Question

outline the role of financial intermediaries and their functions in financial markets. what benefits of the financial system do financial intermediaries provide?

Answer 1

Financial intermediary is a firm or institution that acts as a mediator between a financial service provider and consumer. Some examples of them are commercial banks, investment banks, pension funds, etc. they help people to have access to the money easily.

They have emerged as a very useful tool to bring together the savings and convert them into investments. The main role of financial institute is to bring together those who have money and those who need it. Financial institutes like banks are either asset based or fee based for the service they provide.

Some of the major role of Financial intermediaries are:

1. Reducing Hoardings: they bring together the lender and the borrower and reduce the hoarding of cash by the people
2. Helps the household sector: they profit on the surplus of the household by giving them interest on the savings they have deposited and also provide loan to those who need.
3. Helps the business sector: they help the non-financing business by providing them loans or mortgage and help in investment in plant or inventories.
4. Spreading the risk: the FIs have large resources and they spread the individual risk to different borrowers. They have experts that help in diversification of investment that helps in spreading the risk and reducing individual risk.
5. Helps in lowering interest : because of the completion among the FIs , this leads to lowering of the interest rates. As the savings deposited by people are then invested by the FIs in securities because they prefer it over cash, and when the rice of security goes up, the interest rates reduces.
6. Brings stability in capital market: FIs deals with number of assets and liabilities , which are mainly traded in capital market. If there will not be FI there will be frequent changes in the demand and supply of these assets and this will lead to instability in the capital market.

The main function of financial institutes are :

1. Converting savings of individuals into investments
2. Providing cash storage facilities and safekeeping of valuables
3. Providing liquidity
4. Providing loan
5. Assisting clients to grow their investment

So, to sum up, the main benefits of FIs are:

1. Lower risk.: the lenders are mainly focused on minimizing the risk of the capital fund and lower in interest rates that they have given . but FIs reduces these risk as they themselves own primary security and the help in reducing risk. Also there are several government regulations that helps in reducing the risk of the lender. They also pool the risk by spreading the fund across various investments and loans.
2. High Liquidity: FIs help in providing cash as and when required by the individual. They help in creating liquidity in the market so that the business can be run smoothly and people can purchase their factors or production or household can make necessary expenses.
3. Reducing cost : they help in reduction of cost of many financial transactions that an individual would have not met if nor for FI and they also have expert knowledge to evaluate several portfolios and to invests in low risk investments , saving the lenders cost.