10 Major Types of Financial Institutions and Roles of Financial Institutions in the Economy

This article will explore 10 major types of financial institutions, each with its distinct role and specialized functions. From commercial banks that handle everyday transactions to investment banks that assist large corporations in raising capital, each type of institution contributes uniquely to the stability and growth of the financial system.

Table of Contents

• What are Financial Institutions?
• 10 Major Types of Financial Institutions
• Special Roles of Financial Institutions
• Special Intermediation Roles of Financial Institutions
• Conclusion

Additionally, we’ll examine the essential intermediation services these institutions provide, such as size intermediation, which pools small savings into larger funds; maturity intermediation, which balances short-term deposits with long-term loans; and risk intermediation, which allows for risk-sharing between savers and borrowers.

In a modern economy, financial institutions serve as the lifeblood of economic growth and stability. They act as essential intermediaries, connecting individuals or businesses with surplus funds to those needing capital. This process of financial intermediation is crucial for facilitating investment, enabling economic expansion, and promoting efficient allocation of resources. Understanding the diversity and function of these financial institutions, as well as the sophisticated intermediation services they offer, is key to appreciating their impact on the economy.

What are Financial Institutions?

Financial institutions are organizations that facilitate financial services like saving, borrowing, investing, and managing money. They gather funds from individuals (savers) who have surplus money and distribute them to those (borrowers) who need it, such as companies and government entities. Through this process, financial institutions help create a balanced and efficient economy.

10 Major Types of Financial Institutions

Let’s explore the different types of financial institutions and their unique roles in more detail.

1. Commercial Banks

What are commercial banks?

Commercial banks are financial institutions that offer a variety of financial services to individuals, businesses, and even government entities. They serve as “department stores of finance.” They provide a wide range of services, including savings and checking accounts, loans, and credit facilities. Commercial banks gather deposits from savers and lend those funds to individuals and businesses needing money. Examples include Bank of America, Citibank, and Wells Fargo.

Commercial banks are the most common type of financial institution that we see in our territory.

Key Services Offered by Commercial Banks

• Deposits (Savings and Checking Accounts): Commercial banks offer a secure place for individuals and businesses to store their money. Savers can deposit their funds into savings accounts, earn interest, or use checking accounts for daily transactions. By gathering deposits, banks create a pool of funds that can be used for lending to those who need it.

• Loans and Credit Facilities: Commercial banks provide loans to individuals and businesses for various purposes. For example:
  • Personal Loans: Used for major purchases, like cars or education.
  • Business Loans: Help companies grow, buy equipment, or manage operational expenses.
  • Mortgage Loans: Allow individuals to buy homes, stimulating the real estate market.
  • Credit Lines and Credit Cards: Provide revolving credit that can be used for ongoing expenses, often crucial for small businesses and consumers.

• Payment and Transaction Services: Commercial banks offer payment processing services like check clearing, electronic transfers, and digital payments, facilitating transactions within the economy. They also provide debit cards and online banking, making it easier for customers to manage their finances.

2. Investment Banks

What are Investment Banks?

Investment banks are financial institutions that help big companies and governments get the money they need to grow or fund projects. They do this by helping these organizations sell stocks (shares of ownership) or bonds (loans from investors).

Key Services Offered by Investment Banks

• Raising Capital (Issuing Securities): One of the primary functions of investment banks is to help companies and governments raise large sums of money, usually through securities like stocks and bonds. When a company wants to raise money for expansion or new projects, it can issue shares (stocks) or debt (bonds).
  
  Investment banks design these securities to make them attractive to potential investors, ensuring the company gets the funds it needs.
  
  For example, if a technology company wants to raise capital to launch a new product line, the investment bank will help them structure and sell shares or bonds, making sure they are appealing to investors.

• Underwriting: Investment banks act as underwriters for the securities they help issue. This means they often guarantee the company that it will raise a certain amount of capital.
  
  To do this, the investment bank might buy the entire offering of shares or bonds from the company and then sell them to the public. This guarantees that the company gets the money it needs, even if the investment bank has to take on some risk.
  
  So by underwriting securities, investment banks act as a bridge between the company (issuer) and the investors, ensuring the fundraising process is successful.

• Initial Public Offerings (IPOs): When a private company wants to go public and offer shares to the public for the first time, it often works with an investment bank to launch an Initial Public Offering (IPO). This is a complex process that requires expertise to ensure the company is valued correctly and that there is a strong demand for the shares.
  
