Non-bank financial institutions are those financial institutions that do not operate under the supervision of national or international bank regulatory agencies. To some extent they are also regarded as financial institutions that do not have a full banking license and cannot accept any deposits from the public. They offer several financial services that range from risk pooling, market brokering, contractual savings and investment. In recent operations, NBFIs have been deemed as institutions that are bringing along competition to commercial banks. Commercial banks usually offer their services under one package while NBFIs try to break this package into single units. This ensures that they serve their clients in the best way possible. As a result of this business model, they have been able to remain competitive in the midst of commercial banks. They have been behind recent economic growth being experienced in most countries all over the world (Carmichael & Pomerleano, 2007).

NBFIs come along in different categories. These categories are differentiated based on the line of specialization adopted by the institution involved. Among these categories, there is risk pooling institutions, contractual savings institutions, investment banks and market makers. A brief description of these categories is listed below:

Risk Pooling Institutions

They include institutions such as insurance companies which are involved in covering risks associated with illness, death, property damage among others. They provide a form of assurance to companies and individuals that they would compensate them in case they suffer any loss from risks that they have been insured against (Harper & Arora, 2005). Insurance companies tend to offer both life and general insurance. General insurance tends to cover individuals against loss of income or property. Loss of income may arise from unemployment or sudden disability among others. Life insurance on the other hand insures an individual against economic loss suffered as a result of premature death.

Investment Banks

They are financial intermediaries that perform a variety of services. They participate in large and complex financial transactions such as underwriting, facilitating mergers and other corporate reorganizations, acting as an intermediary between a securities issuer and the investing public. They also act as a broker and/or financial adviser for institutional clients (Noël, 2006).

The advisory divisions of investment banks are paid a fee for their services, while the trading divisions experience profit or loss based on their market performance. Professionals who work for investment banks may have careers as financial advisers, traders or salespeople. Investment banks help corporations issue new shares of stock in an initial public offering (IPO) or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds.

Contractual Savings Institutions

These are savings institutions that obtain their funds through long-term contractual arrangements and invest these funds on the capital markets. Mutual funds, Insurance companies and Pension Funds are good examples of contractual savings institutions. They usually have a steady inflow of funds from their contractual arrangements therefore they do not  experience difficulties with liquidity and can make long-term Investment s in securities such as bonds and sometimes common stock (Tison, 2010). A fundamental source of the growth of contractual intermediaries has been a desire on the part of the public to provide for old age. Increasing life expectancy, rising medical care costs, and the widespread perception that Social Security benefits will be insufficient to cover retirement needs have raised the demand for various types of retirement funds and life insurance policies.

Market Makers

These are broker-dealer firms that accept the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order (Nolan & Benjamin, 2009). This process takes place in mere seconds. To prevent a fall in stock price, the market maker maintains a spread on each stock that it covers. Market Makers must be compensated for the risk they take.


Comparison of these Categories with Commercial Banks

Risk Pooling Institutions and Commercial Banks


  1. The two institutions have different principles that they use in their day to day operations. Commercial banks have two major components that involve lending and borrowing. Risk pooling institutions on the other hand operate under the principle of utmost faith, subrogation, insurable interest and contribution.
  2. Commercial banks have several types of services that allow consumers to retain liquidity. On the other hand, money invested in risk pooling institutions has a specified time period before which a beneficiary cannot access it.
  3. The major risk that risk pooling institutions are involved in is reinsurance prices in the market going up due to funds shortage as a result of large number of repayments. Commercial banks on the other hand are exposed to credit risks, interest rate risks and liquidity risks due to the large leverage that they possess (Harper & Arora, 2005).


  1. Both process payments for their clients.
  2. Both operate as agents for their consumers.


Investment Banks and Commercial Banks


  1. Commercial Banks accept deposits while investment banks do not accept.
  2. Commercial banks manage deposit accounts, such as checking and savings accounts, for individuals and businesses. They make loans to the public using the money held on deposit. Investment banks differ strongly. These institutions facilitate the buying and selling of stocks, bonds and other investments, as well as helping companies to go public with initial public offerings (IPO) (Noël, 2006).
  3. Investment banks have a higher risk tolerance due to their business model and the relative weakness of government regulation in the industry. Commercial banks are much less tolerant of risk. Panic can ensue if families and businesses lose their checking and savings accounts. Therefore, commercial banks have an implied fiduciary duty to act in the best interest of their clients, not to mention the tight strings attached to commercial banks


  1. Both earn money through charging fees and commission.
  2. Bothe are involved in the investment of funds derived from the customers.


Contractual Savings Institutions and Commercial Banks


  1. Liquidity is not a high priority in contractual savings institutions since the stable inflows from policyholders ensures regular payments. On the other, liquidity risk in commercial banks is a high priority due to the large reserves that are possessed.
  2. Contractual saving institutions do not accept deposits from the public, while commercial banks do accept deposits from the public.
  3. The credit creation activity of commercial banks is determined by the excess reserve and the cash reserve ratios of the bank. However, activities of contractual savings institutions are largely governed by the structure of the interest rate (Tison, 2010).


  1. Both are required to hold a specific reserve fund.
  2. Both obtain funds from their clients.


Market Makers and Commercial Banks


  1. People invest this money in commercial banks for safety, liquidity and convenience. However, they invest their money with money makers with the motive of making extra income.
  2. Activities of commercial banks are regulated by central bank, while those of market makers are not generally under the control of central bank and thus the activities may create hurdles in the way of effective implementation of monetary policies (Nolan & Benjamin, 2009).


  1. Both are in business to make profits.
  2. Both operate as agents for their consumers.



Carmichael, J., & Pomerleano, M. (2007). The development and regulation of non-bank financial   institutions. Washington, D.C.: World Bank.

Harper, M., & Arora, S. S. (2005). Small customers, big market: commercial banks in        microfinance. Warwickshire, UK: ITDG Pub. ;.

Nolan, K., & Benjamin, S. L. (2009). Role of NBFIs in the economy. Warwickshire, UK: ITDG    Pub. ;.

Noël, M. (2006). The Development of Non-bank Financial Institutions in Ukraine Policy Reform   Strategy and Action Plan.. Washington, D.C.: World Bank.

Tison, G. S. (2010). Capital Markets and Non-bank Financial Institutions in Romania        Assessment of Key Issues and Recommendations for Development.. Washington, DC:             World Bank.

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