Differences Between Banks and Non-Bank Financial Institutions

Banks are so prominent in the Nigerian economy that non-bank financial institutions (NBFIs) are hardly noticed.

It is against this background that this post seeks to distinguish between banks and non-bank financial institutions.

What is a Bank?

Banks are financial institutions that provide a wide range of financial services to individuals, businesses, and governments.

Their primary functions include accepting deposits from the public, facilitating withdrawals, and offering various types of loans and advances.

Banks play an important role in the economy by acting as financial intermediaries, channelling funds from savers to borrowers.

What is a Non-Bank Financial Institution?

Non-Bank Financial Institutions (NBFIs) are financial entities that offer financial services but do not hold a banking license.

Unlike banks, NBFIs do not accept deposits from the general public.

Examples of non-bank financial institutions are insurance companies, pension schemes, discount houses and finance houses.

Differences Between Bank and Non-Bank Financial Institutions

1. Banks are primarily funded through customer deposits and interbank transactions whereas non-bank financial institutions rely on capital markets, private funding and fee-based services for funding.

2. Banks have the authority to accept deposits from the public.

In contrast, non-bank financial institutions do not accept deposits from the public. They have to rely on alternative sources of funding.

3. Because banks accept deposits, they are subject to stringent regulations and oversight by central banks and financial authorities.

They may be required to adhere to specific capital requirements, liquidity ratios, and other regulations.

In contrast, non-bank financial institutions are not regulated by the government as heavily as banks.

They are subject to less stringent regulations than banks.

4. Banks are very much involved in the payment system of any economy. All payments made in an economy, whether domestically or internationally must go through the banking system.

On the contrary, non-bank financial institutions are not involved in the payment system.

5. Since banks accept deposits, they are insured by the deposit insurance scheme of the country they operate.

On the other hand, non-bank financial institutions are not Insured by the deposit insurance scheme since they do not accept deposits from members of the public.

6. Banks have the unique ability to create credit through the process of accepting deposits and making loans.

This is possible because when banks lend money, they do not physically transfer it but instead credit the borrower’s account with a deposit, which can then be spent or withdrawn.

As these funds are loaned and redeposited across the banking system, a multiplier effect occurs, expanding the overall money supply.

In contrast, non-bank financial institutions do not have credit creation capacity since they do not accept deposits from members of the public.

7. Banks generally offer a wide range of services such as accepting deposits, advancing loans, payment processing and foreign exchange services.

On the other hand, non-bank financial institutions specialize in services like investment banking, insurance and asset management.

Comparison Chart of Bank vs Non-Banking Financial Institutions

FeaturesBanksNon-Bank Financial Institutions (NBFIs)
Funding SourcesCustomer deposits and interbank transactions.Capital markets, private funding, and fee-based services for funding.
Deposit AcceptanceHave the authority to accept deposits from the public.Do not accept deposits from the public
Regulatory OversightSubject to stringent regulations and oversight by central banks and financial authorities.Subject to less stringent regulations than banks.
Payment System InvolvementIntegral to the payment system of any economy.Not involved in the payment system.
Deposit InsuranceInsured by the deposit insurance scheme of the country they operate in.Not insured by a deposit insurance scheme
Credit Creation CapacityYesNo
Services OfferedOffer a wide range of services including deposits, loans, payment processing, and foreign exchange.Specialize in services like investment banking, insurance, and asset management.
Customer BaseServe a broad customer base, including individuals, businesses, and other entities.Often cater to niche markets or provide specialized services to a specific clientele.
Economic RoleServe as intermediaries for payments. They are integral to the monetary policy transmission mechanism.Provide alternative financing options and contribute to the diversification of the financial system.