  The investment bank will help the company with regulatory requirements, determine the right price for the shares, and promote the IPO to potential investors.
  
  For example, when a tech startup decides to go public, it will partner with an investment bank to manage the IPO process, making sure the offering attracts enough investors and raises the needed capital.

• Mergers and Acquisitions (M&A): Investment banks play a significant role in mergers and acquisitions by advising companies on buying, merging with, or selling other companies. This involves evaluating the financial health of the target company, determining a fair price, and helping to negotiate terms.
  
  M&A transactions are complex and often involve large amounts of money, so companies rely on the expertise of investment banks to ensure the process is smooth, legally sound, and beneficial.
  
  For instance, if a manufacturing company wants to acquire a competitor, an investment bank will help it assess the target company’s value, negotiate terms, and finalize the deal.

• Financial Advisory Services: Investment banks provide strategic financial advice to companies and governments. This could include advising on optimal capital structures (the balance between debt and equity), risk management strategies, or major business decisions.
  
  Their insights help companies make informed financial decisions, navigate economic challenges, and achieve their business goals.
  
  For example, a company struggling with high debt might turn to an investment bank for advice on restructuring its finances to reduce costs and improve stability.

• Sales and Trading: Some investment banks also have divisions that handle sales and trading of securities for institutional clients (such as pension funds or insurance companies) and wealthy individuals.
  
  They buy and sell stocks, bonds, and other financial instruments on behalf of their clients, helping them manage large investments and improve their returns.
  
  For instance, if an investment fund wants to invest in a specific sector, an investment bank’s trading desk can execute these trades on its behalf, ensuring efficient buying and selling at the best prices.

• Research: Investment banks often have research departments that analyze industries, companies, and market trends. This research is valuable to institutional clients who make large-scale investment decisions.
  
  The research division provides insights, forecasts, and recommendations on stocks, bonds, and other securities, helping clients make informed investment choices.
  
  For example, an investment bank might publish an in-depth report on the technology sector, predicting growth areas and highlighting potential investment opportunities for clients.

3. Credit Unions

What are Credit Unions?

Credit unions are member-owned, not-for-profit financial cooperatives. This means they are owned and operated by the people who use their services (the members), rather than external shareholders. Because they are not focused on making profits, credit unions exist to serve their members by providing affordable financial services.

Key Characteristics of Credit Unions

• Member-Owned: When you join a credit union, you become both a customer and a part-owner. Each member has a say in the way the credit union operates, often with the ability to vote on important decisions, such as electing the board of directors.
• Common Bond: Credit unions typically serve a specific group of people who share a common bond. This bond could be based on employment (e.g., employees of the same company), membership in an organization, or even geographic location. For example, some credit unions serve only teachers, military personnel, or residents of a particular area.
• Profits Returned to Members: Since credit unions are not-for-profit, any surplus earnings they generate are returned to their members rather than shareholders. This is usually done in the form of:
  • Lower interest rates on loans (such as personal loans, car loans, and mortgages)
  • Higher interest rates on savings accounts
  • Lower fees for financial services
• Community Focus: Credit unions are often more community-oriented and may prioritize the financial well-being of their members and local communities. They tend to offer more personalized service and may provide financial education programs to help members manage their finances better.

Example of How a Credit Union Works

Let’s say you work for a large hospital and join a credit union specifically for healthcare workers. When you deposit money into your savings account, the credit union uses those funds to make loans to other members, such as a nurse who wants to buy a car or a doctor who needs a home loan. Because the credit union is owned by its members (including you), it doesn’t aim to make huge profits but instead provides affordable loans and good savings rates.

4. Pension Funds

What are Pension Funds?

Pension funds are financial plans designed to help employees save for retirement. They are typically sponsored by employers, government agencies, or unions and serve as a benefit for workers, ensuring they have a steady income after they retire. In simple terms, a pension fund is like a pool of money that is built up over a person’s working life and is paid out in installments after retirement.

