Financial entity

What is a financial institution?

A financial institution is defined as a group that is dedicated to offering financial services. It carries out banking activities for financial intermediation, insurance, investment in securities and others.

Financial entities can provide services to natural or legal persons and their earnings are based on commissions, interests or fees that they charge for the activities they carry out.

For a financial entity to take place, there must be, in the first instance, a financial system in which it can act, intermediating among those who have units of saving (lenders) and those who have units of consumption (borrowers).

Characteristics of a financial institution

The main characteristics of a financial institution are the following:

• Financial entities are usually strictly regulatedThis is due to the sensitivity of its functions and the problems that poor management of financial entities can generate for a country (bankruptcy, for example).
• Exists little differentiation. The financial services offered by entities are usually very similar to each other, therefore they compete in the interest rate and the commissions they charge (although these are also usually regulated).
• They bring great value to the economy. The intermediation activity solves a great problem of inefficiency in the markets, by achieving meet the demand of those who require financing.

Functions of a financial institution

Financial entities have passive and active functions.

Passive

• Receive money deposit: people can deposit their money in a bank account, which can be savings or checking.
• Issue and place issued shares to increase capital: the issuance of shares is a mechanism that companies use to finance themselves. Said issuance is carried out through financial entities, which can also issue their own shares.
• Issue and place mortgage bonds and debt with the objective of covering financing needs.
• They can get credits with the Central Bank of the country or with other financial entities of the country or abroad.

Active

• Grant credits: When granting the financing, they charge an interest rate that represents their profit.
• Make turns: carry out operations with other financial entities.
• Maintain operations of credit or debit cards of the people who have accounts in the entity.
• Perform operations of currency exchange: they can buy or sell one currency in exchange for another (Forex).
• Perform operations with financial assets: they can buy securities in the stock market, gold, silver or precious metals (generally they are securities backed in these securities).

Types of financial entities

Financial entities can be credit or investment services and insurance activities.

Credit institutions

Credit institutions are those capable of receive funds from those who have excess savings and loan them to those who have a deficit of those funds, with the promise of repaying them to those who are lending the money.

Credit institutions carry out activities such as granting loans or mortgages, providing payment services, debit or credit cards or checks, advising companies on capital structure, mergers or acquisitions, participating in the issuance of securities, renting safes, etc. .

Their services are very varied and are usually based on the financial intermediation. Therefore, financial credit institutions are those that intervene in the market with the objective of match deficits with surpluses, obtaining a profit for that intermediation.

Investment services entities and insurers

These entities have activities that are not related to credit activity, that is, they are not in charge of lending money. Its function is provide services, such as creating a pension fund for a person or offering insurance policies to individuals or companies, securities dealers or brokerage firms.

Examples of financial entities

An example of financial credit institutions are the banks. These take deposits from people who have a saving surplus and lend it to people who need financing. The condition is that the bank pays the lender his money and makes a profit from this intermediation.

The savings banks, the credit unions and the electronic money institutions They are also an example of financial credit institutions.

On the other hand, an example of a non-credit financial institution is a brokerage company. This acts as an intermediary for the purchase and sale of securities; however, they do not provide financing for the purchase of assets.

The service of these companies is based on connecting those who need to sell with those who need to buy a security, and for that transaction they charge a commission on the amount of the operation.