the repayment can be tough.
This is a guide to Financial Institutions. Here we discuss the explanation, types, functions, roles, and features, with advantages and disadvantages. You can also go through our other related articles to learn more –