Finance is making money or funds available where and when they are needed. It is also seen as the art and science of managing money. Finance is the lifeblood of every organization and is at the heart of all organizations.
Talking about fields of finance, one might be tempted to limit oneself to the areas of personal finance, corporate finance, public finance, and international finance, which, in most cases, are captured under the scope of finance.
What companies are in the finance field?
While attempting to answer this question, it is pertinent to see the finance field, or field of finance, as the financial sector. The services provided in the financial sector determine the nature of companies operating there.
The financial industry is an aspect of the financial system where different financial institutions come together to aid the mobility of funds from the region of surplus to the deficit area in the presence of regulators who provide the rules and regulations guiding the activities of the financial institutions.
Types and Players in the Financial Sector
It is noteworthy that financial institutions are broadly divided into bank financial institutions and non-bank financial institutions. The financial institutions of banks include all licensed banks in the country.
They are commercial banks, merchants’ banks, development banks, mortgage banks, and microfinance banks. Non-bank financial institutions include insurance companies, Pension Fund administrators, etc.
Financial Markets and its Divisions
Besides, financial markets (money and capital markets) are key players in the financial services sector. They also play crucial roles in financial intermediation (i.e., movement of funds from surplus economic units to deficit monetary units). Financial markets can be divided into two segments: capital and capital markets.
Money Market
Money markets are markets where short-term financial instruments are bought and sold. The tools used in the money market include Treasury bills, certificates, commercial papers, bankers’ acceptances, and certificates of deposits.
The major participants in the money market include individuals, corporate organizations, banks, discount houses, and the Central Bank.
Capital Market
The capital market is another arm of the financial market. The capital market is where long-term financial instruments are bought and sold. The market has both primary and secondary wings and markets.
The primary market is where new issues of funds or securities are traded, while the secondary market is where holders of existing financial instruments sell them to other investors.
Tools used in the capital market can be categorised into three groups: ordinary shares (common stock), debt instruments, and preference shares.
Instruments of Capital Markets
Ordinary shares are issued to members of the public, who eventually become owners of the company. They have a nominal or face value. The ordinary shareholders have residual claims to the incomes and assets of the company.
Debt instruments issued by companies are usually evidenced in debentures or bonds. They also have a face value, the debt the issuer owes, and interest paid at a stated coupon rate. Preference shares are shares other than ordinary shares.
They convey some preferential treatment to their holders. Their holders are entitled to a fixed amount of dividends every year. It is obligatory whether the company makes a profit or not. They are varied.
They could be cumulative or non-cumulative, redeemable or irredeemable, and participatory, among other types.
The financial institutions and market operators’ activities are regulated by entities duly authorized by law to discharge such oversight responsibilities. Government agencies also monitor the activities of the regulators to avoid undue excesses.
The terminology can explain the act of supervising the activities of the regulators’ monitor.’
Services Provided by Companies in the Financial Sector
Companies in the financial services sector provide some of the following services:
- Acceptance of deposits: here, cash and check deposits from individuals, businesses, the government, government ministries, departments, and agencies of various sizes are accepted by banks. This service lends credence to the financial intermediation function of banks.
- Granting of loans: deposits received by banks are given to individuals, businesses, and government agencies as loans. This gives rise to indirect finance, where financial institutions act as intermediaries.
- Insurance services guarantee the indemnification of policyholders who suffer losses and encourage risk-taking by businesses with the hope of protection in case of unforeseen mishaps.
- Risk management – this is the hallmark service of financial institutions.
- Issuing guarantees and bonds involves giving confidence to businesses and risk-takers in their financial pursuits.
- Pension fund management: This service guarantees peace of mind for retired workers by assuring them of periodic payments after service.
- Financial technology (FINTECH) companies make financial experiences pleasurable.
- Tax and accounting firms – educate individuals and businesses on tax matters and provide auditing services to them.
- Funds management – Educates all stakeholders on how, when, and where to source and apply funds.
- Stockbroking – they are raising funds for business expansion, among others.
