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FINANCIAL INSTITUTION

  • These are institution which stands between surplus spending unit and deficit spending units.
  • These are institution which acts as a goal between transferring funds from those who have surplus to those who are spending.
THEY PLAY THE FOLLOWING ROLES
  1. They transfer funds from those with surplus to those who are in need
  2. They facilitate the pooling of risks.
  3. They provide the public with more liquid and less risks on assets
  4. They help to increase efficiency by applying special technology and other assistance in investment
  5. They increase the liquidity of financial institution by giving loans.
FINANCIAL INTERMEDIARIES ARE CATEGORIZED INTO TWO
  1. Banks
These are financial institution which provide short term loan, accept and maintain deposit, undertake less risk investment, create credit and their aimed at making profit.
  1. Non banking financial institution (NBFIs)
  • These are institutions that carry out financial activities by their resources and are not directly from the savers as debt instead they mobilize the public saving for providing financial services.
Are institutions that provide banking services without meeting definition of bank for example development bank, life insurance Company, PPF, NSSF, Building society, post offices, saving banks etc.
DIFFERENCE BETWEEN BANKS AND NON BANKS.
Banks
Non Banks
i)They operate different account for their customer example saving, fixed and current account
ii)Bank use saving to advance loans
iii)They make profit from loan inform of interest
iv)Banks are aimed at making profit
-They do not operate account for their customers
– They do not use saving to advance loan
-They depend on revenue obtained from investment.
– They are not aimed at profit making.

Banks can be categorized into
  1. Commercial Banks
  2. Central Banks
  3. Saving Banks
  4. Specialized Banks
  5. Merchant Banks
  1. COMMERCIAL BANK
Is a profit making financial institution, it obtains its profit from charging high interest on loan, charging a commission on service rendered and investing in short term and medium investment.
FUNCTION OF COMMERCIAL BANK
  1. Accepting and keeping deposits
  2. Maintaining different accounts, these are saving current and fixed deposit a/c
  3. They keep valuable articles and documents in self custody
  4. They give loans and overdraft to customers.
  5. They exchange currency
  6. They facilitate quick and payment through cheque, standing orders
  7. Banks manager deceased customer property and distribute it according to the will
  8. They give advice to customers on investment
  9. They assist the government in receiving money from tax payer
  10. They create credit
  11. They help central bank to implement monetary policy
  12. They acts as referees to credit worth customers
  1. NATIONAL BANK OF COMMERCE (NBC)
It was established in 1967 after the Arusha Declaration following the nationalization of private foreign bank. NB was aimed at solving the following problems:
  1. The problem of low finance to domestic sector
  2. There was too much domestic credit to foreigners
  3. There was low savings mobilization to citizens
  4. There was high level of dependency on foreign managerial skills
  5. There was lack of support to the government during deficit budget
FUNCTIONS OF NBC BY THEN.
  1. To provide loans to investors
  2. To mobilize savings
  3. To transfer funds/money from one area to another
  4. To provide technical advice to the investors
  5. Custodian of valuable commodities
  6. It provides other commercial bank services.
After privatization in 1997 NBC was divided into two
  1. National bank of commerce limited ( NBC 1997 ltd)
  2. National micro finance bank (NMB)
NBC was to provide services to big businessmen while NMB was to provide services to low income earners and small businessmen
  1. COOPERATIVE AND RURAL DEVELOPMENT BANK (CRDB)
It was established in 1947 for provision of local development l
oan fund which was to assist food production and for African productivity loan fund in assisting European farmers.
FUNCTIONS OF CRDB OF 1947.
  1. To promote rural development
  2. To monitor projects
  3. To easy the purchase of crops in the rural areas
  4. To provide technical advice to farmers
  5. To provide loans to cooperative unions.
2) SPECIALIZED BANKS
Are banks that deal with specific function or specific sectors.
They include:-
i) T.I.B – Tanzania Investment Bank, the bank was established in 1971 to bring all means of production to the public. It other functions were as follows;
a) To finance large scale agriculture
b) To provide advice on industrial development
ii) T.H.B – Tanzania Housing Bank: The bank was established 1973 in order to receive deposit and provide account services to provide all banking services and provide credit for residential and commercial premises.
CREDIT CREATION
This is a process through which commercial banks use cheque to expand the volume of money lent.
NB: The expanded credit is only in the form of book entry.
Example:-
Assuming the cash ratio/ reserve ratio is 20% and initial deposit is 1000. When people get loan they deposit cheque in their a/c in the same bank. If there are 4 people who are able and willing to borrow money the credit creation process will be follows.
Person
New deposits
Reserve current ratio
New loan
A
1000
200
800
B
800

