Meaning of the Financial Sector: Definition and Key Institutions

Meaning of Financial Sector

The financial sector refers to a part of the economy that is composed of businesses and organizations that contribute to providing financial services and products to commercial and retail customers. The financial sector contributes significantly in earning money from mortgages and loans, which become more valuable when interest rates decrease. It is also a determining factor of the overall health of the economy as a strong financial sector indicates economy is healthy while a weak one indicates deterioration in economy.

Financial sector thus helps keeping an economy stable. It provides loans for businesses to grow, mortgages for people to buy home and insurance to protect individuals, companies and their assets, helps people save money and create endless job opportunities. Despite generally conceived as being similar to Dalal Street, financial sector is different as it includes more components that support everyday economic activities, such as brokers, financial institutions and money markets 

Different Institutions included in Financial Sector 

• The financial sector includes different industries such as banks, investment companies, insurance firms, real estate brokers, consumer finance firms, mortgage lenders and real estate investment trusts (REIT).
• It consists broadly two types of financial institutions namely banks and non-banking institutions. These helps in providing financial services and act as intermediaries between people who wishes to save money and thos who need to borrow it. 
• Banks: These are financial intermediaries that provide capital to borrowers and accept deposits from individuals and businesses. They are regulated to ensure the stability of market and also protect its consumers, building their trust and loyalty to invest in more quantity. Some types of banks are:

1. Public banks
2. Commercial banks 
3. Central banks
4. Cooperative banks
5. State-managed cooperative banks
6. State-managed land development banks

• Non-Banking Financial Institutions: These offer financial services but are not categorised as banks and dont have banking licenses. These institutions help with investments, risk management and market transactions. Some of these non-banking financial institutions are:
  • Commodity traders
  • Finance and Loan companies
  • Insurance companies
  • Mutual funds