Roles Performed by Financial Institution
Financial institutions play a pivotal role in every economy. They are regulated by a central government organization for banking and non-banking financial institutions. These institutions help in bridging the gap between idle savings and investment and its borrowers, i.e., from net savers to net borrowers.
Following are the list of roles performed by Financial Institutions –
- Regulation of Monetary Supply
- Banking Services
- Insurance Services
- Capital Formation
- Investment Advice
- Brokerage services
- Pension Fund Services
- Trust Fund Services
- Financing the Small and Medium Scale Enterprises
- Act as A Government Agent for Economic Growth
Let us discuss each one of them in detail –
#1 – Regulation of Monetary Supply
Financial institutions like the central bank help in regulating the money supply in the economy. They do it to maintain stability and control inflation. The central bank applies various measures like increasing or decreasing repo rate, cash reserve ratio, open market operations, i.e., buying and selling government securities to regulate liquidity in the economy.
#2 – Banking Services
Financial institutions, like commercial banks, help their customers by providing savings and deposit services. They provide credit facilities like overdraft facilities to the customers for catering to the need for short-term funds. Commercial banks also extend several kinds of loans like personal loans, education loans, mortgage or home loans to their customers.
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#3 – Insurance Services
Financial institutions, like insurance companies, help to mobilize savings and investment in productive activities. In return, they provide assurance to investors against their life or some particular asset at the time of need. In other words, they transfer their customer’s risk of loss to themselves.
#4 – Capital Formation
Financial institutions help in capital formation, i.e., increase in capital stock like the plant, machinery, tools and equipment, buildings, means of transport and communication, etc. They do so by mobilizing the idle savings from individuals in the economy to the investor through various monetary services.
#5 – Investment Advice
There are a number of investment options available at the disposal of individuals as well as businesses. But in the current swift changing environment, it is very difficult to choose the best option. Almost all financial institutions (banking or non-banking) have an investment advisory desk that helps customers, investors, businesses to choose the best investment option available in the market according to their risk appetite and other factors.
#6 – Brokerage services
These institutions provide their investors access to a number of investment options available in the market that ranges from stock, bonds (common investment alternative) to hedge funds, and private equity investment (lesser-known alternative).
#7 – Pension Fund Services
Financial institutions, through their various kinds of investment plans, help the individual in planning their retirement. One such investment options is a pension fund, where the individual contributes to the pool of investment set up by employers, banks, or other organizations and get the lump sum or monthly income after retirement.
#8 – Trust Fund Services
Some financial organization provides trust fund services to their clients. They manage the client’s assets, invest them in the best option available in the market, and take care of its safekeeping as well.
#9 – Financing the Small and Medium Scale Enterprises
Financial institutions help small and medium scale enterprises set up themselves in their initial days of business. They provide long-term as well as short-term funds to these companies. The long-term fund helps them in the formation of capital, and short-term funds fulfill their day to day needs of working capital.
#10 – Act as A Government Agent for Economic Growth
Financial institutions are regulated by the government on a national level. They act as a government agent and help in the growth of the nation’s economy as a whole. For example, to help out an ailing sector, financial institutions, as per the guidelines from the government, issue selective credit line with lower interest rates to help the sector overcome the issues it is facing.
Financial institutions are the backbone of the economy. Without the help of these institutions, the economy will go down and will not be able to stand up. Due to their pivotal role in the development and growth of the economy, the government regulates these institutions through the central bank, insurance regulators, pension fund regulators, and so on. Over the years, their role has expanded from accepting and lending funds to larger areas of services.
This has been a guide to the role of financial institutions. Here we discuss the top 10 role of financial institutions in economic development, which includes banking services, insurance services, trust fund services, etc. You may learn more about financing from the following articles –