By Financial institutions are one of the main pillars of a country’s economic system. There are two main types of financial institutions: banking and non-banking financial institutions.
Although both play important roles in the economy, there are significant differences between them.
This article will provide an overview of these differences, along with explanations of what constitutes banking and non-banking financial institutions. Here is more information on the subject.
Differences in Definitions
The first significant difference lies in the definitions of the two types of institutions. Many people know that they are different entities. Here are the general differences in their definitions:
Definition of Banking Financial Institutions
A banking financial institution is a financial entity that acts as an intermediary in financial activities between those with excess funds and those in need of funds.
Banks play a vital role in a country’s economy by providing various financial services such as loans, deposits, investments, and fund transfers. Banks are also responsible for maintaining financial system stability and offering protection to their customers.
Definition of Non-Banking Financial Institutions
In contrast, a non-banking financial institution is a financial entity that does not have the license to accept deposits from the public and does not have the authority to create money.
Non-banking financial institutions typically operate in other financial sectors such as insurance, capital markets, and financing companies. Although they do not perform the same functions as banks, non-banking financial institutions also play an important role in supporting economic activities and providing financial services to the public.
Differences in Legal Status
Banking financial institutions are regulated by law and have operational licenses from the country’s financial authorities. In contrast, non-banking financial institutions do not have operational licenses from the country’s financial authorities and are usually regulated by more lenient laws.
Essentially, both banking and non-banking financial institutions have significant roles in a country’s economy. They complement each other in providing financial services to the public and supporting economic activities.
Therefore, it is important for these two types of financial institutions to cooperate and comply with applicable regulations to maintain financial system stability and protect customers.
Differences in Fund Acceptance
Banks accept funds from the public in the form of deposits and savings, which are then used to provide loans to customers. Non-banking financial institutions do not accept deposits from the public; their funding sources typically come from investors or other parties.
Main Functions of Banking and Non-Banking Financial Institutions
Banks primarily function as intermediaries, collecting funds from the public and providing credit to customers.
Non-banking financial institutions provide various financial products and services but do not engage in deposit-taking activities.
The main difference between banking and non-banking financial institutions lies in the types of financial services they provide and the regulations governing their activities.
Banks are regulated by the central bank and must comply with stringent regulations to maintain financial system stability, whereas non-banking financial institutions are regulated by different financial authorities depending on the financial services they offer.
Differences in Regulation
Banks are regulated by national financial authorities and must adhere to strict regulations in their operations. Non-banking financial institutions have more flexible regulations and are not tightly controlled by national financial authorities.
Therefore, non-banking financial institutions have their own jurisdiction for setting internal rules.
Service Coverage
Banks generally offer a wider range of services, including conventional and digital banking services. As a result, their services are easily found and visible in public areas.
Non-banking financial institutions usually focus on specific financial services, such as financing companies, insurance, and capital markets. Therefore, these institutions are not as easily found in general public areas but rather have specific locations.
Differences in Risk
Banks have higher risks because their main activities involve managing public funds. Non-banking financial institutions have risks that are more focused on the specific financial services they provide. Customers should be cautious in choosing the most appropriate services for their needs.
Differences in Customer Protection
Banks are generally required to offer customer protection, such as deposit guarantees and consumer protection. In contrast, non-banking financial institutions may not always provide the same level of protection to their customers.
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Despite these differences, both banking and non-banking financial institutions play important roles in supporting economic activities. It is important to understand the differences between them to choose the financial institution that best meets our needs and trust.
