What Is The Role Of The Financial Institution In An Economy?

The Financial Institution

First off, we need to understand what a financial institution is. A financial institution is basically an establishment that conducts financial transactions such as investments, loans and deposits.

There are five main types of financial institutions.

1.Commercial banks

2. Investment Banks

3. Insurance Company

4. Brokerage

5. Investment Company

You can see the definitions for all of them here.

The primary role of financial institutions is to provide liquidity to the economy and permit a higher level of economic activity than would otherwise be possible.

According to the Brookings Institute, banks accomplish this in three main ways: offering credit, managing markets and pooling risk among consumers.

If you are familiar with GDP, the investment portion is heavily influenced by financial institutions, as they facilitate how much people save and invest in an economy, which is an ingredient for economic growth.

Without financial institutions, people wouldn’t be able to take advantage of rising and falling interest rates and there would be no saving of money, other than the stacks you stuff under your mattress.

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This piece was originally published on Globalmillennial.org