How Pension Funds Work

• Contributions from Employers and Employees: Pension funds are built through regular contributions from employees and, in most cases, matching contributions from employers. For example, each month, a portion of an employee’s salary is contributed to the pension fund, and the employer may also add a percentage to support the employee’s retirement savings.
• Investment of Funds: The money collected in a pension fund is not left idle; it’s invested in various assets to grow over time. These investments can include:
  • Stocks: Shares of companies, which offer potential growth but come with risks.
  • Bonds: Loans to companies or governments that provide steady interest payments and are generally safer than stocks.
  • Real Estate: Pension funds may invest in property, which can provide long-term returns.
  • Other Assets: Some funds diversify further by investing in infrastructure, private equity, or alternative assets like commodities.
• Growth Over Time: Since employees typically contribute to pension funds over many years, the investments have time to grow. Through a combination of contributions and investment returns, pension funds aim to build a substantial amount of money that can support the employee during retirement.
• Payments to Retirees: When an employee retires, the pension fund starts to pay them a regular income. These payments are usually fixed or based on the employee’s salary and years of service, providing retirees with a steady income to support their living expenses after they stop working.

Types of Pension Funds

There are two main types of pension funds:

• Defined Benefit Plans: In this type of plan, the retiree receives a guaranteed monthly payment, typically based on their final salary and years of service. The employer is responsible for ensuring there is enough money in the fund to make these payments, regardless of how the investments perform.
• Defined Contribution Plans: In this type of plan, both the employee and employer contribute to the pension fund, but the retirement income depends on the fund’s investment performance. The employee bears the investment risk, meaning the value of their retirement savings can vary based on market conditions.

Example of How Pension Funds Operate

Imagine you work for a large corporation that offers a defined contribution pension plan. Each month, a percentage of your salary goes into the pension fund, and your employer matches part of that contribution. The fund managers then invest this combined contribution in a diversified portfolio of stocks, bonds, and real estate. Over time, these investments grow, and by the time you retire, your pension fund has built a substantial amount of money. Upon retirement, you begin receiving monthly payments from the fund to support your living expenses.

5. Insurance Companies

What are Insurance Companies?

Insurance companies are financial institutions that help individuals and businesses manage financial risks by providing protection against unexpected events, like accidents, illnesses, property damage, or death. To access this protection, individuals and businesses pay a regular fee, called a premium, to the insurance company. In return, the company promises to provide financial assistance or cover costs if a specified event, known as an “insured event,” occurs.

For example, a person might buy health insurance to cover medical bills if they become ill, or a company might buy property insurance to cover damage to its building. Insurance companies offer a wide range of insurance types, including life, health, auto, property, and business insurance.

How Insurance Companies Work

• Collecting Premiums: Insurance companies receive regular payments, or premiums, from policyholders (individuals or businesses). These premiums are based on the type of insurance, the amount of coverage, and the risk level of the insured event. For example, a life insurance policy might have a monthly premium, while a property insurance policy might require an annual payment.
• Pooling Risks: Insurance companies work by pooling the premiums of many policyholders into a single fund. Because only a portion of policyholders will experience an insured event at any given time, this fund allows the insurance company to cover the claims of those who need it without running out of money. This pooling of risk spreads out the financial impact of unexpected events across a large group.
• Investing Premiums: To ensure they can cover future claims and stay financially stable, insurance companies invest the premiums they collect. They typically invest in safe, income-generating assets, like stocks, bonds, and real estate. These investments grow over time and provide additional income, helping the insurance company pay out claims and continue offering coverage.
• Paying Claims: When a policyholder experiences an insured event, such as a car accident or a medical emergency, they file a claim with the insurance company. If the claim is approved, the insurance company pays for the expenses, either directly or by reimbursing the policyholder. These payments help individuals and businesses recover from financial losses, restoring their financial security.

Certainly! Let’s take a closer look at how insurance companies operate, how they provide financial protection, and the important role they play in the economy.

Types of Insurance

Insurance companies provide different types of coverage to address various needs, including:

• Life Insurance: Pays a benefit to the family or beneficiaries of the policyholder upon their death, helping them cope with financial expenses.
• Health Insurance: Covers medical expenses, including hospital stays, surgeries, and doctor visits, reducing the cost burden of healthcare.
• Auto Insurance: Covers damages to vehicles and provides liability protection if the policyholder is at fault in an accident.
• Property Insurance: Protects buildings, homes, and contents from damage or loss due to events like fire, theft, or natural disasters.
• Business Insurance: Covers businesses against risks, such as liability, property damage, or business interruption.

6. Mutual Funds

Mutual funds are investment vehicles that gather money from multiple investors to create a large pool of funds. This pooled money is then used to buy a diversified portfolio of stocks, bonds, or other types of securities. By combining resources, mutual funds make it easier for individual investors—who may have limited funds—to access a wide variety of investments without having to buy each one individually.

