In an economy, some people have extra money they do not need to spend immediately (surplus units), while others need money to start businesses or buy homes but do not have enough (deficit units).
A financial institution is an organization or body that acts as an intermediary (a go-between) between these savers and borrowers. They collect funds from those who have surplus money and lend it to those who need it for productive purposes.
Financial institutions are broadly classified into two main groups:
Understanding the differences between these two types of institutions is crucial for understanding how money flows through our economy.
| Feature | Banking Financial Institutions | Non-Banking Financial Institutions |
|---|---|---|
| Primary Definition | Institutions that accept deposits and create credit. | Institutions that offer specific financial services but do not accept demand deposits. |
| Demand Deposits | They accept demand deposits (withdrawable by cheque or ATM). | They do not accept demand deposits. |
| Credit Creation | They can create credit through the fractional reserve system. | They cannot create credit; they only mobilize existing savings. |
| Cheque Clearing | They are part of the clearinghouse system (you can cash their cheques). | They are not part of the clearinghouse system. |
| Examples | Central Bank, Commercial Banks (e.g., GTBank, Zenith Bank), Merchant Banks. | Insurance Companies, Pension Fund Administrators (PFAs), Traditional Thrift Societies (Esusu/Ajo). |
