Financial Institution

A financial institution is a banking or non-banking institution established under the certain act to contribute for the economic development by collecting the funds and investing in various productive sectors. It acts as a mediator between savers and users of money. It collects funds from individuals and organization by offering various deposits schemes and invests it into various profitable sectors.

Types of Financial Institutions:

Financial institutions can be classified into banking and non-banking institutions. They are as follows:

1. Bank
2. Insurance Company
3. Employees’ Provident Fund
4. Citizen Investment Trust
5. Financial Cooperative Society

Bank

The word bank is derived from the Italian word ‘Banco’ which means a place for keeping, lending and exchanging money. The bank is a financial institution that accepts deposits from individual, organization and pubilc and creates credit. It allows interest on the deposits made and charges interest on the loans granted. It is also known as trader of money as it accepts deposits and grants loans. Bank can be regarded as the wheel of the business. It is the manufacturer as well as a trader of money. It collects spare money. Providers’ security invests into productive sectors and forms additional capital. It promotes industrial, agricultural as well as commercial sectors of the economy. It is the signal of economic prosperity and civilized society. It plays the role of agent, which performs all monetary transactions on behalf of its clients. It is the connecting link between business houses, which helps in settling accounts. It is a means for promoting foreign trade.

The following are the main definitions of the bank: -

“Banks are financial institutions that fund in the form of deposits repayable on demand or in short notice.” – World Bank

“Bank is an institution which collects money from those who have it to spare and who are saving it out of their income and lends this money out to those who require it.” – Crowther

“Bank refers to a corporate body which has been established and got permission to perform financial transactions.” – Bank and Financial Institute Ordinance 2060

Importance of Bank

It plays an important role in the economic development of the country by performing various functions. The main importance of the bank can be highlighted as follows: -

1. Capital formation
   The bank accepts deposits of spare money from its customers. The deposits are utilized for formation of capital in the productive sectors like industry, trade and service areas of the country.
   
   
2. Granting loan
   The bank grants loan to individual as well as an organization against the security placed. It grants the loan in productive sectors like industry, trade and service areas, which enhances the economic development of the country.
   
   
3. Encouraging saving
   The bank provides full security for the money deposited and allows interest on such deposits. It thus, encourages people to save as much as possible which supports capital formation.
   
   
4. Issuing notes
   The bank issues coins and paper notes which help for exchanging goods and services. Such coins and notes make easier for measuring the value of goods and services.
   
   
5. Exchanging foreign currencies
   The bank exchanges foreign currency as per the direction of the central bank. It fulfills the requirement of foreign currencies, which promotes foreign trade.
   
   
6. Promoting trade and industry
   The bank provides different types of financial as well as technical services to the trader and manufacturer, which encourage and improve the quality of industry and trade. It supports the development and expansion of industrial and trading activities.
   
   
7. Assisting the government
   The bank provides necessary financial data and information to the government, which facilitate for preparing monetary, tax and fiscal policies of the country.

Types of Bank

There are different types of banks emerged in the banking sectors specializing the different functional areas like industrial, commercial, agricultural and rural development. The following are the different types of bank: -

1. Central Bank
2. Commercial Bank
3. Development Bank