Table of Contents
Lesson Objectives
By the end of the lesson, students should be able to:
- Explain the meaning of financial institutions.
- Identify the main types of financial institutions.
- Define a bank and describe the origin of banking.
- Explain what a commercial bank is.
- State and describe the characteristics of commercial banks.
What are Financial Institutions?
Financial institutions are organizations that deal with money and provide financial services to individuals, businesses, and the government. They help people to save, borrow, invest, and transfer money safely and conveniently.
These institutions act as intermediaries between those who have extra money (savers) and those who need money (borrowers).
By performing these roles, financial institutions promote trade, investment, and economic growth in the country. Examples of financial institutions include commercial banks, insurance companies, development banks, and microfinance banks.
Types of Financial Institutions
There are two major types of financial institutions:
1. Banking Financial Institutions
Banking financial institutions are organizations that are legally allowed to accept deposits from the public and give out loans. They act as intermediaries between people who have extra money (depositors) and those who need money (borrowers).
These institutions help to promote savings, investment, and trade by offering financial services such as accepting deposits, granting loans, transferring funds, and providing means of payment like cheques and debit cards.
They play a central role in the financial system by ensuring the smooth flow of money within the economy.
Examples:
- Central Bank
- Commercial Banks
- Development Banks
- Mortgage Banks
- Microfinance Banks
These banks play a vital role in the economy by promoting savings, investments, and trade.
2. Non-Banking Financial Institutions
Non-banking financial institutions are organizations that provide financial services similar to banks but are not allowed to accept deposits from the general public.
They help in mobilizing and investing funds, providing loans, and managing risks, but they do not operate current or savings accounts like banks do.
These institutions contribute to economic development by supporting long-term investments and specialized financial activities such as insurance, pensions, leasing, and capital market operations.
Examples:
- Insurance Companies
- Pension Funds
- Finance Houses
- Stock Exchange
- Cooperative Societies
They help to mobilize funds for long-term investment and economic development.
Definition of a Bank
A bank is a financial institution that accepts deposits from individuals, businesses, and organizations, keeps those funds safe, and makes them available for withdrawal or lending.
It serves as an intermediary between people who have surplus money (savers) and those who need funds (borrowers).
In addition to receiving and lending money, banks also provide other important services such as money transfers, payment of bills, issuance of cheques, debit and credit cards, and foreign exchange transactions.
Through these activities, banks help to promote trade, investment, and overall economic development.
Origin of Banking
The origin of banking can be traced back to ancient civilizations where trade and money exchange began. In early societies such as Babylon, Egypt, and Greece, people needed safe places to keep their wealth, especially gold and silver.
Temples and merchants served as the first “banks,” keeping money for others and lending it out at interest. Records from as early as 2000 BC show that loans and deposits were already being made in Mesopotamia.
In medieval Europe, the goldsmiths of England and Italy played a major role in the development of banking. People used to deposit their gold with these goldsmiths for safekeeping, and the goldsmiths would issue paper receipts to represent the gold kept with them.
Over time, these receipts began to be used as a form of money because people trusted that they could be exchanged for gold at any time.
The goldsmiths later discovered that not everyone came to collect their gold at the same time, so they started lending out some of the deposited gold and charged interest on it. This practice became the foundation of modern banking.
The word “bank” itself comes from the Italian word *banco*, meaning a bench or counter. In the Italian cities of Venice and Florence, money changers sat on benches to conduct financial transactions, such as exchanging coins and lending money.
When a money changer failed in business, his bench was broken, giving rise to the term “bankrupt.”
Modern banking spread across Europe in the 17th and 18th centuries. The establishment of the Bank of England in 1694 marked a major step in organizing banking systems.
Later, as European nations expanded their trade and colonies, banks were introduced in other parts of the world. In West Africa, modern banking began during the colonial period.
The Bank of British West Africa, founded in 1894 (now First Bank of Nigeria), was one of the first banks to operate in Nigeria. Other banks soon followed, leading to the development of today’s modern banking system in Africa.
