Question

Explain the various ways that financial intermediaries increase the efficiency of an economy.

Answer 1

A financial Intermediary is an institution that serves as a middle man among diverse parties.

• To facilitate financial transactions
• There are common types like
• Commercial banks, Investment banks,stock exchanges etc.
• Through the process of financial intermediaries
• Certain assets or liabilities are transformed into different assets or liabilities.
• Financial intermediaries collect funds from people who have surplus capital.
• It is a typical institution to facilitate the funds between lenders and borrowers indirectly.
• Lenders give funds to intermediaries,institution and that institution gives to spenders.
• In form of loans or mortgages.
• In the climate finance and development.
• Financial intermediaries refer to private sector intermediaries
• Like banks,capital funds,leasing companies insurance etc
• Institutional financial institutions provide funds through companies in the financial sector rather than directly financing projects.

Financial intermediaries offers three major functions.

1. Creditors provide a line of credit to qualified clients and collect premiums such as loans for Education,homes small businesses etc.
2. Risk information converting investments in to relational risky ones.
3. Convenience denomination matching small deposits with large loans and large deposits with small loans.