Academic journal article Contemporary Readings in Law and Social Justice

Non-Bank Financial Institutions. Types and Functions

Academic journal article Contemporary Readings in Law and Social Justice

Non-Bank Financial Institutions. Types and Functions

Article excerpt


The paper describes the main types of non-bank financial institutions and their field of activity, underlining the role and common functions for all types. Whether credit unions, pawnshops, finance companies, credit societies or pension funds, they all sell credits to people, on different basis.

Keywords: non-bank financial institutions, types, functions, role

1. Types of Non-Bank Financial Institutions

Non-bank financial institutions include pawnshops, credit unions, mutual credit societies, insurance companies, pension funds, finance companies and other types of activity, depending on the country. Pawnshops are lending institutions, referring to loans secured by personal property. Historically, they have emerged as a private enterprise usurious loan. Under current conditions in many countries, capital formation and operation of pawnshops are governed by laws and include state participation. Depending on the degree of the state participation and that of private capital, pawnshops are of state or municipal, private, and of mixed type. Pawn shops specialize in providing consumer credit secured by a pledge of movable property, based on operations of customer's values storage and sale of mortgaged property on a commission basis. The special feature of credit operations in pawnshops is the lack of the credit agreement with the client and encumbrances. In granting loans against mortgage a customer gets a ticket, as a rule, to the bearer, having registration number in the log file, which specifies the details of the borrower and the basic terms of the transaction. For most credit transactions the period of time stipulated is quite long and only its termination, the mortgaged property may be sold.

Credit unions are credit and settlement services for members of a union, cooperatives, rental companies, small and medium-sized businesses, and individuals. Capital credit unions are based on the purchase of shares and the mandatory nonrefundable entry fee payment and provide loans, commissions and brokerage operations. They are also credit cooperatives, organized groups of individuals or small credit institutions, which may be an organized group of individuals united within a profession, or a number of voluntary associations of independent credit unions. Credit unions perform operations such as attracting deposits, loans secured by members of the union, bill discounting, trade commissions and brokerage operations, consulting and auditing services.

Mutual Credit Society is a kind of credit institution that is similar in nature to commercial banks that serve small and medium businesses. Participants in mutual credit societies that are formed by entry fees capital may be individuals or legal entities. When a member joins the mutual credit a certain percentage of open credit is accessible as payment shares, the person remaining liable for his/her debts, as well as operations of the Company in the open credit. Insurance companies rely on the insurance policies taken from the public savings in the form of regular contributions, which are then placed in government and corporate securities, mortgages for residential buildings. Regular flow of contributions, interest income on bonds and dividends on shares held by insurance companies, provides a stable and large accumulation of financial reserves. Insurance companies may be organized as a joint stock company or a mutual company. In the latter case, the owners of insurance policies are co-owners of the company, the accumulated contributions of the owner of the insurance policy are considered as own share in the mutual company.

Private pension funds are legally independent companies, managed by insurance companies or trust departments of commercial banks. Their sources are formed on the basis of regular contributions and deductions working firm established a pension fund, as well as income in the Fund securities. Pension funds invest in the most profitable types of private securities, government bonds, and real estate. …

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