In summary, the origin of banking grew out of people’s need for safe storage of wealth, reliable payment systems, and access to credit.
From the goldsmiths’ benches of medieval Europe to the organized institutions we have today, banking has evolved into a central part of every modern economy.
Commercial Bank
A commercial bank is a financial institution that provides banking services to individuals, businesses, and organizations with the aim of making profit.
It accepts deposits from customers, keeps their money safe, and lends it out to those who need funds for personal or business purposes.
Commercial banks also offer other financial services such as money transfers, payment of bills, issuance of cheques and debit cards, and foreign exchange transactions.
They act as a link between savers and borrowers, helping to promote trade, investment, and economic growth in the country.
Examples of Commercial Banks in Nigeria:
- First Bank of Nigeria
- Zenith Bank
- Access Bank
- United Bank for Africa (UBA)
- Guaranty Trust Bank (GTBank)
Characteristics of Commercial Banks
1. Profit-oriented:
A major characteristic of commercial banks is that they are established to make profit. Their main goal is to earn income through the financial services they provide.
They make profit by charging interest on loans given to customers, and by collecting fees for services such as transfers, cheque books, and ATM cards.
The profit earned helps the bank to pay its workers, expand its operations, and reward its shareholders.
2. Accept deposits:
Commercial banks accept deposits from individuals, businesses, and organizations. This is one of their most important functions. People can keep their money safely in the bank instead of holding it at home.
Deposits are received through different types of accounts such as savings accounts, current accounts, and fixed deposit accounts. In return, the bank pays interest to customers who keep their money in certain types of accounts.
3. Provide loans:
Another key characteristic of commercial banks is their ability to provide loans and advances to customers.
The money collected from depositors is partly used to lend to people and businesses who need funds for various purposes, such as buying goods, building houses, or starting a business.
The bank earns interest on these loans, which is higher than the interest paid on deposits. This difference is one of the main sources of the bank’s profit.
4. Offer financial services:
Commercial banks also provide several financial services that make business and personal transactions easier. They help customers to transfer money, pay bills, receive payments, and exchange foreign currencies.
They also issue cheques, debit cards, and drafts to make payment convenient and safe. These services help to promote trade, both within and outside the country.
5. Operate under government regulation:
Commercial banks are not free to operate without control. They are regulated and supervised by the Central Bank to ensure that they follow financial laws and operate safely.
The Central Bank sets rules on how banks should manage their funds, how much money they must keep in reserve, and how they should treat customers. These regulations help to protect depositors and maintain stability in the banking system.
6. Act as intermediaries:
Commercial banks act as intermediaries between people who have extra money and those who need money. They collect funds from savers who do not need to use their money immediately, and lend it to borrowers who can use it productively.
In this way, the bank channels money from areas of surplus to areas of shortage. This process supports investment, creates jobs, and helps the economy to grow.
7. Maintenance of Customer Accounts:
Commercial banks keep records of their customers’ accounts and transactions. They ensure that every deposit, withdrawal, or transfer is properly recorded.
Customers can always check their account balances through statements, passbooks, or digital banking platforms. This record-keeping builds trust and helps customers manage their money effectively.
Final Thoughts
- Financial institutions are organizations that manage money, such as banks and insurance companies.
- There are two main types of financial institutions: banking and non-banking financial institutions.
- A bank is a financial institution that accepts deposits and gives out loans to the public.
- Banking started with ancient goldsmiths who kept people’s valuables and issued receipts that later became accepted as payment.
- A commercial bank is a profit-making bank that provides financial services to individuals and businesses.
- Commercial banks have key features such as profit orientation, acceptance of deposits, and provision of loans under government regulation.
Tags
Financial Institutions, Banking Institutions, Non-Banking Institutions, Bank, Commercial Bank, Central Bank, Development Bank, Microfinance Bank, Insurance Company, Pension Fund, Finance House, Stock Exchange, Cooperative Society, Deposits, Loans, Credit, Savings, Investment, Borrowing, Intermediary, Profit, Regulation, Foreign Exchange
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