Explain the different types of financial institutions.

a) Depository Institutions
These are deposit taking financial institutions. They include;
i) Commercial Banks
ii) Non bank financial institutions - All financial institutions that are not classified as commercial banks. They include;
- Savings and loans institutions
- Building societies
- Development finance institutions
iii) Credit Unions
Depository institutions make a profit from the spread between the interest rate they pay on their deposits and the interest
rate they charge on their loans. The functions of depository institutions include:
- They create liquidity in the economy
- They minimize the cost of obtaining funds
- They minimize the cost of monitoring borrowers
- They pool risk

b) Contractual Savings Institutions
These are specialized institutions in which a client remits money for a given period of time for a specific course as agreed between him and the institution.
Examples include:
a. Life Insurance Companies
b. Medical Insurance Companies
c. Pension Funds

c) Investment Intermediaries
These are specialized institutions which are specifically aimed at mobilizing funds for investment purposes. They include:
i) Finance Companies – Housing Finance, ICDC, KIE etc
ii) Mutual Funds (Mutual banks) – they collect savings and give loans but are structured as “mutuals,” meaning that the
depositors own the bank/institution – e.g SACCOs in Kenya, ICEA mutual funds etc.

d) Microfinance Institutions (MFIs)
MFIs are institutions that mobilize and provide finance for micro and small enterprises and low income households. They are deliberately structured in such a way that they avail financial services to the poor in the society.

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Kavungya answered the question on March 26, 2019 at 08:44