Non-Bank Financial Institution (NBFI)
Non-bank financial institution (NBFI) is an institution that doesn’t hold the banking license. Also, that means a national bank (or another regulatory banking body) doesn’t supervise such an institution.
Though NBFIs don’t work under the bank license, they perform and offer bank-related activities and services. Their examples include insurance, investment, short-term loans, etc.
Non-bank financial institutions play an important role in the financial system. It creates competition for banks. Though universal banks offer a wide selection of services, they are rather standardized. NBFIs are more flexible when it comes to finding what suits the client the most. Non-bank establishments may offer the right package of services for select business types or individuals. Moreover, NBFIs can substitute some governmental services like pension funds. Non-government pension funds that refer to NBFIs help people keep their funds and invest them risk-free to make much of investment.
During a recession and shocks, non-bank institutions can help the economy to recover. Of course, as long as country’s financial regulation is efficient. While banks do act following certain rules and instruction, NBFIs have more freedom. The stricter are the regulations for banks, the more chances non-bank establishments have to win the competition.
There are various non-bank financial institution types. There are some of the types’ examples like market makers, risk-pooling establishments, financial service providers. Every country has its own regulatory authority to supervise the NBFIs activity.