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What is Financial Institutions? – Historical Background and More

What is Financial Institutions? – Historical Background and More

What is Financial Institutions?

Financial institutions are for-profit companies whose activity is providing financial services to the company’s economic agents.

Financial institutions’ services have become so sophisticated that it is often difficult to define their activity from depository and loan (classic banking services) to more modern and sophisticated services such as factoring or investment banking.

It has not stopped reinventing itself. Simply put, a financial institution is a company that provides services to its customers related to their money. Recently, companies are emerging that also perform these tasks. They are known as fintech companies.

Historical Background of Financial Institutions

financial institutions

The history of financial institutions dates back to ancient times. Already at the time of the Greeks, there were moneylenders in charge of these tasks.

In the mercantilist era, storing precious metals from South America created the need for a figure to provide custody services. It made the model of the first private banks.

Therefore, this is considered the gem of financial institutions as we know them today.

What are the Types of Financial Institutions?

financial institutions

1. Bank System

The banking system makes up of all the country’s banking institutions. It makes up of the Bank and the commercial and savings banks.

We Loan with House as Collateral

Commercial banking and savings’ main activity is to collect money from the public on deposit or in another way.

And also, use that money to grant loans in various forms or operations subject to market risks.

2. Non-Bank System

The types of finance that are independent of the banking system. Although they also capture resources from the public, their use varies according to their objectives.

Below are the different institutions that make up this type, as well as their objects.

Popular savings and credit banks. Its purpose is to carry out financing operations, in preference to small and micro-enterprises.

Popular Credit Boxes

Its purpose is to provide banking services to the Provincial Councils and District Councils and their municipal companies.

Rural Boxes

Its goal is to grant preferential financing to entrepreneurs of small and micro-enterprises in the rural productive sector.

Specialized Companies

Its objective is to act as a transfer agent and record operations or transactions in the commercial and financial field. They include surety and guarantee companies, factoring, and fiduciary services.

Financial Leasing Company

Its purpose is the acquisition of movable and immovable property to lease them to third parties.

Financial Companies

Their purpose is to place securities issues, operate with transferable securities, and provide financial advice.

Insurance Companies

And also, its objective is to protect against risks for people and companies.

What is the Role of Financial Institutions?

  • They are organizations whose function is to receive financial capital and direct it towards productive activities.
  • Financial institutions are financial intermediaries (banks, municipal funds, savings, and credit cooperatives) by institutional investors (pension funds and insurance companies).
  • Its function is to provide services as intermediaries in the financial markets.
  • They are answerable for transferring funds from investors to the companies that need those funds. By doing so, they allow the savings to use to facilitate loan funds.

The Function of Financial Institutions

Financial institutions provide services as intermediaries in financial markets.

They are responsible for transferring coffers from investors to companies that need those funds. Financial institutions facilitate the flow of money through the economy, allowing savings to boost loans.

Risks of Financial Institutions

  1. It calls systemic risk when a client cannot meet its financial institution’s obligations due to financial problems.
  2. That there is a kind of contagion between users, and en masse they fail to comply with the agreed payments can shake the financial market.
  3. An altered economy can produce a systemic risk that disrupts banks’ work and modifies their continuous interconnections in the financial market by receiving payments, making them, and making loans, among other activities.
  4. And also, to prevent dangers such as these from threatening economic stability, the government imposes a series of regulations that limit all transactions carried out within a financial organization to maintain its liquidity.
  5. These regulations also prevent risky transactions that could cause an entity to fail, and with it the entire financial market, from business to personal.
  6. An example of this scenario would be that a bank customer stops making deposits or carrying out a massive capital withdrawal.
  7. And also, the systemic risk, when presenting you with an alteration of the financial service, would be evident.
  8. On the contrary, its proper functioning assumes the country’s economic balance, even with the regulations that each government imposes in the search to minimize the imbalance.

Considerations for Clients of Financial Institutions

  1. Given the number of offers in the financial market, the user must handle essential considerations when choosing their savings or loan, among other actions, and their capital stability.
  2. And also, the chosen system’s legality is vital, and the interested party must appear as the owner of the account, service, or insurance they are choosing.
  3. Being wary of low-interest loan offers is a valuable consideration. Therefore, the client must ask for and consume all the information pertinent to the requests.
  4. Reading contracts is an uncommon practice that should not regard since it represents a guarantee when managing a claim with the entity.
  5. Knowing if the debt or commitment acquired can be canceled before the expected time will be of great economic value.
  6. And also, many institutions exempt some payment fees when the client is ahead of the agreed date. Therefore this element is of great importance.


Financial institutions provide strength to the economic system and their diversity, which is increasing, implies the constant updating of the market.

And also, its transactions significantly facilitate the management of our savings and the connections that can establish your investment and growth.

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