What is Financial Institutions?
The global financial system is the network of institutions, both formal and informal, that help to match investors with capital needs. The main actors in this market are commercial banks, investment banks, central banks, insurance companies, pension funds, hedge funds and sovereign wealth funds.
Types of Financial Institutions
Financial institutions can be categorized by their ownership structure: regulated depository institutions (e.g., savings associations), credit unions; unregulated non-depository financial institutions (NDFI) such as finance companies; or other specialized service providers such as payday lenders or money transmitters.
Banks
- Banks are perhaps the most well-known type of financial institution.
- They accept deposits from customers and use that money to lend to other individuals or businesses.
- Banks charge interest on loans, which helps them make a profit while also providing a service to their borrowers.
Insurance Companies
- Insurance companies provide protection against risk.
- When people purchase insurance policies, they pay premiums into a pool of money that the insurer uses to pay claims when accidents or disasters occur.
- Insurance can protect people financially if they suffer an unexpected loss, such as damage to their home or car, or if they become sick or injured and cannot work.
Each type of financial institution has its own advantages and disadvantages depending on what you’re looking for. It’s important to shop around and compare options before making any decisions about where to put your hard-earned money.
Growth of the Financial Institutions
A variety of factors have contributed to the growth of the global financial system over the past few decades.
Technological advances have made it easier for investors and borrowers to connect without going through traditional intermediaries like banking channels—allowing for a more direct flow of capital around the world at lower costs than ever before possible.
One major driver has been deregulation which began in earnest during the 1970s led by US President Jimmy Carter’s administration but really gained traction under Ronald Reagan who championed laissez-faire capitalism unfortunately along with removing many regulations came fraudulent activities like insider trading embezzlement Ponzi schemes all while shadow banking started filling gaps left open by departing regulations.
Technology-led innovation in products and services helps to build new business models and strategies.
International Financial Institutions
The World Bank
The World Bank Group is an international financing institution that offers loans and other assistance to developing countries. It consists of five organizations such as,
- The International Bank for Reconstruction and Development (IBRD)
- The International Development Association (IDA)
- The International Finance Corporation (IFC)
- The Multilateral Investment Guarantee Agency (MIGA)
- The International Centre for Settlement of Investment Disputes (ICSID)
Headquartered in Washington D.C., USA, the World Bank Group has more than 10,000 employees working in over 120 offices worldwide.
The International Monetary Fund (IMF)
The IMF is another global organization headquartered in Washington D.C., the USA that provides economic stability and promotes sustainable growth by offering policy advice and technical assistance to its member countries.
Key features of IMF
- Manage currency exchange rates.
- Helps countries to stabilize economies.
- Technical assistance to member countries.
- Surveillance of monetary and fiscal policies of member countries.
- Credit facilities.
Founded during WWII to manage currency exchange rates between nations, the IMF today also lends money to world economies facing difficulties. As part of the Bretton Woods Agreement, which set forth rules for stabilized currencies after WWII, the US dollar was pegged to gold at $35 per ounce—resulting in the creation of what we now know as the mixed economy. In 2016, the IMF had 189 member countries with a staff of approximately 2,700 people from 116 different nations.
As the world continues to evolve, so will finance and the institutions behind them. There is still much we can do to ensure that these institutions and policies benefit the greater good.