Non Banking Financial Institutions
Besides the commercial
banks, there are many types of Non-Banking Financial Institutions (NBFIs)
operating in our financial markets. These institutions provide great
diversification of the financial sector, which is increasingly being recognized
as complementary to the banking system. In fact, they successfully absorb the
violations and shock during economic depression. Moreover, the existence of
these additional financial service providers profoundly contributed to the
healthy completion in the market. Since both the regulators and customers are
benefited from the competition, they obviously enhanced the market stability.
As a consequence, it is crucial for investors to have sufficient knowledge on
the structure of these organizations, and utilize them to create better return
on investment.
It is easy for us to
comprehend the nature of these institutions if we divided them into three
acknowledgement criteria: the service provided, the source of funds, and the
use of funds. Firstly, the investment banks, which is officially classified as
money market corporations have played a crucial role in the financing industry.
Although they only represent a small proportion of assets in the market, it
does not reduce their significant position. Generally, they involved in highly
sophisticated advisory and arrangement services. For instance, they perform as
the undertaker of IPOs and help their customers to arrange private placement
buyers. Other than that, they assist corporations to structure the financing
strategy on domestic and international markets, reconstruct the balance sheet
corresponding to change in business environment and advising of merger and
acquisition of other companies. Investment banks source their funds majorly
from offshore and from capital market securities. They rarely hold loans as an
asset, so they rater sell the loan on the capital markets.
Another major sector of
NBFIs is the managed funds. This category includes many distinct institutions
such as insurance company, unit trust funds, mutual funds, hedging funds and
superannuation. Each of them represents a different structure to provide
financial services as the complement of bank. For example, the life/general
insurance is the contractual saving that customer pays a premium to cover the future
adverse events. In addition, the mutual fund is the pooling of resources from
individual investors to invest in a diversified portfolio. On the contrary, the
hedging funds involve in a higher risk and higher return investment strategy,
which is designed for the tall-end of wealthy individuals or large
corporations. They usually operate under a high leverage, so the investors will
expect a significant economic value in return. It is common for hedge funds
utilize derivative instruments to manage risk exposure and gain benefit on both
markets up and down turn.
In conclusion, the
Non-Banking Financial Institutions played critical role in the development of
financial market. Therefore we need to understand their function as a financial
participant.
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