Financial Intermediaries Paper A financial intermediary is an organization that acts as the middleman between shareholders/investors and firms raising funds. They may also be called financial institutions. Examples of financial intermediaries are chartered banks, insurance companies, mutual funds, and pension funds and loan associates. In many countries banks are the primary form of financial intermediary, and as such are the largest arsenal for the publics savings, the main source of external credit, and the key performer in the payments system. Some countries have more complicated financial systems; banks in these countries tend to be at the heart of diversified financial services. Financial intermediaries provide two important advantages to investors. First, lending through an intermediary provides less risk than lending directly.
The reason behind this is that the financial intermediary is able to diversify. An average saver could directly make only a few loans, and any bad loans would substantially affect his wealth. An intermediary insures its depositors from considerable losses. Financial intermediaries reduce risk is that by making many loans, they learn how to foresee and predict who are able to repay and who arent. Consequently, someone who does not specialize in this profession may be a poor judge of which loans are worth making and which are not. A second advantage of financial intermediary is that it provides liquidity. This means that under a financial intermediary, assets are converted to cash basis instantly. Financial intermediaries help large numbers of people to use financial markets.
The Essay on The Principle Role of Financial Intermediaries
There are evidences that “financial intermediaries play a key role in improving the performance of the economy”. (Morawski 4) Not to mention that they “could even act as a good predictor of long run rates of economic growth, capital accumulation and productivity improvement” (King and Levine cited in Chakraborty 1). However, what –exactly- is the principle role of financial intermediaries? This is ...
Although these intermediaries are important in the macroeconomic functioning of the economy, they are usually stable and change only slowly. The integrity of the financial system is of great importance to any economy, given the need for financial intermediation to be conducted in a safe and efficient financial system to support economic growth and development. Particularly in the international aspect where financial intermediation is conducted in an international dimension, serving the needs of local as well as domestic investors. The integrity of the financial system should therefore be protected and guarded by everyone, including financial intermediaries. The private interests of financial intermediaries increasing profits are not in line with the public interest in promoting the stability, integrity, diversity and efficiency of the financial system. Some would say that the less competent the financial system is, the more profitable the financial intermediary is. We must guard against rivalries that corrode profitability. This will only force financial intermediaries into improper behaviour and eventually weakens the stability and integrity of the financial system.
If ever this situation happens, pressure will be experienced by both the employee of the financial intermediary by compelling him to produce higher and higher contributions to the bottom line, or the pressure faced by the employer when business expenses are high and market share is unstable. A financial intermediary abusing the trust of its clients can be very damaging to the integrity of the financial system..
