Banks and central banks appear to be the most popular financial institutions out there. But while they are popular, they aren’t the only financial institutions. There is a long list of other institutions that engage in financial transactions. These are summed up as Other Financial Institutions.

In this article, we introduce you to OFIs, what they are, how they function, and some examples in Nigeria.

What are Other Financial Institutions (OFIs)?

Other Financial Institutions, or OFIs, is a term that broadly describes finance-servicing institutions which are neither central banks nor deposit money banks (DMBs).

These institutions play a huge role in the operation and sustenance of a financial ecosystem. However, they are distinct in terms of the type of customers they serve and the range of services they render.

While OFIs do not allow cash deposits like regular banks, they make other critical processes possible. Much of this comes from their direct interaction with banks, regulatory authorities, and other types of financial players.

How Other Financial Institutions (OFIs) Differ from Banks

We should start by saying that banks serve a large number of customers but they often perform limited functions. That is not so with Other Financial Institutions. It’s the very opposite. OFIs tend to serve a narrow set of customers. However, they provide a wide range of services.

OFIs also differ from DMBs in terms of their revenue generation models.

With banks, the model is to offer loans and generate revenue from the loan interest. On the other hand, OFIs use several different models. They charge fees for their services and for profits made using their services.

For example, as an OFI client, you will have to pay to receive investment consultation. Also, you will pay a small fee for every profit you make from brokerage and similar services.

Functions of Other Financial Institutions (OFIs)

We’ve explained that one of the ways OFIs differ is by offering a wider range of services. Here’s a brief on what these services are:

Brokerage Services

OFIs sometimes serve as brokers. In other instances, they operate brokerage platforms where users come on board and make transactions by themselves. The aim of a brokerage service is to give investors access to stocks and make buying and selling them easy.

Investment Options

Looking for directions on where to put your money and watch it grow? OFIs are a great option. These institutions are well-positioned to offer advice on investment options, risks, and expectations. Many of them have had years of experience with the Nigerian market, enabling them to accurately forecast market movements and identify new and existing trends.

Capital Servicing

New businesses and companies in the growth stage require a lot of capital resources. One way in which they may access these resources is through the help of an OFI. The OFI’s role here will be to provide necessary monetary assistance through which machinery, structures and tools can be acquired.

Trust Fund Services

Both individuals and businesses may utilise trust fund services to manage critical or large-volume assets. These services are rendered by financial institutions that stand separate from banks.

Trust fund services do not only secure a client’s assets. They practically manage them by investing in the right markets, creating profit and increasing the value of such assets.

Financial Advice or Consultation

Central and deposit money banks rarely offer any form of advice to individual customers. They are there simply to take your orders and transaction requests - and nothing more.

They will process your transfers, deposit your funds, and offer loans. However, they do not offer consultations on how or what you should do with your finances.

If you’re in need of advice or consultation, you will have to turn to OFIs.

Policy Formation

OFIs may contribute to policy formation at one level or the other. They may not serve as the head of a policy formation body, but they can be called upon to provide contributions.

This takes into account their meaningful position within any financial ecosystem.

Types of Other Financial Institutions (OFIs)

What are the different types of OFIs?

Credit Unions

A credit union is a financial institution designed to pool funds and then use this to provide loans to its members. Of course, this sounds like what any bank could do. Well, the difference is that with a credit union, members get very low-interest rates on their loans.

Secondly, credit union members all have significant decision-making power. Rules and policies are not decided by a select few.

Investment Banks

Investment banks work much unlike contemporary banks. Instead of accepting deposits, they partner with governments and companies to assist them in issuing securities. The investment bank controls most of the process related to issuing securities to the public and managing the profit realised.

Mutual Funds

Mutual funds are another type of Other Financial Institutions (OFIs). They function by pooling funds from individuals and corporate entities. Pooled funds are used to invest in a broad range of securities.

Brokerage Firms

Brokerage firms are responsible for creating the platform through which investors access securities.

Insurance Companies

An insurance company handles financial transactions related to insurance. They provide the insurance policy and contract to a policyholder.

These documents provide the terms for which a policyholder will receive financial reimbursement from the insurance company. For example, in the event of death or the loss of a business.

Examples of Other Financial Institutions (OFIs) in Nigeria

Bank of Agriculture (BOA) BOA or Bank of Agriculture is the leading agriculture and development finance institution in Nigeria. The bank focuses on helping rural dwellers secure agricultural benefits through loans and other credit facilities.

AIICO Insurance AIICO Insurance is a non-banking financial services company. It delivers insurance for health, life, motor and travel. In addition, AIICO Insurance covers other types of investment needs.

Conclusion

Everything from Development Finance institutions (DFIs), microfinance banks (MFBs), finance companies (FCs), and primary mortgage banks (PMBs) all fall under the OFIs classification.

OFIs stand apart from regular deposit-taking banks and you will need them for your trading or investment activities.