A Report on a Non Bank Financial Institution

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Non Bank Financial Institution

Definition:

A non-bank financial institution (NBFI) is a financial institution that does not have a complete banking license and is not administered by a national or international banking regulatory agency. NBFIs make easy bank-related financial services, such as investment, contractual savings, risk pooling & market brokering.

Examples:

Examples consist of insurance firms, check cashing locations, pawn shops, currency exchange, cashier's check issuers, payday lending, & microloan organizations.

Alan Greenspan has identified the role of NBFIs in intensification an economy, as they facilitate “multiple alternatives to transform an economy's savings into capital investment act as backup facilities should the primary form of intermediation fail”.

Types:

  1. Commercial Banks.
  2. Investment Banks.
  3. Insurance Companies.
  4. Brokerages.
  5. Investment Companies.
  1. Commercial Banks:
  • Commercial banks accept deposits & offer security and convenience to the customers.
  • The original purpose of banks is to provide clients secure keeping for their money.
  • Through banks customers does not longer need to keep huge amounts of currency in their hand, transactions can be handled with checks, debit cards & credit cards as an alternative.
  • Commercial banks also provide loans to the individuals and businesses use to buy goods or expand business operations which in turn direct to more deposited funds that make their way to banks.
  1. Investment Bank:
  • Investment banks may be called "banks," their operations are far dissimilar than deposit gathering commercial banks.
  • An investment bank is a financial intermediary which executes a range of services for businesses and some governments.
  • The services contains underwriting debt and equity offerings, acting as an intermediary among an issuer of securities and the investing public, making markets, providing mergers and different corporate reorganizations, and acting as a broker for institutional customers.
  • In general investment banks are subject to less regulation than commercial banks. Although investment banks work below the direction of regulatory bodies likes the Securities and Exchange Commission, FINRA, and the U.S. Treasury.
  1. Insurance Companies:
  • Insurance companies pool risk by collecting imbursement from a big group of people who want to defend themselves & their loved ones against a particular loss, for instance a fire, car accident, illness, lawsuit, disability or death.
  • Insurance assist individuals and companies supervise risk and preserve wealth. Through insuring a large amount of people, insurance companies can function profitably and simultaneously pay for claims that may arise.
  • Insurance companies make use of statistical analysis to plan what their actual losses will be within a given class. They know that not all of the insured individuals will endure losses all at once.
  1. Brokerages:
  • Brokerages operate as an intermediary among buyers and sellers to provide securities transactions.
  • Brokerage companies are remunerated via commission after the transaction has been successfully completed. For instance, when a trade order for a stock is carried out, an individual often pays a transaction fee for the brokerage company's efforts to execute the trade.
  • A brokerage can be either full service or discount.
  • A full service brokerage provides investment advice, portfolio management and trade execution.
  • In exchange for this high level of service, customers pay significant commissions on each trade. Discount brokers allow investors to perform their own investment research and make their own decisions.
  1. Investment Companies:

An investment company is a corporation or a trust through which individuals invest in diversified, professionally managed portfolios of securities by pooling their funds with those of other investors.

Types:

  • Unit investment trusts (UITs).
  • Face amount certificate companies.
  • Managed investment companies.

Role of Financial Institutions:

  • NBFIs supplement banks by facilitating the infrastructure to allot surplus resources to individuals and companies through deficits.
  • NBFIs also introduce competition in terms of financial services.
  • Whereas banks may present a set of financial services as a packaged deal, NBFIs unbundle and modify these services to meet the requirements of particular clients.
  • Growth

A few researches recommend elevated correlation b/w a financial development and economic growth. Usually, a market-based financial system has improved developed NBFIs than a bank based structure which is encouraging for economic growth.

  • Stability

A multi-faceted financial system that comprises of non-bank financial institutions can protect economies from financial shocks and allow speedy recovery when these shocks occur.

Other Types:

  1. Risk-Pooling Institutions:

Insurance companies endorse economic risks linked with illness, death, damage and other risks of loss. In return to collecting an insurance premium, insurance companies offer a dependent promise of economic protection in the case of loss. There are two major types of insurance companies:

  • General insurance
  • Life insurance.

General insurance be likely to be short-term, whereas life insurance is a longer-term contract, which cease at the death of the insured. Both kinds of insurance life and general are accessible to all sectors of the district.

  1. Contractual Savings Institutions:

Contractual savings institutions provide individuals the chance to invest in collective investment vehicles (CIV) as a fiduciary rather than a principal role. Collective investment vehicles pool means from individuals and firms into diverse financial instruments together with equity, debt, and derivatives.

The two main types

  • Open-end
  • Closed-end funds.

