A financial institution is ... Definition

Money in its various manifestations has always been and will be the basis of economic relations at the micro and macro levels. A financial institution is an active participant in the monetary system of a particular country or the international financial market.

The concept of financial organizations

Money is also a subject of trade, the sellers of which are credit institutions. A financial organization is an economic agent (most often a legal entity), operating on the financial market under a license and providing services for the issuance of loans, sale of securities and other transactions related to the formation of cash flows.

Functions of financial companies

In fact, financial companies carry out intermediary functions for the redistribution of funds. Their current assets are deposits accepted for a certain fee from the population and legal entities, which are subsequently "sold" to other participants in credit relations under the guise of loans. Of course, this is a primitive model of the mechanism of functioning of financial intermediaries, but its principle remains general, only the scale, form and participants of the transaction change. Thus, credit institutions perform the following functions:

• Participation in the formation and functioning of the cash and securities market.
• Redistribution of cash income in the form of savings of the population, that is, their transformation into investment funds.
• Counseling participants in economic relations and financial management.
• Assessment and minimization of risks.

Modern financial organizations, their types and functions

Some distinctive characteristics of participants in monetary relations, as well as the features of the provision of services by them, allowed them to be classified into several groups. At the level of any modern state, the following forms of financial organizations can be:

1. Banks are intermediary organizations in the circulation of which highly liquid assets operate: money (electronic, cash) and securities.
2. Non-bank credit organizations - indirectly involved in the redistribution of savings. Their area of ​​activity is rather the highly specialized financial management of customer income.
3. Investment companies - carry out an assessment of economic risks and determine the most attractive investment areas.
4. Credit unions - provide savings and loan services to community members. Differ from commercial companies in that they do not pursue the goal of profit

Banks, their features and types

A banking financial institution is an intermediary that helps “sell” money or a product / service, provides advisory services in the field of cash investments. Thus, three types of banks can be distinguished:

1. A personal finance bank is a commercial institution that provides cash loans to the public or economic agents for a fixed fee. The interest on loans paid by customers is the main income item of commercial banks. The expenses of these credit companies are interest on deposits (customer deposits). It is deposits of depositors that form the bulk of the bank ’s working capital.
2. Bank financing sales. The service of this type of institution is mediation in the sale of durable goods by installments. In this case, the offer and the sale of goods itself is carried out not by the bank, but by a trading company. The bank only oversees the issue of payment for the purchase.
3. An investment bank is a participant in national and international financial systems. His clients are legal entities and even the government of the state. The main objective of the investment institution is to attract investment in various sectors of the economy, as well as mediation in the resale of business and in the field of transactions with securities.

The division of commercial banks according to the proposed option is rather arbitrary, since most credit organizations cover all known areas of activity: financing, and investment financial management.

Non-Bank Credit Organizations

Non-bank credit institutions are commercial enterprises that may, on the basis of a license, carry out certain banking operations. The principle of operation is reduced to settlement operations, since such structures have much less authority than bank financial organizations. Examples of this group of companies are as follows:

• Insurance companies. The principle of operation is reduced to issuing debt obligations used by customers to cover unforeseen costs, the list of which is specified in the contract. Clients pay an insurance premium to purchase these bonds. The difference between the income of insurance premiums and the payment by the insurer of reimbursements (unless, of course, this happens), as well as the administrative expenses of the company, is the profit of the Insurance Company.
• Pension funds for a certain time collect cash contributions from customers, forming and accumulating working capital. Upon reaching retirement age, the client is expected to pay monthly benefits from accumulated savings. In this case, the respondent opens a personal savings account, which only reflects the amount of contributions, but does not give the right to use them in full. The amount of remuneration is calculated on the basis of a generally accepted formula and has time limits. Pension funds can function both as financial organizations of the Russian public sector and as private commercial companies.
• Pawnshops operate in the field of personal financing and issue small consumer loans. A loan is granted on bail only of jewelry and valuable tangible things, which, in case of non-repayment of debt, are withdrawn and sold at auctions. Until the loan expires, the pawnshop has no right to dispose of the pledged property, while the organization is obliged to ensure the safety of things. The income in this case is not only the proceeds from the sold jewelry, but also from the percentage on the loan issued, that is, the client must return not only the loan amount, but also a fixed percentage.
  

Investment Institutions

An investment financial organization is an institution specializing in attracting the investments of respondents (investors). The object of investment is securities (stocks, bonds, bills). Their value may vary depending on the current market situation. Varieties of this group of organizations:

• Brokers and dealers - intermediaries in transactions of purchase and sale of securities, operating on the basis of a license.
• Investment companies - form a certain community whose members trust the company to manage their investments. Thanks to investment portfolios, such a union allows reducing the risks of individual investors to nothing.
• An investment fund - an intermediary between a lender and a borrower, differs from ordinary brokers in that it issues its own debt obligations mobilized into objects subject to privatization of other companies. The fund directs the proceeds from the sale of its securities to purchase bonds of other organizations. The difference between the sale and purchase of these securities is the fund’s income, and the resulting profit at the end of the reporting year in the form of dividends is distributed among its members.
• A stock exchange is a securities market, which, in fact, issues them and provides the conditions for transactions with shares and bills.

Credit Unions

Credit cooperatives are among non-bank credit organizations, but due to the fact that such an organization does not pursue profit-making, it can be attributed to a separate group. The principle of the union is based on the financial mutual assistance of member countries.

A variety of credit unions are mutual assistance cash desks, which can be founded by a group of individuals and legal entities on one common basis, for example, territorial. Credit unions, like commercial banks, issue interest-bearing loans and accept deposits in the form of deposits. The only difference is that these services are available only to members of the cooperative, and the percentage of loans issued is distributed among the participants in proportion to their contributions.

The need for MFIs

The Great Depression, which took place in the 30s of the last century, the collapse of the European regional market as a result of World War II, the rejection of the gold standard by most countries, numerous regional and global crises in the post-war period served as the prerequisites for the creation of a single centralized system for regulating currency interstate relations.

Thus, in 1944, as a result of negotiations in which 29 countries participated, it was decided to create a new monetary system - the International Monetary Fund (MFI). The International Bank for Reconstruction and Development (IBRD) was created as the executive body.

The main financial organizations in the world

Of course, for the functioning of world monetary and financial relations, MFIs and IBRDs are not enough. The effectiveness of international economic relations is ensured by the following institutions:

• The International Development Association (IDA), which provides loans to developing countries on concessional terms.
• International Finance Corporation - supports the private sector of states.
• International Investment Guarantee Agency - Regulates investment flows in developing countries.
• Bank for International Settlements - conducts international financial and currency transactions between central banks of different states.

Along with global international financial institutions, there are also regional:

• European Bank for Reconstruction and Development - attracts investment in the European economic region, and also carries out lending activities.
• European Financial Society - carries out banking activities in the European region.
• European Investment Bank.
• Asian Development Bank - provides soft loans to Asian countries.
• African Development Bank.
• Inter-American Development Bank.
• League of Arab States - provides effective economic relations between the Arab countries.

Summary

Just as demand generates supply in the consumer market, the existence of monetary, monetary and economic relations gives rise to the emergence of financial institutions, the forms of which differ depending on the specifics of their functioning. Some of them work exclusively in the field of lending to individuals, while others provide services to legal entities and government agencies. At the same time, state financial organizations accountable to the government operate in close interconnection with commercial credit enterprises.