What Are the Functions of Financial Institutions?

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Financial institutions provide financing, facilitate economic transactions, issue funds, offer insurance and hold deposits for businesses and individuals. Financial institutions are private or public organizations that serve as an intermediary between savers and borrowers of funds. The two primary types of financial institutions are credit unions or depository banks and non-depository mutual funds and insurance companies. Banks and equity markets are the fundamental institutions in most financial systems.

Depository banks and credit unions provide private and commercial loans for individuals and businesses. These financial institutions also hold deposits and issue certificates for investments. Non-depository financial institutions, such as insurance companies, collect funds by selling policies or units to the public. These institutions provide returns to their investors in the form of benefits, dividends and/or profit payouts. Non-depository financial institutions are critical in mitigating risk for businesses and consumers.

Financial institutions fuel the economy by issuing credit, which comes in the form of loans, mortgages and credit cards, to allow individuals and businesses to purchase goods and services, homes, attend college, start a business, etc. Financial institutions also serve as direct providers of liquidity through demand deposits and credit lines.

Financial institutions, through processing transactions and purchasing and selling large volumes of securities, play a fundamental role in the equity markets.