The rates of interest charged on loans, service fee charges, and nature of services offered by financial institutions, to a large extent, influence the decision making of individuals in regard to financial matters. If for instance commercial banks in the US, as is the case presently, decide to offer high interest rates for savings, a lot of Americans will be influenced to open savings account and to start saving.
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Again, individuals are often required to get approval from commercial banks or other financial institutions in order to receive large sums of money that they may use to make expensive purchases. The differences between various financial institutions in terms of collateral requirement, loan repayment period and service fees charges also influence the financial decision making of individuals. In other words, more people will tend to transact business with banks or financial institutions which offer favorable terms.
Thus, as intermediaries of financial markets, financial institutions including commercial banks, insurance companies, building societies, trust companies, mortgage loan companies and credit unions are major players in determining financial decisions of a majority of individual consumers and businesses.
How financial institutions facilitate transactions
Financial institutions create financial instruments such as stocks and bonds, “maintain efficient and modern payment systems” and lend money to creditworthy individuals and businesses organizations (Siklos 40). Government securities, bonds and other savings deposited by investors in commercial banks and other financial institutions are made available as funds which can be obtained by individuals and businesses in form of loans.
Normally, financial institutions pay depositors a specified percentage of interest on funds deposited and, on lending out these funds to other consumers, the institutions charge higher interest rates on these loans. Through this way of accepting deposits, providing loans and paying and charging interest rates, financial institutions are thus able to effectively play there role in facilitating transactions between individuals, businesses and governments.
Financial institutions are virtually the only gateways through which payments of bills are made and economic transactions effected. Modern facilities such as credit cards, ATMs, internet and mobile banking have revolutionized the way payments are made and changed the way transactions are conducted between individuals, businesses and governments.
These roles of financial institutions are necessary for economic stability and development. They provide “safe custody of individual and business savings and offer interest” for amounts deposited (Lewis 39).
Financial institutions also enable businesses to grow by extending loans that can be used to expand the business. Without financial institutions, businesses would come to a standstill and the whole economy would go down in free fall. Provision of efficient payment facilities by financial institutions, on the other hand, enables transactions to be carried smoothly and reliably.
Role of financial institutions in financial matters for businesses
In regard to the financial matters of businesses, financial institutions are important intermediaries in financial decisions and play a similar role as to individuals. Like individuals, businesses often approach banks other money lending agencies for loans and make and receive payments through the same institutions.
Commercial banks, particularly, work closely with businesses in successful management of business finances. Financial institutions also work with businesses to “appraise business assets, to link them with potential buyers” and to facilitate and approve access to business loans (Dobson 61).
Financial institutions, like commercial banks, offer services such as trade finance, general corporate finance, as well as project finance that can be used by businesses to cover purchases of inventory, machinery and raw materials. Using business tailored services, financial institutions also make possible the reliable transfer of funds and facilitate smooth exchange of valuable economic and financial information which affects business operations.
Dobson, John. Finance Ethics: The Rationality of Virtue. New York: Rowman & Littlefield Publishers, 1997. Print.
Lewis, Michael. The Big Short: Inside the Doomsday Machine. London: Allen Lane, 2010. Print.
Siklos, Pierre. Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson, 2001. Print.