Types of Financial Institutions: Depository Institutions and Non-depository Institutions
Arjun EP
Financial institutions are business organization.
They trade money and money equivalent paper.
Generally, there are two types of financial institution; they are depository and non-depository.
But in developed countries, there are three types of financial institutions.
Financial institutions are also known as financial Intermediaries.
Types of Financial Institutions
Depository institutions |
Non-depository institutions |
Others institutions |
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Commercial banks |
Insurance companies |
Investment bankers |
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Development banks |
Pension fund |
Mortgage bankers |
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Finance companies |
Mutual fund |
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Saving and credit cooperatives |
Citizen Investment Trust |
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Micro finance |
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(1) DEPOSITORY INSTITUTIONS
The depository institutions collect the saving from different types of savers and provide long-term or short-term loan to the borrower.
The main depository financial institutions are:
(a) Commercial Banks
Commercial banks are one of the major financial institutions.
Their primary function is to transfer of funds from the savers to users.
Commercial bank accepts both time deposit and the demand deposit.
Commercial banks are an important source of short term loan.
Nepal Bank Limited is the first commercial bank of Nepal; it was established in 1994 B.S.
The second commercial bank of Nepal is Rastriya Banijya Bank (RBB); it was established in 2022 B.S. as a fully government owned bank.
After restoration of multiparty democracy in the country several joined venture banks were established.
At present, there are 27 commercial banks in Nepal (15 July 2020).
Commercial banks are ranked ‘A’ grade by Nepal Rastra Bank.
Commercial banks are the major financial institutions.
The main objective of the bank is to earn maximum profit in SAARC countries.
(b) Development Banks
Development banks are financial institutions engaged in the promotion and development of industry, agriculture and other key sectors of the country.
Development banks are graded ‘B’ by Nepal Rastra Bank based on paid-up capital.
Development banks can do better business when they have better financial strength, technical expertise and the managerial skill like commercial bank.
Development bank creates the proper environment in the country for the development of rural area, industrial and agricultural area of the country.
There are 20 Development Banks upto 15 July 2020.
(c) Finance Company
It is the lower level financial institution than development bank.
Generally, finance company does not take deposit from public like banks.
But, some special finance companies take deposit from public.
The main work of finance company is to provide personal loan and some business loan.
The interest on loan of finance company is higher than banks.
Finance Companies are graded ‘C’ by Nepal Rastra Bank based on paid-up capital.
There 22 finance companies in Nepal upto 15 July 2020.
Finance companies offer different type of banking services.
Such as loans and credit facilities, private education funding, retirement planning, trading in money market, underwriting shares etc.
These institutions also provide wealth management such as managing portfolios of shares, discounting services etc.
Finance company supports investments in property.
It also prepares feasibility study, market or industry studies for companies.
(d) Saving and Credit Cooperatives
Saving and credit co-operatives are the institutions where large numbers of people are voluntarily associated for saving and borrowing purposes.
It is different from the banks and finance companies.
Its purpose is not to earn profit but to render the services to the people.
Saving and credit co-operatives collect deposit primarily from their members.
They educate their members to promote habit of saving.
Savings generated from their members are used to lend themselves to satisfy their small financing needs.
In context of Nepal saving and credit cooperative are regulated, supervised and monitored by co-operative department.
According to the Nepal Federation of Saving & Credit Cooperative Union Ltd (NEFSCUN), there were 34,512 cooperatives in Nepal (upto 15 July 2020).
Out of them, 15 saving and credit cooperatives have obtained permission from NRB to conduct limited banking functions.
(e) Microfinance
Microfinance is also known as microcredit.
It is a type of banking service provided to unemployed or low-income individuals or groups.
Microfinance provides small amount of loan that other financial institutions do not lend.
Generally, microfinance charges high interest rate in Nepal.
Microfinances are graded ‘D’ by Nepal Rastra Bank based on paid-up capital.
There 85 microfinance companies in Nepal upto 15 July 2020.
It allows people to take small amount of loan for small business safely.
It operates its business in under developing and developing countries such as in SAARC countries, Uganda, Indonesia, Serbia etc.
According to the World Bank more than 500 million people have benefited from microfinance-related operations.
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Final Accounts |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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(2) NON-DEPOSITORY INSTITUTIONS
Non-depository institutions do not take deposit from customer or clients as depository institution.
They collect fund by collecting premiums or other sources.
They provide long-term or short-term loan to depository institutions.
The main non-depository financial institutions are:
(a) Insurance Company
Insurance companies are the contractual saving institutions.
They collect amount in the form of periodic premium from insured party and in return agree to compensate against the risk of life or property.
Normally, insurance companies can be classified into two categories; life insurance and non-life insurance.
Life Insurance companies make payments to a beneficiary based on certain events, such as the death or disability of the insured party.
Non-life insurance or casualty insurance companies make payments when financial loss occurs due to fire, theft, accident and illness.
At present, insurance companies are the major agents of fund transfer.
There are 40 insurance companies in Nepal upto 15 July 2020; out of them 19 life, 20 non-life insurance and 1 is reinsurance company.
(b) Pension Fund
Pension funds are retirement plans funded by corporations or government agencies for their workers.
Pension funds make a periodic deposit and provide benefits to associated employees on the retirement.
The pension funds basically invest in stock, bonds and other type of long-term securities including real estate.
The pension fund has not grown smoothly at private level also.
There is no specialized pension fund company in Nepal.
Employees Provident Fund (Karmachari Sanchaya Kosh in Nepali) was applied by Judha Shamsher Rana in 1993 B.S.
It manages the provident fund (PF) on behalf of Government of Nepal.
All the permanent government employees who work as police, army, civil servant, teachers etc are eligible for provident fund.
Any private sector establishments with more than ten employees are also eligible to become members.
Citizen Investment Trust (CIT) manages pension funds of public sectors companies in Nepal.
(c) Mutual Funds
Mutual funds are investment companies.
They accept money (funds) from saver.
These funds are used to buy various types of financial assets such as shares, long-term bonds and short-term debt instruments etc.
These organization pools funds and thus reduce risk through diversification.
The small investors, who are unable to form a well-diversified portfolio of securities on their own, can hold investment portfolio by investing in mutual fund units.
NIDC capital market and Citizen Investment Trust are operating mutual funds in Nepal.
Siddhartha Bank Limited has registered Siddhartha Mutual Fund at security exchange Board of Nepal (SEBON) under the Mutual Fund Regulation 2010 AD.
Siddhartha Bank Limited is the fund sponsor of Siddhartha Mutual Fund.
(d) Citizen Investment Trust
Citizen Investment Trust (Nagarik Lagani Kosh) was incorporated in 18th March 1991 (4th Chaitra 2047 B.S.) under the Citizen Investment Trust Act, 1990.
It is a statutory body under Ministry of Finance, Government of Nepal.
It is only a semi-governmental organization.
It is being operated all over the nation.
It is a saving and investment institution.
It is providing fully function activities in the capital market insurance programs, capital markets services, unit-trust management services and trustee services.
At present, it has been launching various types of voluntary retirement schemes (pension funds, gratuity funds) and mandatory insurance fund programs on the basis of fully funded and individual account.
CIT encourages the long-term saving, employee saving growth schemes, employee savings growth retirement fund, Insurance funds for government employees and teachers and so on.
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