Financial Institutions

What are Financial Institutions?

Financial institutions are companies in the financial sector that provide a broad range of business and services, including banking, insurance, and investment management. Governments of the country consider it essential to oversee and to regulate these institutions as they play an integral part in the economy of the country.

Types of Financial Institutions

There are many different types of financial institutions that exist in the financial market for fund flows. These are divided primarily based on the type of transactions performed by them, i.e., some of them are involved in the depositary type of the transaction. In contrast, others are involved in the non-depositary type of transactions.


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#1 – Depository Institutions:

Types of Depository Institutions are –

Types of Depository-Institutions

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Depository institutions are allowed to accept monetary deposits from the consumers legally. These include commercial banks, savings banks, credit unions, and savings and loan associations. The different types of depository institutions are explained as below:

# 2 – Non-Depository Institutions:

Non-depository institutions serve as the intermediary between the savers and the borrowers, but they do not accept the time deposits. Such institutions perform their activities of lending to the public either by way of selling securities or through the insurance policies. Non-depository institutions include insurance companies, finance companies, pension funds, and mutual fundsMutual FundsA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of more.

Federal Deposits Insurance Corporation (FDIC) in the United States ensures the regular deposit accounts to reassure the individuals and businesses with respect to the safety of their finances with the financial institutions.



  • There are various documentation and the other facilities through which a concern requiring finance from the financial institutions has to undergo. It requires time and efforts of the concerns requiring the finance. Also, many of the deserving concerns may also fail to get the assistance for non-fulfilling certain condition that is laid down by the institutions or due to the want of the security.
  • Sometimes, convertibility clauses are also laid down in the loan agreements for the loan given to the parties, which places restrictions on the autonomy of the management of the concerned person. They also sometimes insist on appointing their nominees in borrowing the company’s board of directors.

Important Points

  • At several scales, these financial institutions can operate, i.e., from the credit unions at the local community to the international investment banks. These institutions can vary based on size, geography, and scope.
  • They are divided primarily into two categories, depository institutions and the non-depository institutions based on the type of transactions performed by them.
  • They are engaged in dealing with monetary and financial transactions like deposits, loans, insurance, investments, and currency exchange.


Thus it can be concluded that the financial institutions provide a broad range of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit more within the financial services sector. While some of these institutions have a focus on providing the services to the general public, on the other hand, others serve only to certain consumers with more specialized offerings.

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This article has been a guide to what are financial institutions and its definition. Here we discuss types of financial institutions along with an example, advantages and disadvantages. You can learn more about corporate finance from the following articles –

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