The Components of the Financial System_ Finance Tips

The financial system comprises institutions that can be identified or classified in many ways. This can either be by your generic names, for example, Central Bank, Commercial Banks, Merchant banks, Non-Bank financial institutions, the financial market, or by the way they are funded and also by their function, which we will discuss later in this article.

For instance, we have the deposit financed institutions, that's those that obtain funds through deposits, these institutions are; the commercial banks, merchant banks, and savings banks, and also the non-deposit financed institutions, which are those that obtain funds but do not through the deposit, within this group, there are institutions financed by Contractual savings such as insurance companies, pension, and provident funds; investment companies, whose fund come from unit trusts, shares, and bonds, it also comes as government subvention. The current example in Nigeria includes national development banks such as the Nigerian Industrial Development Bank (NIDB), and the Federal Mortgage Bank of Nigeria (FMBN).

                                             photo credit: thebalancecareers.com

There are then the financial markets, which are specialized institutions created for the sale and purchase of bonds. In this group, the money and capital markets, stock booking firms, finance house the stick exchange, and the Nigerian Securities and Exchange Commission. 

However, financial institutions can also be classified or identified by their functions. 

There are:

1. Monetary Financial institutions like the central bank and the commercial banks whose main function is the provision of adequate stock of money for the economy.

2. Liquidity Providing Financial Institutions, for instance, institutions or instruments that provide facilities to convert or dispose of assets into money or near money assets_ time deposits treasury bills, bonds stocks and shares, bank acceptances, commercial bills, and others.

3. Equilibrating Financial Institutions, such as the Central Bank and the Securities and Exchange Commission stand at the apex of the institutions to plug identified holes and fill in the gaps in the financial system.

photo credit: thegef.org


4. Non- Monetary Financial Institutions, such as savings, banks, building societies, and so on, their primary function is to facilitate the transfer of money between economic units.

5. The financial markets incorporate the money and capital markets, the stock exchange, and the stock brokers.

6. Brokerage Financial Institutions, such as stock brokers, and fund managers who link those with surplus funds to lend with those serious about borrowing funds; or those who have stocks and shares for sale with those who need to buy stocks and shares. 

7. Institution that insure against or minimizes risks in business. Examples are the insurance companies, the Nigerian Deposit Insurance Corporation, and the Agricultural Credit.

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