Definition of Financial Institution (Bank)

Kali will discuss the meaning of financial institutions (Banks) and their functions, types and purposes. Let’s look at the explanation …


Table of contents :

Definition of Financial Institution (Bank)

Functions of Financial Institutions (Banks)

  1. Money Creation
  2. Supporting the Smooth Payment Mechanism
  3. Community Savings Fund Collection
  4. Supporting the Smoothness of International Transactions
  5. Storage of Valuable Goods
  6. Provision of Other Services

Types of Financial Institutions (Banks)

  1. Commercial Banks
  2. Central Bank

Purpose of Financial Institutions (Banks)

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Definition of Financial Institution (Bank)

Based on the Law of the Republic of Indonesia Number 10 of 1998 dated November 10, 1998 concerning banking,


What is meant by bank is a business entity that collects funds from the public in the form of deposits and distributes them to the public in the form of loans and / or other forms to improve the quality of sleep of many people.


Banks are the most important financial institutions in the economy. When consumers and producers have to make payments for purchases of goods and services, they will use a bank to provide a check or credit card facility.


When someone has excess money, they can put the money in the bank and then the bank distributes the money to people who need it.


When they need financial information and financial planning, banks can become their advisors and consultants.


Functions of Financial Institutions (Banks)

The functions of commercial banks described below show how important the existence of banks is in the modern economy, namely:


  1. Money Creation

The money created by banks is demand deposits, which are a means of payment through a clearing mechanism.


The ability of commercial banks to create demand deposits contributes to their position and function in implementing monetary policy.


The central bank can reduce or increase the money supply by affecting the ability of commercial banks to create demand deposits.


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  1. Supporting the Smooth Payment Mechanism

Another function of the bank that is no less important is to support the smooth operation of the payment mechanism.


This is possible because one of the services offered by commercial banks is a service related to payment mechanisms.


Some of the well-known services are clearing, money transfer, deposit acceptance, providing cash payment facilities, credit, easy and convenient payment facilities, such as plastic cards and electronic payment systems.


  1. Community Savings Fund Collection

The funds that are mostly collected by banks are savings funds. In Indonesia, savings funds consist of demand deposits, time deposits, certificates of deposit, savings, and / or other equivalent forms.


The ability of commercial banks to raise funds is much greater than that of other financial institutions.


The savings funds that have been collected will be distributed to those in need, especially through credit.


  1. Supporting the Smoothness of International Transactions

Banks are also very much needed to facilitate and / or facilitate international transactions, both goods / services transactions and capital transactions.


Difficulties in transactions between two different countries always arise due to differences in geography, distance, culture and monetary systems of each country.


The presence of commercial banks operating on an international scale will facilitate the completion of these transactions.


With the existence of commercial banks, the interests of those who carry out international transactions can be handled more easily, quickly and cheaply.


  1. Storage of Valuable Goods

Storage of valuables was one of the earliest services offered by banks.


People can keep their valuables such as jewelery, money, and diplomas in boxes provided by banks for rent (safety boxes or safes).


The rapid economic development has caused banks to expand their services by storing securities or securities.


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  1. Provision of Other Services

In Indonesia, the provision of other services by commercial banks has also increased and is widespread.


Currently we can pay for electricity, telephone buy cell phone credit, send money through ATMs, pay employee salaries using bank services.


These services are very convenient and provide a sense of security and comfort for those who use them.


Types of Financial Institutions (Banks)

In accordance with their function, banks are divided into 3 types, namely commercial banks, central banks and people’s credit. Here’s the explanation:


  1. Commercial Banks

Commercial bank is a bank that functions in providing services regarding all banking services and serving all levels of society, both institutions or for individual communities.


definition of a bank financial institution

commercial banks

Another name for this commercial bank is a commercial bank. Commercial banks are divided into three groups, namely:


Non-foreign exchange  commercial banks – these banks do not provide services related to foreign currencies.

Foreign exchange commercial banks –  this type of bank serves services related to all foreign currencies.

Bank Perkreditan Rakyat (BPR) –  is a bank that specializes in serving small communities, for example in rural areas. Previously, banks for community credit initially came from village banks, banks, granaries, villages and other banks which were later merged into BPR (people’s credit banks)

The products offered by BPR are relatively narrow compared to commercial banks.


There are even several types of bank services that BPRs do not allow, such as opening current accounts and participating in clearing.


  1. Central Bank

The central bank in Indonesia is Bank Indonesia. The definition of a central bank is a bank that has a function as a circulation bank, last business lender and bank banker in a country.


Bank Indonesia is more aimed at the interests of the government and banking institutions. The main objective of the central bank is to fulfill and maintain rupiah stability.


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The way to achieve this is to establish monetary policy, regulate and maintain the smooth operation of the foreign exchange system that oversees and regulates banks.


Purpose of Financial Institutions (Banks)

The following are some of the objectives of bank financial institutions:


Banks collect funds from public valuable documents so that public funds are safer.

The bank redistributes the funds raised for use in financing in the economic and development sectors.

Banks provide capital assistance in the form of credit to the public or companies for venture capital.

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