- Investment banking – educates individuals and businesses on where to invest their funds for optimal returns.
- Mortgage financing involves the provision of funds for the acquisition of landed property or the building of houses. Commercial and merchant banks complement the efforts of Federal Mortgage banks in this direction.
- Project financing and management – financial institutions provide funds for the execution of projects by various stakeholders in the sector. These funds could be accessed through guarantees and bonds.
It could be an Advance Payment Guarantee (APG), Bid Bond, and Performance Bond. While APG guarantees the contractors access to an agreed percentage of funds in the first instance, Bid Bonds guarantee contract employers that the contractors bidding for jobs will secure funding from the Bonds issuer (the Bank).
Meanwhile, performance bonds guarantee to the contract employer(s) that the contractor has the expected quality to perform the about-to-be-awarded job to specification.
Project management services involve planning, organizing, directing, coordinating, implementing, and controlling the activities involved in ensuring the total quality of a project to attain proper funds management and prevent project failure.
In discharging this function, financial institutions liaise with project managers who may be staff of the institutions or professionals in practice to ensure the safety of funds and the quality of the project.
5. Commercial Banks and their Functions
Commercial Banks accept deposits into savings or current accounts. A time deposit or fixed deposit account can also be opened for customers with funds to set aside for some durations usually agreed upon upfront.
Deposits into current accounts are known as demand deposits. They are so-called because holders of this type of account have the right to withdraw from the account at will. Because of the services they require from the banks, they charge them some approved charges.
Accordingly, commercial banks are only authorized to lend for short durations. The terminology ‘borrow short and lend short’ is usually used to depict a situation where commercial banks apply the deposits received from the public.
Commercial banks sometimes transform the sizes and durations (maturity periods) of deposits received to suit borrowers’ requests. In doing this, they must guard against mismatches to forestall anything affecting their ability to meet maturing short-term obligations.
6. Merchant Banks and their functions
Merchant banks, on the other hand, provide wholesale banking services. They perform banking functions, corporate finance services, issuing house services, equipment leasing, treasury/financial services, and funds and portfolio management functions, among others.
They do not accept any deposit(s) withdrawable by cheques and, as such, are restricted from opening demand deposit accounts.
In some climes where universal banking is practiced, the gap between services provided by commercial and merchant banks becomes smaller, as both banks act as financial supermarkets where clients can stand in one location and access varieties of financial products of their choice, taste, and fashion.
7. Insurance companies
Insurance companies provide guarantees, indemnities, bonds, and all allowable protections/covers against all insurable risks. They also manage funds for their clients and give them financial advice.
The main thing that comes to mind about insurance companies is INDEMNITY. This means restoring a policyholder to the financial position where they were before the loss. Several principles inspire the functions of insurance companies.
The regulations include utmost good faith, proximate cause, indemnity, subrogation, and insurable interest. The law of large numbers governs insurance.
8. Finance Decisions and Functions
Financial institutions make financial decisions that also inform their functions. There are three significant areas of decision-making in finance. They are investment, financing, and dividend or profit allocation decisions.
These decisions are long-term in nature. A finance manager must also make some decisions that ensure the business’s smooth running. With that in mind, some liquidity or working capital decisions must be made.
Accordingly, finance functions are the same thing as finance decisions. They are both long-term and short-term in nature.
- investment function
- financing function
- dividend function, and
- liquidity function
The investment function is concerned with where to place or allocate the funds available to the organization intelligently. The financing function is concerned with the raising of funds. It should consider sources that are competitive and economical.
Reliability of the head and economy of cost are the significant considerations under the financing function. The dividend or profit allocation function involves the distribution of profits among the firm’s various stakeholders.
For the firm to continue operating, liquidity or working capital decisions must be made. That is the firm’s only short-term decision.
It is essential to conclude that every sector of the economy needs financial services provided by lawfully constituted entities for their clearly defined responsibilities. The discharge of these services is carefully monitored or regulated by bodies created for such duties, depending on the jurisdiction.
The rendition of these services contributes enormously to the economic growth of the nation/country where the services are rendered.
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