For example, instead of an investor needing to buy shares in 50 different companies to diversify, they can simply invest in a mutual fund, which already holds a broad selection of stocks, bonds, or other assets. This diversification helps to spread out risk, as the performance of one asset won’t have an outsized impact on the investor’s overall return.

How Mutual Funds Work

• Pooling of Investor Funds: Many individual investors contribute money to the mutual fund. Each investor’s money is combined into one large pool of funds managed by professional fund managers. Investors own “shares” in the mutual fund, representing their portion of the fund’s assets.

• Professional Management: The mutual fund is managed by professional fund managers who make investment decisions on behalf of the investors. These managers use their expertise to select and balance the assets in the fund’s portfolio, aiming to achieve the best returns while managing risk.

• Diversification: Mutual funds invest in a mix of assets, such as stocks, bonds, and sometimes other securities. This mix provides diversification, which reduces the risk associated with investing in a single asset. If one investment performs poorly, it is offset by others that may perform well.

Types of Mutual Funds:

• Actively Managed Funds: In actively managed funds, fund managers carefully select investments they believe will outperform the market. They analyze individual stocks, bonds, and market trends to try to achieve high returns. Because of the extensive research and active decision-making, these funds typically have higher fees.

• Passively Managed Funds (Index Funds): Passively managed funds aim to replicate the performance of a specific market index (like the S&P 500). Instead of choosing individual investments, they hold a basket of securities that mirror the index. These funds are generally cheaper to manage and have lower fees because there’s less active decision-making involved.

7. Exchange-traded funds (ETFs)

What are Exchange-traded funds (ETFs)?

Exchange-traded funds, or ETFs, are investment funds similar to mutual funds, but they have some unique features. Like mutual funds, ETFs pool money from many investors to invest in a collection, or “basket,” of assets, such as stocks, bonds, or commodities. 

However, ETFs are traded on stock exchanges, which makes them easy to buy and sell throughout the trading day, much like individual stocks. This feature gives ETFs higher liquidity than most mutual funds, as investors can trade them at any time during market hours.

How Exchange-traded Funds (ETFs) Work

• Tracking an Index or Sector: Most ETFs are created to track the performance of a particular index, such as the S&P 500, the NASDAQ-100, or other market sectors. This means the ETF holds a collection of stocks or assets that mirrors the index, so its performance closely follows the overall performance of that index.
• Trading on Exchanges: ETFs are traded on stock exchanges, meaning investors can buy or sell ETF shares at any point during regular trading hours. This trading flexibility makes ETFs more accessible than mutual funds, which are usually traded only at the end of the day.
• Liquidity and Pricing: Because ETFs are traded on exchanges, their prices fluctuate throughout the day, just like stocks. This real-time pricing allows investors to take advantage of price changes within the trading day, which can be helpful for those who want to actively manage their investments.
• Lower Fees: Many ETFs have lower fees compared to mutual funds, especially passively managed ETFs that simply track an index without requiring frequent adjustments. The cost savings make ETFs an affordable investment option for a wide range of investors.

Example of How ETFs Work

Let’s say an individual wants to invest in technology stocks but doesn’t have the resources to buy shares of each major tech company individually. Instead, they can purchase shares of a technology-focused ETF, which holds a mix of technology stocks like Apple, Microsoft, and Google. 

This ETF gives the investor exposure to the entire technology sector without requiring them to buy each stock separately. Throughout the trading day, the investor can buy or sell shares of the ETF as its price fluctuates, giving them flexibility and instant diversification in the tech sector.

Types of Exchange-traded Funds (ETFs)

ETFs come in a variety of types, allowing investors to choose ones that align with their goals. For example:

• Broad Market ETFs: Track the entire stock market or major indexes, such as the S&P 500.
• Sector or Industry ETFs: Focus on specific sectors like technology, healthcare, or energy.
• International ETFs: Track stocks from global markets, enabling investors to diversify geographically.
• Commodity ETFs: Invest in commodities like gold, silver, or oil.
• Thematic ETFs: Focus on specific themes, like green energy or innovation, to capture emerging trends.

8. Brokerage Firms

Brokerage firms are companies that help people and institutions buy and sell investments, like stocks and bonds. They act as the “middlemen” in financial markets, providing the platforms and services needed for trading. Some brokerage firms offer full-service options with financial advice, while others focus on low-cost trading for investors who prefer to manage their investments.

