Financial intermediaries bring together borrowers and lenders in financial markets by interacting with savers and borrowers simultaneously and by producing a set of services facilitating the transformation of liabilities into assets like transforming deposits into loans. Though financial markets can also bring together lenders and borrowers directly, still the existence of financial intermediaries is of utmost importance. This is because the direct lending approach between savers and borrowers has proved inefficient as this process can be directly traced to the barter system where there is always a need for double coincidence of wants. This function of transformation is termed as intermediation. Through this process, financial intermediaries facilitate savers and borrowers to have indirect lending and borrowing. Financial intermediaries can be banks, building societies, financial advisor or broker, insurance companies, life insurance companies, mutual fund and pension fund. Firstly, national bank serves as a financial intermediary by accepting deposits and placing in various securities and mortgage loans. By doing this, individual investors are linked by banks with financial markets and demanders of credit. The intermediaries actually act as a middleman between firm raising funds and investors (Rampini & Viswanathan, 2012, pp.1-2). Requirement of financial intermediary Though financial markets can also bring together lenders and borrowers directly, still the existence of financial intermediaries is of utmost importance. This is because the direct lending approach between savers and borrowers has proved inefficient as this process can be directly traced to the barter system where there is always a need for double coincidence of wants. People with savings will want to lend the amount available with them for a particular time period. For this, one will have to find a person who needs approximately the same amount of fund for the same time period. Searching of such a person is a difficult task. Again, direct lending necessitates a negotiable contract. Transactions of repayments of principle and interest are required to account for. Direct lenders will have limited ability to diversify and minimum exposure to default risk by lending small amounts to many borrowers but the transaction costs would be relatively higher. Here financial intermediaries reduce the transaction costs and minimize risks. Thus, it improves the economic efficiency. Generally, the financial intermediaries perform the following functions: i. It facilitates transactions. ii. It creates a portfolio. iii. It spreads risks over time. iv. It eases household liquidity constraints. v. It reduces the problem of asymmetric information. In addition to intermediation, sometimes brokerage function also takes place by financial institutions in bringing together buyers and sellers to complete financial transactions. Stockbrokers specialize in brokerage to perform such task. Types of financial intermediaries Fee based or advisory financial intermediaries These financial intermediaries charge a fee for rendering advisory financial services. Their services include: i. Issue management ii. Underwriting iii. Portfolio management iv. Corporate counselling v. Stock broking vi. Credit syndication vii. Mergers and acquisitions viii. Debenture trusteeship ix. Capital restructuring Asset based financial intermediaries The specific requirements of customers are met by these financial intermediaries. They provide the required asset or finance for rent or interest respectively. The income is earned by them from
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Financial intermediaries bring together borrowers and lenders in financial markets by interacting with savers and borrowers simultaneously and by producing a set of services facilitating the transformation of liabilities into assets like transforming deposits into loans. …
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