Financial intermediary

Financial intermediation consists of channeling funds between surplus and deficit agents. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.[1] Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.[1] As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).[2] In the West, a financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly.[citation needed] 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 loans or mortgages.[3] Alternatively, they may lend the money directly via the financial markets, which is known as financial disintermediation

Functions performed by financial intermediaries

Financial intermediaries provide 3 major functions: 1. Maturity transformation
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Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs) 2. Risk transformation
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Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to spread the risk) 3. Convenience denomination Matching small deposits with large loans and large deposits with small loans [edit]Advantages

of financial intermediaries

There are 2 essential advantages from using financial intermediaries: 1. Cost advantage over direct lending/borrowing
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2. Market failure protection the conflicting needs of lenders and borrowers are [citation needed] reconciled, preventing market failure The cost advantages of using financial intermediaries include: 1. Reconciling conflicting preferences of lenders and borrowers 2. Risk aversion intermediaries help spread out and decrease the risks

3. Economies of scale using financial intermediaries reduces the costs of lending and borrowing 4. Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

Types of financial intermediaries

Financial intermediaries include: Banks Building societies Credit unions Financial advisers or brokers Insurance companies Collective investment schemes Pension funds
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[edit]Summary

& conclusion

Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds [citation needed] who want to borrow. In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost [citation needed] disadvantages of direct finance. Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. The other main explanation draws on the analysis of informat finance

Abstract Financial Intermediaries are performing various roles in addition to what they used to do earlier by innovating and upgrading themselves in many ways. Some of the important roles they are expected to perform in the 21 st century is to help in the reduction of Poverty, Restructuring of firms in distress, Markets for firm's Assets and so on. Keywords Financial Intermediary/ Types of Financial Intermediary/ Need for financial intermediary/ Roles performed by financial intermediary/ Financial Intermediary for Poverty Reduction/ Markets for Firm's Assets/ Pension Funds Introduction The term financial intermediary may refer to an institution, firm or individual who performs intermediation between two or more parties in a financial context. Typically the first party is a provider of a product or service and the second party is a consumer or customer. Financial intermediaries are banking and non-banking institutions which transfer funds from economic agents with surplus funds (surplus units) to economic agents (deficit units) that would like to utilize those funds. FIs are basically two types: Bank Financial Intermediaries, BFIs (Central banks and Commercial banks) and Non-Bank Financial Intermediaries, NBFIs (insurance companies, mutual trust funds, investment companies, pensions funds, discount houses and bureaux de change). Financial intermediaries can be: Banks; Building Societies; Credit Unions; Financial adviser or broker; Insurance Companies; Life Insurance Companies; Mutual Funds; or Pension Funds.

The borrower who borrows money from the Financial Intermediaries/Institutions pays higher amount of interest than that received by the actual lender and the difference between the Interest paid and Interest earned is the Financial Intermediaries/Institutions profit. Financial Intermediaries are broadly classified into two major categories: 1) Fee-based or Advisory Financial Intermediaries 2) Asset Based Financial Intermediaries. Fee Based/Advisory Financial Intermediaries: These Financial Intermediaries/ Institutions offer advisory financial services and charge a fee accordingly for the services rendered. Their services include:

i. Issue Management ii. Underwriting iii. Portfolio Management iv. Corporate Counseling v. Stock Broking vi. Syndicated Credit vii. Arranging Foreign Collaboration Services viii. Mergers and Acquisitions ix. Debentive Trusteeship x. Capital Restructuring ASSET-BASED Financial Intermediaries: These Financial Intermediaries/Institutions finance the specific requirements of their clientele. The required infra-structure, in the form of required asset or finance is provided for rent or interest respectively. Such companies earn their incomes from the interest spread, namely the difference between interest paid and interest earned. The financial institutions may be regulated by various regulatory authorities, or may be required to disclose the qualifications of the person to potential clients. In addition, regulatory authorities may impose specific standards of conduct requirements on financial intermediaries when providing services to investors. Role of Financial Intermediaries for Poverty Reduction Finding innovative ways to provide financial services to the poor so that they can improve their productive capacity and quality of life is the role of the financial intermediaries in the 21st century. Most of the poor live in the rural areas, and are engaged in agricultural activities or a variety of micro-enterprises. The poor are vulnerable to income fluctuations and hence are exposed to risk. They are unable to access conventional credit and insurance markets to offset this.

Most formal financial institutions do not serve the poor because of perceived high risks, high costs involved in small transactions, perceived low profitability, and most importantly, inability to provide the physical collateral generally required by such institutions. About 95 percent of poor households still have little access to institutional financial services. Most poor and low-income households continue to rely on meager self-finance or informal sources of finance. Providing efficient micro-finance to the poor is important for many reasons: Efficient provision of savings, credit and insurance facilities can enable the poor to smoothen their consumption, manage risks better, gradually build assets, develop micro-enterprises, enhance income earning capacity, and generally enjoy an improved quality of life. Efficient micro-finance services can also contribute to improvement of resource allocation, development of financial markets and system, and ultimately economic growth and development. With improved access to institutional micro-finance, the poor can actively participate in and benefit from development opportunities.

The latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. This could allow them to be more self-reliant, create employment opportunities, and, not least, engage women in economically productive activities. Micro-finance activities prove that poor households can and do save rather than borrow, and it is possible to successfully mobilize funds from poor households. Another important fact is that contrary to expectations, the poor are creditworthy and financial services can be provided to the poor on a profitable basis at low transaction costs without having to rely on physical collateral. Finally, micro-finance services contribute to the development of rural financial markets and to strengthening the social and human capital of the poor.