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.
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.
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
Investment Banks and Commercial Banks
Contractual Savings Institutions and Commercial Banks
Market Makers and Commercial Banks
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