Finance question - Assignment Example

This paper will take into account depository institutions whose main purpose is to provide financial services such as loans and deposits. Some of the constituents of depository institution are commercial banks, building societies, mortgage loans and credit unions, which all fall under one mainstream of financial institution. The depository institution came into existence when people felt there was need for security for their money. People faced the risks of loss of money through theft or accidents’ while keeping their money in their wallets or at home.

Thus formed the initial goal of financial institution, which was only to offer the safekeeping of their clients’ money. Currently depository institution such as commercial banks, takes deposits from clients, offer security and convenience of service to their customers. Clients can now transact with the use of checks or wire transfers at their convenience courtesy of the commercial banks. Clients to banks also have a chance to earn money from their deposits that is they can let their money work for them.

The depository institution, also provide loans to business, individuals and organizations to allow them to expand as this will only provide more income to the institutions once they bring back their income and profits (Valentine 2010). Nevertheless, the main difference between the depository institution and other financial institutions is the ability of the depository institution to offer cash deposits to its customers. The institutions achieve this through facilities such as savings account, fixed account and current accounts, Australia, & PricewaterhouseCoopers (2001).

Financial institutions arises out of the needs and demands of the customers, therefore the main function of this institution is to be intermediaries of financial markets. That is they are responsible for the movement of funds from one market to another for example, from investors to organizations or individuals to individuals. Thus, these financial institutions form the backbone of every economy, as they are responsible for the movement and flow of money in the economy. However, this is only the function of financial institution.

In relation to the depository institution, it also shares some of the general function, but its main function is to provide the facility of cash deposits to their clients, thus, enabling them to meet their financial obligations at their convenience. These depository banks also provide security to the clients’ investment, from cash to assets, as customers can easily transact without the obligation of carrying large sums of money as financial institution takes charge of such matters. In addition, they also keep records of account of their clients as they enable them to keep track of their finances (Pearson 2009).

Another function of depository institutions is to pool the deposits and saving of many small depositors and converts them into a large pool of money that provides loans to its trustworthy customers. This function also serves and answers the question of the sources of funds of these institutions. Through this mechanism the bank, makes money that they use in the daily running of their business. Subsequently the bank lends money to its customers at a higher rate ensuring