Financial Institutions

Financial institutions are authorised deposit-taking institution that is used for financial works such as it manage and accepting deposits of money from people. Banks (financial institutions) also provide loans to their clients. The word bank has emerged from the medieval Italian word Banca which means bench (table) in English. The financial institutions started addressed as banks because early financial transactions were conducted at a table or bench.

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Hence the practice of banking is originated in medieval Italian cities or states. The development of financial institutions was done after many centuries. Italy was the center of the world trade network so Italian traders and financiers use banks for their money management. Thus Italy became the birthplace of banking in the twelfth and thirteenth centuries. Italians used their knowledge to establish a better and new way of managing financial exchanges.

Trade and Credit

Long-distance trade was not safe In the medieval period because upfront costs would be high and the probability of venture to be failed. Different steps were included in paying for a medieval trading voyage such as at the destination, buying goods that could be exchanged, fitting out a ship or packing animals, and hiring people for making the trip.

The term “Credit” is used for borrowing and lending and borrowing of money along with a promise that the person who is taking the money from the financial institutions will repay at some future date. Credit was helpful in filling the gap between collecting the profits and paying for the long voyage. In the medieval period, this idea of lending money to traders for a share of the profit of venture existed in many societies. For example, it became popular partnerships between an investor and trader that investor used to fund the venture of a trader in return for a share of the profits such as Song China, Abbasid Caliphate, and in European trading cities.

The Emergence of Italian Banks

The practice became very popular in Italy for lending money to traders in exchange for a share of potential by the time banking appeared in Italy. It was the easiest way to make money for investors to lend money and collect interest (a charge to borrow money on top of the principal loan amount), but religious institutions tried to prevent this practice. At that time, the Catholic Church and riba in Islamic law consider interest usury.

The change is observed in the 13th century in Italy regarding banking. A new idea of finance came into existence which was a person could make money from buying and selling financial instruments such as a bill of exchange(monetary contracts). Profits avoided the potential charge of usury and earned on legitimate trade, or through natural increases in the value of an item.

Bills of exchange were entitled the holder of the bill to a specified payment from a third party and written agreements. Bill of exchange promises a future payment. This was a better method of earning for banks because previously they lend money to traders and waited for them to return to share the profits but now bankers started buying and selling these bills of exchange as objects of value.

Expansion of Banking ( The Medici of Florence )

The Medici of Florence was the most successful Italian family to take up banking. the Medici established branches of their bank in major cities throughout Europe from the late 14th century until the end of the 15th century. the Medici made money because they had branches in different cities which helped them to take advantage of changing exchange rates and therefore to avoid committing the sin of usury. 

A bill of exchange had the main advantage that it can be redeemed at any branch of Medici Bank. The Medici Bank became so trustworthy that not only trades and merchants but kings and Popes borrowed money from the Medici and other major banking families. Before the expansion of banking one else was able to lend a huge amount of money because in the war the empire need a huge fund. Hence also helped the kings and their officers to protect their nation. Thus banking families became very powerful and played important role in politics as well as economics.

Types of Financial Institutions

Some types of financial institutions are given below.

• Investment Banks: An investment bank provides its services to people, company or corporate divisions that are working in advisory-based financial transactions to individuals, corporations, and governments.

• Commercial Banks: A commercial bank is a financial institution that makes a profit accepts deposits from the public and gives loans for the purposes of consumption and investment.

• Internet Banks: Internet banking is famously known as online banking, web banking, or home banking. It is an electronic payment system to conduct a range of financial transactions through the website of financial institutions.

• Retail Banking: Retail banking or consumer banking is a kind of personal banking which for the public as the provision of services by the bank rather than to companies, corporations, or other banks. It is often referred to as wholesale banking.

• Insurance Companies: Insurance is a form of risk management and means of protection from financial loss. It is used against the risk of uncertain loss.

• Mortgage Companies: It is a financial firm that contributes to the business of originating or funding mortgages for residential or commercial property.

Role of Financial Institutions

The role of financial institutions is given below.

• Different types of financial services to the customers are provided by the financial institutions.

• The financial institution also gives an attractive rate of return to their regular customers.

• Banks and other institutions promote direct investment and make the customers understand the risk associated with that as well.

• Financial institutions play an important role in managing an emergency in the financial markets or in the nation.

• Financial institutions are helpful in the development of the economies of a country.

• The rate of return provided by such institutions is higher compared to any other place. Hence very useful for the people who used to make money from the moneylender.

• Financial institutions provide the best financial services to customers.

Do you Know?

Temples, Churches, and monasteries were the first institutions that were used for the storage of money and valuables. The inhabitants of ancient Athens used to keep their valuable things and savings in the temples of the Acropolis and in the same way the medieval Europeans in the monasteries.

Conclusion

In the medieval period and modern-day the best method to invest money and earn good returns from the investment is provided by financial institutions. It is continuously helping the nations to develop and maintain their economies. They provide advanced and unique methods to keep the money safe. The customers also understand that there are some risk factors with the institutions associated with their services. So must work with mutual understanding.