Each financial institution has one main role, and the clearest way to compare them is to state that role first. A commercial bank moves savings to borrowers, a central bank oversees the system, and an insurer pools risk.
This lesson belongs to money, banking and income. It builds on explaining the functions of money, because every institution below holds or moves money.
How do the main institutions compare?
| Institution | Main role | Who deals with it directly |
|---|---|---|
| Commercial bank | Accepts deposits and gives loans | Households and firms |
| Central bank | Issues currency and oversees the financial system | Government and banks |
| Insurer | Pools risk by collecting premiums and paying claims | Households and firms |
| Savings group or co-operative | Pools members’ savings and lends to members | Members |
Learn the role phrase with each name. “Accepts deposits and gives loans” is the phrase for a commercial bank, and it is also the phrase a marker looks for.
Worked example: matching a need to an institution
Four needs in an invented household. Match each to the institution whose role fits best.
| Need | Best institution | Reason |
|---|---|---|
| Safe place for RM5 000 of savings that can also earn interest | Commercial bank | Accepts deposits |
| Borrowing RM20 000 for a small shop | Commercial bank | Gives loans |
| Cover for a RM60 000 house against fire | Insurer | Pools the risk of loss |
| Issuing the new banknotes in the country | Central bank | Issues currency |
The first two needs go to the same institution, because the bank does both deposit and loan roles. The last two point to different institutions, so the need decides the match, not the word “bank”.
The mistake to avoid
The common slip is to treat the central bank as the place where households save. A student writes: “Ahmad deposits RM5 000 in the central bank.” The central bank is the bank for the government and other banks, not for everyday customers.
| Wrong | Right | |
|---|---|---|
| Saver’s deposit | Central bank | Commercial bank |
| Note issuing | Commercial bank | Central bank |
| Fire cover | Bank | Insurer |
A second slip is to describe an institution by its name or building, not by what it does. “It is the big bank in the town” is not a role. Always answer with a verb: accepts, lends, issues, pools.
A comparison sentence to reuse
“A commercial bank accepts deposits and lends to borrowers, whereas an insurer collects premiums from a large pool of people and pays those who suffer a loss.”
The sentence names one role for each institution and uses “whereas” to show the difference. Keep the pair on the same point, here the use of the money, so that the comparison is fair. For a wider topic view, return to the SPM Economics learning guide.
Check yourself
Name the institution that fits each role, and state the role in a verb phrase.
- Collects small payments from thousands of customers and pays for the large losses of some of them.
- Lends to a firm that wants to buy a delivery van.
- Issues the banknotes and coins used in the country.
Answer
-
Insurer: pools risk by collecting premiums and paying claims.
-
Commercial bank: gives loans using the deposits it accepts.
-
Central bank: issues currency and oversees the financial system.
What to study next
Continue with distinguishing sources of personal income, then use the chapter practice. Log any mix-ups in the mistake log.
For a teacher to quiz you with fresh examples, see online one-to-one Economics tuition.