Financial Intermediation
Financial intermediation comprises of the activities undertaken by financial intermediaries - agents and principal institutions to bring investors and borrowers together, pool funds and channel the funds to their desired destination. It simplifies the process of transferring funds by reducing the costs, risks and delays associated with it and thus plays a vital role in the economy.
The financial intermediaries channel funds from various sources such as households, firms, government departments among others and then provides funds to help equity, fixed income and other securities markets, thus functioning as a link between those who have surplus money and those who need to borrow it. They also offer funds to lenders such as mortgage lenders, and to investors such as mutual funds, pension funds, and insurance companies. Financial intermediaries are intermediaries who transact in financial assets and create liquidity in the financial markets.
Financial intermediaries not only provide financial services and products such as deposits, loans, investments, but also act as advisors, providing advice to their clients about the best investments and financial products which are suitable for their needs and risk appetite. They also assist borrowers in obtaining funds from banks, other financial institutions and other investors.
Financial intermediation is a very important function in an economy as it plays an important role in helping the economy to grow by facilitating the flow of funds and providing better access to funds to both investors and borrowers who cannot access the capital markets directly. It is an essential part of the financial system as it helps in the effective allocation of resources which is necessary for both economic and social development.
Financial intermediaries also provide credit products such as acceptance credits, revolving lines of credit, overdrafts, factoring services and other alternative financing products. In addition, they provide services such as foreign exchange services, deposit taking and foreign exchange hedging.
The recent financial crisis has changed the landscape of financial intermediation. Many financial intermediaries have had to close down due to rising costs and losses incurred. The current tougher banking risk regulations have also impacted the activities of financial intermediaries by making it more difficult for them to raise capital and facilitate the flow of funds. This has led to a shift towards more direct financing and venture capital, and more equal access to credit for entrepreneurs and small business owners.
Financial intermediaries, however, continue to be of major importance in the economy. They are important for financial stability, making sure that the availability of funds is balanced between those with surplus and those with a need to borrow. They are also essential for economic growth, helping to make sure that capital is allocated to its most efficient use. Financial intermediaries help to channel capital to its highest and best use and to the projects which will benefit the economy the most.
