Financial institutions: have a very important role in the economy as they help in the flow of funds, acting as financial intermediaries.
Banks, credit unions, insurance companies, investment houses, and other similar institutions are necessary for a sound economy. They fulfil several important roles that ensure money circulates to and from households and businesses.
Banks are among the most crucial financial service providers. They take money from other customers and then lend it out to other customers that require it for their own use. This makes it possible for the capital to get to those who require it for expansion of businesses, for purchase of essential items such as homes and cars, and for expenditure. Banks and other similar institutions also offer checking and saving accounts, as well as all forms of credit.
CU’s are member-oriented financial institutions where members can deposit, withdraw, give checks, and borrow at reasonable and competitive interest rates. Credit unions combine funds to protect them and offer members low rates of interest on loans and other services. This converges to the aspect of member value whereby credit unions set high rates of interest in deposits and low rates of interest on loans as compared to large commercial banks.
Insurance firms are also very important in the economy as they provide a cover whereby individuals and companies can limit their losses in instances such as an accident, the effect of natural disasters, injuries or diseases. Insurance assists in increasing the level of confidence of people, for instance in taking various business risks and big activities in life. The insurance business is mainly funded through the pool of money collected from policyholders in the form of premiums, which are invested with the aim of generating a return and profit for the insurance company.
Last but not the least; investment banks, Brokers and Asset management companies mobilize funds raised from investors towards securities such as stocks and bonds which provide businesses with capital they need for expansion, employment generation and thereby enhance economic activity. The efficiency and innovation of any financial markets are highly dependent on the proper running of the markets.
It is an intricate web of institutions that facilitate the circulation of money and credit across the economy for business, employment, investment, and profit making. It means that they work according to certain rules and have to be very careful to supply credit, investment offers, risk management, and other significant financial services. The financial sector, although not stagnant, adapts to technological advancements of the modern era as it has always done – driving economic growth.