A financial institution refers to an organization involved in handling financial and monetary operations, including deposits, loans, investments, and foreign exchange.

Types of Financial Institutions

1. Central Bank
2. Commercial Banks
3. Micro-Lending Agencies
4. Government Agencies
5. Non-Bank Financial Institutions, such as:
6. Credit Unions
7. Insurance Companies
8. Building Societies
9. Central Bank

Definition:

The Central Bank serves as a financial institution that manages financial and banking services for the government and commercial banks. It does not extend its services to private individuals or businesses.

Example:

The Central Bank of Trinidad and Tobago (CBTT)

Functions:

1. Issues and manages the supply of currency, including replacing damaged notes collected by commercial banks.
2. Acts as a banker to the government by offering services similar to those of commercial banks.
3. Serves as a banker to commercial banks, holding their cash reserves.
4. Manages the country's foreign exchange reserves to maintain stable currency exchange rates.
5. Supervises and regulates the activities of commercial banks.
6. Functions as the "lender of last resort," providing loans to commercial banks when necessary.

Commercial Bank

Definition:

A Commercial Bank is a financial institution that caters to private individuals and businesses, accepting deposits and providing loans.

Examples:

Scotiabank Trinidad and Tobago

First Citizens Bank (FCB)

Royal Bank of Canada (RBC)

Republic Bank Limited (RBL)

Functions:

1. Offers various deposit services such as savings accounts, fixed deposits, and chequing accounts.
2. Facilitates credit creation by lending funds at different interest rates while maintaining a portion of deposits as cash reserves.
3. Provides advisory services on insurance, investments, wills, and taxation.
4. Offers safety deposit boxes for securely storing valuables.
5. Discounts Bills of Exchange.
6. Extends overdraft facilities, allowing clients to withdraw more than their account balance within a specified repayment period.
7. Enables money transfers, including standing orders for regular payments, and facilitates transactions via cheques, credit cards, and bank drafts.

How the Central Bank Regulates Commercial Banks

1.)Cash Reserve Ratio: The Central Bank specifies the percentage of deposits commercial banks must hold as reserves, impacting the funds available for lending.

For instance, if the reserve ratio is 10%, 10% of deposits must be kept with the Central Bank. Increasing the ratio reduces the lending capacity of commercial banks.

Special Deposits: The Central Bank may require commercial banks to place fixed-term deposits, reducing their available funds for lending.

2.)Buying securities increases the money supply in commercial banks as citizens deposit payments.

Selling securities reduces the money supply as citizens withdraw funds to pay for them.

3.)Direct Controls and Moral Suasion: The Central Bank may issue directives or encourage banks to modify their policies, such as raising interest rates on certain loans.

Micro-Lending Agencies

Micro-lending agencies provide small loans at low interest rates, often targeting startups or self-employed individuals.

Examples:

MIPED (Mayaro Initiative for Enterprise Development)

Caribbean Microfinance Limited

Government Agencies

Government agencies offer affordable loans to small businesses or entrepreneurs.

Example:

NEDCO (National Entrepreneurship Development Company Limited)

Credit Unions

A credit union is a non-profit, member-run financial institution formed by individuals with common interests. It promotes savings, offers loans at favorable rates, and provides additional financial services.

Insurance Companies

Insurance companies offer financial protection through contracts (insurance policies) that compensate for losses, damages, or injuries in exchange for periodic payments called premiums.

Building Societies

Building societies are member-owned institutions that provide financial services, particularly mortgages. Like mortgage banks, they collect deposits from the public and use them to fund property loans for individuals and businesses.