How do brokerage firms work?

Brokerage firms work by connecting buyers and sellers in the financial markets, making it easy for people to invest in assets like stocks, bonds, and ETFs. Here’s a simple breakdown of how they operate:

• Providing Trading Platforms: Brokerage firms offer online platforms or physical locations where investors can place orders to buy or sell securities. Through these platforms, investors can see real-time prices, track market movements, and execute trades.

• Order Execution: When an investor places an order (like buying a stock), the brokerage firm finds a seller at the current market price and completes the transaction. If an investor wants to sell, the broker finds a buyer, ensuring the order is processed efficiently.

Different Service Levels of brokerage firms:

• Full-Service Brokers: Offer personalized financial advice, research, and portfolio management, which is helpful for investors seeking guidance.

• Discount Brokers: Focus on low-cost trading with minimal services, allowing investors to manage trades independently at a lower cost.

• Fees and Commissions: Brokerage firms earn money by charging fees or commissions on each trade, or by charging account fees for additional services. Some discount brokers also offer commission-free trades but make money from other services, like lending or premium accounts.

9. Hedge Funds

What are hedge funds?

Hedge funds are specialized investment funds that use high-risk strategies to try to achieve large returns. They are designed primarily for wealthy individuals and institutional investors, such as pension funds, due to their complex strategies and higher minimum investment requirements.

Unlike mutual funds, hedge funds have fewer regulatory restrictions, which allows them to pursue a wide range of investments and strategies, often with higher risk.

How Hedge Funds Work

• Investment Strategies: Hedge funds use a variety of aggressive and complex strategies, such as leveraging (borrowing money to amplify potential returns) and derivatives (financial contracts that derive their value from an underlying asset, like options and futures). These strategies allow hedge funds to take advantage of market changes and attempt to make money regardless of market direction.

• Hedging Risks: Although hedge funds are known for taking high risks, the term “hedge” refers to techniques they use to reduce certain risks. For example, a hedge fund manager might bet on a stock going up while also using options to protect against losses if the stock falls. This approach is meant to limit downside risk, though not all hedge funds actually “hedge” in this way.

• Flexibility in Investments: Hedge funds can invest in almost any asset class, including stocks, bonds, real estate, currencies, commodities, and even art. This flexibility allows them to pursue opportunities that are outside the reach of most traditional funds.

• High Minimum Investments: Due to their complex strategies and high risk, hedge funds typically require large minimum investments, often $1 million or more. This limits access to wealthy individuals and institutions with the capacity to absorb potential losses.

Example of Hedge Fund Activity

Suppose a hedge fund manager expects tech stocks to fall but sees potential for growth in energy stocks. The hedge fund might short-sell tech stocks (betting they’ll drop in value) and use the profits to buy energy stocks. If tech stocks fall and energy stocks rise, the hedge fund can make a significant profit from both moves. This complex approach uses advanced strategies to manage risk and pursue returns.

10. Private Equity Firms

Private equity firms are investment firms that buy entire companies, usually with the goal of improving and growing those businesses to sell them later at a profit. They typically target undervalued companies or companies with potential for improvement. By investing in these companies, private equity firms aim to increase their value through better management, strategic changes, and financial restructuring.

Private equity firms often use a combination of investor funds and borrowed money (leverage) to acquire companies. This leverage amplifies potential profits, but it also adds risk. The goal is to eventually sell the improved business at a higher price than what was initially paid, generating returns for the firm and its investors.

How Private Equity Firms Work

• Raising Funds: Private equity firms create “funds” that pool money from investors, such as pension funds, wealthy individuals, and institutional investors. These investors commit their capital for a set period, typically 7–10 years, during which the private equity firm manages the investments.

• Acquiring Companies: Using the pooled investor money and borrowed funds, private equity firms purchase entire companies or a majority stake in them. They often target businesses with untapped potential, operational inefficiencies, or growth opportunities.

• Improving Operations: After acquiring a company, private equity firms work to increase its value. They may bring in new management, streamline operations, reduce costs, or expand the business into new markets. The goal is to make the company more profitable and competitive.

• Selling or Exiting: Once the private equity firm has improved the business and increased its value, it seeks to “exit” the investment. This exit typically happens through selling the company to another business, taking it public through an IPO, or selling it to another private equity firm. The firm then distributes the profits to its investors.

