Banking Sector

Financial Inter-mediation.

Introduction

 financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvited capital to productive enterprises through a variety of debt, equity, or hybrid stake-holding structures.

Through the process of financial inter-mediation, certain assets or liabilities are transformed into different assets or liabilities.^[2] As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).

A financial intermediary is typically an institution that facilitates the channelling of funds between lenders and borrowers indirectly.That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loansor mortgages.Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disinter-mediation.

Mutual Funds as Financial Intermediaries.

Mutual funds provide active management of capital pooled by shareholders. The fund manager connects with shareholders through purchasing stock in companies he anticipates may outperform the market. By doing so, the manager provides shareholders with assets, companies with capital and the market with liquidity.

Advantages of Financial Intermediaries.

Through a financial intermediary, savers can pool their funds, enabling them to make large investments, which in turn benefits the entity in which they are investing. At the same time, financial intermediaries pool risk by spreading funds across a diverse range of investments and loans. Loans benefit households and countries by enabling them to spend more money than they have at the current time. 

Financial intermediaries also provide the benefit of reducing costs on several fronts. For instance, they have access to economies of scale to expertly evaluate the credit profile of potential borrowers and keep records and profiles cost-effectively. Last, they reduce the costs of the many financial transactions an individual investor would otherwise have to make if the financial intermediary did not exist. 

Disadvantages of Financial Intermediaries

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There is no doubt that financial inter-mediation provides a number of advantages.However,it does not come without cost as both borrowers and lenders must pay for the benefits they receive.This generally means.

• Increased cost of funds borrowing.
• Reduced return for lending for savers.
• Its less likely for secondary Financial assets to be securitised.