Welcome! We will be looking at Financial Institutions today in our Economics class. Do have a great time studying with us!

Lesson Note

Subject : Economics

Topic: Financial Institutions

Learning Objectives: By the end of the lesson, the learners should be able to:

  • Explain the term financial institution;
  • State the types of financial institutions;
  • Define the ten bank;
  • Narrate how banking originated;
  • Mention the types of banks.


Financial Institution

Financial institution refer to all business organisations which hold money for individuals and institutions may borrow from them in order to give loans or make other Investments. Financial institutions are very important for the economic development of a nation. They represent the main channel or medium by which funds can flow from lenders to borrowers.

Types of financial Institution

Financial Institutions may be divided into two major groups. They are banking and non-banking financial institutions.
The major difference between the two is that the liabilities of the banking institutions are counted as part of the total supply of money while those of the nonbanking institutions are excluded from the money supply.

Banking Financial institutions

Commercial banks
Central bank
Merchant banks
Development banks
Savings banks

Non financial institutions

Insurance companies
Hire purchase companies
Building societies

Definition of A Bank

A bank is a commercial institution which performs various financial activities such as accepting and handling of deposits of its customers. It is a body of persons who carry on the business of banking. Banks are institutions that create money and give out loans to people. Bank is also a place where money and other valuables like jewelry are kept.

Origin of banking

Banking had it’s origin with the goldsmiths in London in the seventeenth century. The goldsmiths had facilities for storing valuables, therefore, they accepted money and other valuables from merchants for safe keeping.
The first banking function was accepting deposits of cash from merchants who had no safe place to keep their money. The second stage came when receipts for these deposits began to be used as means of payment by merchants. This made the early bankers to issue bank notes of fixed denominations, which were more generally acceptable.
The next stage in the development of the banking system was the development of money lending to customers with interest charged on it. This provided a profitable business, hence bankers began to encourage merchants and others to increase their deposits.
In recent times, banks have introduced more complex systems of banking into the industry.

Types Of Banks

The major types of banks include:

  1. Commercial banks
  2. Central bank
  3. Merchant banks
  4. Development banks
  5. Savings banks

These banks listed above are discussed individually. Do stay connected for more on this lesson.