Non-banking institutions are different from banking institutions because they lack a banking license and hence they do not take deposits from their clients. They operate by mobilizing savings from members, which finance their activities. They include pension funds, insurance companies, mutual funds, venture capital companies, leasing and factoring companies. They are key to the economic growth and development in a country, because of their functions.
Their roles are as highlighted here:
Non-banking institutions act as intermediaries between people who have money to save and those who need money to invest. Such reallocation propels growth economic growth as more services and products are now produced in the economy, owing to the finances made available to investors by non -bank lenders. They do this through inducing savings from individuals by providing them with a store for their value in form of financial assets, an aspect enhanced by their attractive offers in interest rates and other benefits. These savings later become a source of finance for investments and hence economic growth in the long run.
Non-bank lenders compete favorably with banking institutions in the market, giving them a reason to improve quality in their services. With an increase of these players in the market, banks have had to improve efficiency and responsiveness in order to remain relevant in the market. Such competition is good for any market, with every player working to improve what they offer the market.
Non-banking institutions increase consumer choice in the market, increase the variety from which a consumer chooses. This enables a consumer to choose what best suits them as some of the institutions provide specialized and customized services.
Complement banking institutions
The nonbank institutions provide services not provided by banking institutions, filling in the gap that exists in the market. They also target specific sectors in an economy, like housing for instance, which banks may not fully cater for.
A source of employment
Non-bank institutions provide jobs for people who are employed to work in the institutions, ranging from the unskilled and semi-skilled to the skilled personnel. Through them, individuals and families have a source of income, which enables them to access goods and services from the market.
Measure of economic growth
The existence of non-bank institutions can be used as a measure of economic growth because of how they mediate between savers and investors and eliminating hoarders in the market. Their existence is an indication of growth in an economy.
Income for savers
Non-banking institutions give savers income from the earnings derived from investments made. The investments are financed by periodic savings. Such institutions enjoy economies of scale, earning more than an individual would earn in case they made individual investments.
Cushion against risk
By bridging between the saver and investor, they relieve the saver of the risk involved in lending money. Their bear the weight by selling lenders indirect securities and buying from investors primary securities.