Example of Private Equity Activity

Imagine a private equity firm that identifies a mid-sized retail company that has strong potential but is struggling with inefficient operations and high debt. The firm acquires the company, brings in new management, and implements better inventory management systems and marketing strategies.

Over the next few years, the company becomes more profitable and grows its customer base. The private equity firm then sells the company at a much higher value than it was purchased for, sharing the profits with its investors.

Generally, these are the 10 major types of Financial institutions you must know about. Now, let’s explore the roles financial institutions play in improving and stabilizing the economic condition of a country.

Special Roles of Financial Institutions

Beyond these specific types, financial institutions contribute to the economy in various unique ways:

• Information Costs: Financial institutions gather and evaluate data on potential borrowers, making it easier for individual savers and investors to make informed decisions. This reduces uncertainty and the costs associated with poor lending choices. As a result, more capital is available for productive investment, boosting overall economic growth and stability.

• Liquidity and Price Risk: By offering liquid investments, financial institutions allow individuals and businesses to have quick access to funds without significant loss. This flexibility encourages more people to save and invest, knowing they can access their money when needed. It supports business operations and consumer spending, which fuels economic expansion.

• Payment Services: Financial institutions play a crucial role in processing payments, from check clearing to electronic transfers. These services enable efficient trade and commerce by allowing funds to move seamlessly between parties. This facilitates business activities and consumer transactions, promoting economic activity and growth.

• Credit Allocation: TBanks and similar institutions allocate funds to specific economic sectors such as manufacturing, agriculture, or real estate. This targeted credit distribution ensures that key areas of the economy receive the necessary financial support to grow and create jobs, contributing to balanced and sustained economic development.

• Intergenerational Wealth Transfer: Life insurance companies and pension funds help individuals plan for the transfer of wealth to future generations. This role promotes long-term financial planning and stability, ensuring that wealth supports economic activity over time. It also helps maintain consumer confidence and economic security.

• Money Supply Transformation: Financial institutions collaborate with central banks to manage the money supply. By influencing the availability of money through lending practices and reserves, they help control inflation and interest rates. Effective money supply management is crucial for economic stability, as it affects business investment, consumer spending, and economic growth overall.

Each of these roles ensures that financial systems support sustainable development, efficient capital allocation, and overall economic health.

Special Intermediation Roles of Financial Institutions

Financial institutions not only connect savers and borrowers but also help manage differences in the size, timing, risk, and information needs of funds. Here are the four main intermediation roles they play:

1. Size Intermediation

Individual savers often have small amounts of money to invest, while borrowers, such as businesses, may need large sums. Financial institutions gather funds from numerous savers, pooling them into a larger amount that meets borrowers’ needs. For example, a bank can combine small deposits from many account holders to make a large loan to a company. This process ensures that borrowers can access the funds they need while allowing savers to invest effectively.

2. Maturity Intermediation

Savers may prefer to keep their money accessible in the short term, while borrowers often need long-term funds. Financial institutions manage this mismatch by pooling short-term funds from savers to provide long-term loans to borrowers. For instance, a bank might use funds from short-term deposits to issue long-term mortgages. This way, borrowers receive the timeframes they need, and savers retain access to their funds.

3. Risk Intermediation

Savers generally seek low-risk investments, while borrowers may need funds for higher-risk projects. Financial institutions handle this mismatch by accepting low-risk deposits from savers and lending them at higher risk levels. Banks, for example, offer depositors a guaranteed return while using those deposits to fund potentially riskier business loans. The bank absorbs the risk, making it easier for savers to invest safely.

4. Information Intermediation

Many savers lack the expertise to assess the creditworthiness of borrowers. Financial institutions act as informed intermediaries, gathering and analyzing information on borrowers. They evaluate credit histories, assess risk levels, and monitor loans. This process enables savers to invest confidently, knowing that financial institutions have vetted the borrowers. For example, a bank performs credit checks before approving a loan, helping to protect savers whose deposits support the loan.

Conclusion

Financial institutions are essential for maintaining a healthy and functioning economy. They connect savers and borrowers, manage risks, provide essential services, and ensure that funds are allocated efficiently. Through their intermediation roles, they manage differences in size, timing, risk, and information, making the flow of funds in the economy smoother and more secure. Each type of financial institution contributes uniquely to economic stability and growth, enabling both individuals and businesses to achieve their financial goals while supporting a more resilient and prosperous economy.