MEANING OF FINANCIAL INSTITUTION
Financial institution refers to all business organizations which hold money for individuals and institutions and may borrow
money from them in order to give loans or make other investments. It is an organization that manages and mobilized funds
for other organizations and individuals.
TYPES OF FINANCIAL INSTITUTIONS
Financial institutions may be divided into two major groups- banking and nonbanking financial institutions. The major
difference between the banking and the nonbanking 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:
i. Central bank
ii. Commercial banks
iii. Merchant banks
iv. Development banks
v. Saving banks
vi. Mortgage bank
Non-banking financial institutions include:
i. Traditional financial institution
ii. Insurance companies
iii. Hire purchase companies
iv. Building societies
v. Discount houses
vi. Trust Fund
Definition of a Bank
It is an institution licensed and approved by the relevant authorities to render certain financial services to a specified group
of people or the general public. Examples of financial services a bank can render include accepting deposit, credit facilities,
online transaction, transfers of fund etc.
TYPES OF BANKS
1. Commercial banks
2. Central bank
3. Merchant banks
4. Development banks
5. Savings bank
Meaning and types of financial system
A financial system is also known as a financial market. It is where money and near money instruments exchange hand
between lenders and borrowers. That is, the market deals in money. Financial market provides opportunities for financial
institutions to make facilities available for borrowers and lenders. Therefore, financial institutions trade in money and
money worth.
Types of Financial market
Financial markets are broadly divided into two categories and they are as follows:
1. Money market
2. Capital market
MONEY MARKET
Money market may be defined as a financial market for exchange of short term financial instruments and securities. This
type of market aids all forms of business transactions. A lot of financial institutions are involved in this type of market,
purchase and sale of funds on short-term bases and it is controlled by the Central Bank. Examples of financial instruments
used in the money market are treasury bills, treasury certificates, bills of exchange and money at call.
FUNCTIONS OF THE MONEY MARKET
i. Provision of short-term capital to investors in both the private and publics sectors
ii. Provision of short-term investment opportunities from which income may be earned
iii. Mobilization of saving for investment.
iv. Provision of investment, technical and managerial advice.
v. Provision of opportunity for the public to participate in the management of the economy.
INSTITUTIONS INVOLVED IN THE MONEY MARKETS
The Central Bank: It makes money available to money market and capital market as a lender of the last resort.
Commercial Banks: They offer short term loans to individuals, organizations, governments, etc.
Discount Houses: These are institutions that offer discount, by buying and selling bills of exchange and treasury
bills.
Acceptance Houses
Financial Companies
Hire purchase companies
EVALUATION:
a. What is money market?
b. Enumerate five functions of the money market
CAPITAL MARKET
The market is made up of financial institutions which deal in long term financing. The capital market provides a platform for
the exchange of medium and long-term financial instruments. They therefore bring long term lenders and borrowers
together. Examples of financial instruments used in the capital market are shares, bonds, debentures, gilt edge etc. It is
controlled by the Securities and Exchange Commission (SEC).
The capital market can be divided into the primary market and secondary market. The primary market deals with the
buying and selling of new securities. It is dominated by merchant banks. The secondary market is the market that deals with
the buying and selling of old (second hand) securities. It is dominated by Stock Exchange.
INSTITUTIONS THAT OPERATE IN THIS MARKET INCLUDE:
Insurance Companies
Issuing Houses
Development Banks
Investment Banks
Investment Trusts
Building Society or Mortgage Bank
Finance Corporations
Savings Banks
The Stock Exchange
FUNCTIONS OF THE CAPITAL MARKET
i. Provision of long term capital to investors both in the public and private sector.
ii. Provision of long term investment opportunities from which income may be earned.
iii. Mobilization of savings for investment.
iv. Encourages the growth of merchant banking.
v. Provision of investment advice.
vi. Provision of opportunity to the public to participate in running of the economy.
EVALUATION:
a. What is capital market?
b. List five institutions that operate in capital market