160
640
C
640
128
512
D
512
102.4
409.6
Total credit is equal

The number of times the money increase is called the credit multiplier
LIMITATION OF CREDIT CREATION
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    Leakage of money out of bank system
  2. Liquidity ratio / reserve ratio, if ratio is low credit creation in high
  3. Illiteracy and altitude where by some people do not keep money in the bank
  4. Regulation of central bank which reduce the amount lent
  5. High interest rate which discourage borrowing
  6. Very low interest rate which discourage savings
  7. Lack credit worth. Customers making it difficult to give out loans.
PROBLEM FACING COMMERCIAL BANKS.
  1. Shortage of funds for loans to customers
  2. Illiterate customers
  3. Insecurity of commercial banks, constant invention by robbers
  4. Most banks are under capitalized hence the level of operation is restricted
  5. Inflation discourages lending
  6. Most of the bank are allocated in towns facing steep competition
  7. Collapse of banks resulting from failure of shareholders to pay back the loans
3. CENTRAL BANK.
Is a financial institution which controls all other financial institution and implements monetary policies. The central bank of Tanzania (BOT) was established 1965 replacing the existing East Africa currency board. The Bank of Tanzania BOT started issuing currency in 1966.
FUNCTIONS OF B.O.T

1. Banking function, the BOT does the following
  1. It acts as the clearing houses for commercial banks
  2. Banker to the government in terms of account and loan
  3. Banker to other banks ( all commercial bank should have a/c in central bank)
  4. It is a lender of last resort
  5. Issuing of currency
2. Development function the central bank stabilize the economic by
  1. It formulate and implement monetary and fiscal policy
  2. It supervises commercial bank and non banks in their activities
  3. It provides employment
3. Domestic monetary management functions
-BOT acts as adviser on all financial institutions
-It is responsible for financing the government in case of deficit budget
-It manages all government debts
4. External monetary management function
  1. It controls the foreign currency and exchange rates.
Difference between central bank and commercial bank
Commercial bank
Central bank
  1. They aimed at making profit
They aimed at serving the public
  1. They provide safety custody for valuable goods
Does not provide safe custody for valuable goods
  1. They create credit
They do not create credit
  1. They do not control financial institution
They control other financial institution
  1. They accept deposit from public
They accept deposit from government institution and banks
  1. Take care of property of the deceased
They so not take care of the property of deceased
  1. They do not print money

They print and organize printing
  1. They are owed by individuals and government
Owned by the government
Qn. 1. Discuss the objectives of monetary policy
2. What are the problems of implementing monetary policy in LDC’S.
NONE BANKS FINANCIAL INSTITUTIONS.
Non banking institutions perform the following roles
  1. They advance loan to entrepreneur
  2. They invest on physical investment such as buildings, factories etc
  3. They stimulate and promote financial and capital market through investment in shares.
  4. They provide socio security
  5. They provide life assurance and pension services to the public
  6. They mobilize saving among the public
  7. They help to control poverty (poverty alleviation.)
NATIONAL INSURANCE COMPANY (N.I.C)
It was established in 1967 after Arusha declaration which speculates nationalization policies.
The main objectives of NIC where
  1. To collect premium from member/ clients
  2. To invest in productive activities like buildings
  3. To provide compensation to client against risks
  4. To fight against poverty alleviation
  5. Income distribution
Qn. Discuss the roles of PPF?
Privatization of financial institutions.

  1. To reduce the government burden
  2. To increase the amount of profit
  3. To eliminate beau racy
  4. To make the institution more efficient in their operation
  5. To increase capital hence expand their institution
  6. To allow the use of advance technology
  7. To enable the consumer to make choice.
  8. To reduce embezzlement of fund.
  9. To reduce political interference brought about the existence of public institutions.
  10. To allow technical assistance in the management from abroad




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