What Are the Roles of Financial Institutions?

Jessica Ellis
Jessica Ellis

The roles of financial institutions are critical to modern, functional economies throughout the world. Some of the most important roles of financial institutions include providing credit, enforcing fiscal policy and increase investment opportunities. Different financial institutions may fulfill different roles in an economy; even distribution of different kinds of financial institutions can help ensure that the needs of consumers and investors are met throughout the geographic range of an economy.

Financial institutions like banks provide credit, enforce fiscal policy and increase investment opportunities.
Financial institutions like banks provide credit, enforce fiscal policy and increase investment opportunities.

Financial institutions, such as credit unions and investment banks, developed as more people throughout the world began to collect liquid capital. Deposit banks created a safe place for citizens to store money or valuables, where deposits were often backed by financial guarantees. Investment institutions developed to allow business owners to finance their operations, while at the same time allowing investors the opportunity to increase their savings. Building societies and mutual funds created a way for people to pool resources in order to ensure financial security throughout their lives. In the centuries leading up to modern-day economies, the roles of financial institutions became critical in nearly every type of monetary transaction, from the purchase of stocks to the creation of a college fund.

Provision of credit is one of the most important roles of financial institutions. Credit allows borrowers to purchase an item or start a venture based on the assumption of future income. Since it has become less and less feasible for the average person to keep a large supply of liquid assets, such as enough money to purchase a house, on hand, credit has become more and more important to many financial transactions. Financial institutions that provide private, student, automobile, real estate, or small business loans help stimulate the economy by allowing purchases to be made by a wider group of people.

In many regions, governments update fiscal policy rules, such as regulations and interest rates, on a fairly regular basis. Legal financial institutions can help direct the economy in a desired direction by adhering to government-created fiscal policy. The roles of financial institutions in maintaining government fiscal plans can be quite varied; in some cases, a bank may be assisting governmental efforts simply by implementing a new interest rate. Governments can also take a more direct role in the guidance of fiscal policy by creating state-run financial institutions. A federally backed or run banking group that exists primarily to provide loans to citizens for rural development is one example of this type of venture.

Another of the most important roles of financial institutions is as an intermediary in the investment market. Financial companies are able to match up potentially profitable businesses with appropriate investors, in order to permit both sides greater opportunity for financial advancement. In addition, banks can also offer investors a dual service by extending credit to increase the level of investment possible. By managing the price levels of stock offerings, financial institutions can also help manage risk throughout the financial market.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?