Open-end funds produce original investments by allowing the public to buy new shares at any time and shareholders can liquidate their holding by selling the shares back to the open-end fund at the net asset value.

Closed-end funds release a predetermined number of shares in an IPO. In this instance the shareholders capitalize on the value of their assets by selling their shares in a stock exchange.

  1. Market Makers:

Market makers are broker dealer institutions that quote a buy and sell price and provide transactions for financial assets. Such assets contain equities, government and corporate debt, derivatives, and foreign currencies. As soon as receiving an order the market maker without delay sells from its inventory or makes a purchase to offset the loss in inventory.

The degree of difference between the buying and selling quotes, or the bid-offer spread is how the market maker creates profit. A main contribution of the market makers is getting better the liquidity of financial assets in the market.

  1. Specialized Sectorial Financiers:

They offer a restricted range of financial services to a targeted sector. For instance, real estate financiers channel capital to prospective homeowners, leasing companies offer financing for equipment and payday lending companies that offer short term loans to individuals that are under banked or have limited resources.

  1. Financial Service Providers:

Financial service contributor includes broker’s securities and mortgage, management consultants, and financial advisors, and they function on a fee for service basis. Their services contain enhancing informational efficiency for the investors & in the case of brokers, providing a transactions service by which an investor can liquidate existing assets.

Purpose and Scope:

The purpose is to provide the Financial Crimes Enforcement Network (FinCEN) with factual profiles of five sectors of non-bank financial institutions (NBFIs), based upon their size, services, geographic and transaction attributes.

FinCEN has regulatory responsibilities for a wide variety of financial institutions, and needs current and detailed information on those financial institution industry elements subject to its regulatory authority. Senior policy makers need to make regulatory decisions based on the best available information, so as to ensure that their public responsibilities are discharged fairly and effectively.

In the near future, FinCEN will be proposing significant changes to its regulatory requirements relating to certain "non-bank financial institutions" (identified below) and will need basic information concerning the size, extent, revenue derived and nature of the businesses that offer these financial services to the public.

In order to provide reliable information, we:

  • conducted an intensive discovery process -- identifying and cataloging conventional and unconventional sources of data, through similarly conventional and unconventional means;
  • investigated these sources to the extent possible in connection with the scope of the study;
  • utilized internal resources and networks of professionals to obtain key information;
  • Opened channels of communication with major industry participants and state regulators; and
  • Utilized innovative quality analysis techniques to identify and highlight meaningful indicators and trends.

The five NBFI sectors covered by the study are:

  • Money Transmission
  • Travelers Check
  • Money Order
  • Retail Foreign Currency Exchange
  • Check Cashing.

List of Non-Bank Financial Institution in Pakistan:

A. Development Finance Institution:

  • Equity Participation Fund.
  • Investment Corporation of Pakistan.
  • National Investment Trust Ltd.
  • Pakistan Kuwait Investment Company (Pvt) Ltd.
  • Pakistan Oman Investment Co.Pvt.Ltd
  • Saudi Pak Industrial and Agricultural Investment C. (Pvt) Ltd.

B. Leasing Companies:

  • Asian Leasing Corporation Ltd.
  • Askari Leasing Company Ltd.
  • Dawood Leasing Company Ltd.
  • Saudi Pak Leasing Company Ltd.
  • Pak-Apex Leasing Company Ltd.
  • Lease Pak Ltd.
  • Pakistan Industrial & Commercial Leasing Ltd.
  • Universal Leasing Corporation Ltd.
  • Trust Leasing Corporation Ltd.

C. Investment Banks:

  • Asset Investment Bank Ltd.
  • Crescent Investment Bank Ltd
  • Islamic Investment Bank Ltd.
  • First International Investment Bank Ltd.
  • Jahangir Siddiqui Investment Bank Ltd.
  • Security Investment Bank Ltd.
  • Trust Investment Bank Ltd.

D. Modaraba Companies:

  • Al-Zamin Leasing Modaraba
  • Financial Link Modaraba
  • First General Leasing Modaraba
  • First Islamic Modaraba
  • First Pak Modaraba
  • First Punjab Modaraba
  • Industrial Capital Modaraba
  • Guardian Leasing Modaraba
  • Long Term Venture Capital Modaraba

E. Discount & Guarantee Houses:

  • First Credit & Discount Corporation (Pvt) Ltd.
  • First Prudential Discount & Guarantee House Ltd.
  • National Discounting Services Ltd.

F. House Finance Companies:

  • Citibank Housing Finance Company Ltd.
  • House Building Finance Corporation
  • International Housing Finance Ltd.

G. Venture capital Company:

  • Pakistan Venture Capital Ltd.

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