CREDIT INSTITUTIONS: WHAT THEY ARE FOR AND EXAMPLES - ECONOMY - 2024

Credit institutions are establishments that carry out financial transactions, such as investments, loans and deposits. Almost all entities interact with credit institutions on a regular basis.

They consist mainly of banks and credit unions. Credit unions differ from banks with respect to their legal form. A credible and stable banking sector is one of the basic requirements for a functioning economy. Unlike the case of banks, the position of credit unions does not have a fundamental influence on the global financial system.

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However, the positive effect of credit unions in today's highly competitive environment should not be overlooked, especially in the field of lower-ranking loan and deposit management.

The credibility, stability and competitiveness of credit institutions cannot be guaranteed only by market mechanisms. Therefore, its activities are governed by a large number of restrictive and precautionary regulations, in the form of legal norms or banking regulations.

What are credit institutions?

Credit institutions provide a wide variety of financial services. In its most basic form, banks hold money on behalf of customers.

This money is payable to the customer at the time of request, either when it appears at the bank to make a withdrawal, or when writing a check for a third party.

The two main types of credit institutions are credit unions and depository banks. Banks are the fundamental institutions in most financial systems.

Banks use the money they have to finance loans, which they give to companies and individuals to pay for operations, mortgages, education expenses and any other type of thing.

Credit unions can only be established as cooperative societies, the amount of capital they must have is much less than that of banks. It is only for members the circle of clients for which they are authorized to carry out activities.

These institutions have played an important role in meeting the financial and management needs of different industries. They have also shaped national economic scenes.

Commercial banks

Commercial banks accept deposits and provide security and convenience to their customers. Part of the original purpose of banks was to offer customers custody of their money.

When keeping physical cash at home or in a wallet, there are risks of loss due to theft and accidents, not to mention the loss of earning interest income.

With banks, consumers no longer need to keep large amounts of currency on hand. Instead, transactions can be handled with checks, debit cards, or credit cards.

Commercial banks also make loans that individuals and businesses use to purchase goods or expand their business operations, which in turn leads to more funds being deposited.

They essentially enter into financial transactions lending their reputation and credibility to the transaction. A check is basically just a promissory note between two people, but without the name and bank information on that document, no merchant would accept it.

Banks are regulated by the laws and central banks of their home countries. They are usually organized as corporations.

What are they for?

Credit institutions provide financing, facilitate economic transactions, issue funds, offer insurance, and maintain deposits for businesses and individuals.

They offer loans, business inventory financing, and indirect consumer loans. They obtain their funds by issuing bonds and other obligations. These institutions operate in different countries.

Credit institutions are private or public organizations that serve as intermediaries between savers and borrowers of funds.

Depository banks and credit unions offer personal and business loans for individuals and businesses. These credit institutions also have deposits and issue investment certificates.

They fuel the economy by issuing credit, which comes in the form of loans, mortgages, and credit cards, to enable individuals and businesses to purchase goods and services, residences, attend college, start a business, etc.

Retail and commercial banks

Traditionally, retail banks offer products to individual consumers, while commercial banks work directly with businesses.

Today, most large banks offer deposit accounts, loans, and limited financial advice to both demographics.

Products offered at retail and commercial banks include checking and savings accounts, certificates of deposit, personal and home loans, credit cards, and business bank accounts.

Credit unions

Credit unions serve a specific demographic based on their field of membership, such as teachers or members of the military.

Although the products offered resemble the offerings of retail banks, credit unions are owned by their members and operate for their own benefit.

Examples

Credit institutions include banks, credit unions, asset management firms, construction companies, and securities brokerages, among others.

These institutions are responsible for distributing financial resources in a planned way to potential users.

Financial organizations that take deposits are known as commercial banks, mutual savings banks, savings associations, loan associations, etc.

There are a number of institutions that collect and provide funds for the sector or individual needed. On the other hand, there are several institutions that act as intermediaries and join the surplus and deficit units.

Savings and loan associations

They arose largely in response to the exclusivity of commercial banks. There was a time when banks only accepted deposits from relatively wealthy people, with referrals, and did not lend to ordinary workers.

These associations generally offer lower borrowing rates than commercial banks and higher interest rates on deposits. The narrower profit margin is a by-product of the fact that such partnerships are privately or mutually owned.

Mutually supportive credit institutions that provide no more than 20% of total credit to businesses are in the category of savings and loan associations.

Individual consumers use savings and loan associations for deposit accounts, personal loans, and home loans.

By law, savings and loan companies must have 65% or more of your loans in residential mortgages, although other types of loans are allowed.

References

1. Investopedia (2019). Types Of Financial Institutions And Their Roles. Taken from: investopedia.com.
2. Czech National Bank (2019). Supervision of credit institutions. Taken from: cnb.cz.
3. Melissa Horton (2018). What are the 9 major financial institutions? Investopedia. Taken from: investopedia.com.
4. Reference (2019). What Are the Functions of Financial Institutions? Taken from: reference.com.
5. Eiiff (2019). Role of Financial Institutions. Taken from: eiiff.com.