Importance of Financial Institution

Topics: Bank, Financial services, Investment Pages: 2 (639 words) Published: June 5, 2013

Nature and Role of Financial Institutions in the Economy

1.   Nature of financial institutions
Financial institutions are the organizations which perform the essential functions of channeling funds from those with surplus funds (suppliers of funds) to those with shortages of funds (user of funds).Financial institutions are active in today’s global markets include commercial banks, insurance companies credit unions, finance companies, savings and loan associations, saving banks, pension funds, mutual funds, and similar organization. Their fundamental role in the financial system is to serve both ultimate lenders and borrowers but in a much more complete way than brokers and dealers do. Financial institutions issue securities of their own-often called secondary securities to ultimate lenders and at the same time primary securities from borrowers. The secondary securities issued by financial intermediaries include such familiar financial intermediaries include such familiar financial instruments as checking and savings accounts, life insurance policies, annuities and shares in mutual fund. For the most part, these securities share several common characteristics. They generally carry low risk of default.

Financial institutions are accept primary securities from those who need credit and in doing so, take on financial assets that many savers, especially those with limited funds and limited knowledge of the market, would find unacceptable.

Money lending in one form or the other has evolved along with the history of the mankind. Even in the ancient times there are references to the moneylenders. Shakespeare also referred to ‘Shylocks’ who made unreasonable demands in case the loans were not repaid in time along with interest. Indian history is also replete with the instances referring to indigenous money lenders, Sahukars and Zamindars involved in the business of money lending by mortgaging the landed...
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