Question

As in the present scenario everybody is very busy in their regular work. We expect some intermediary to do our work faster and easier. Financial intermediaries reallocate uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stake holding structures As a student of financial management, what do you think financial intermediary in your own words, what are the primary role you expect from a financial intermediary to do your work faster and easier with any interruption (any 6 points)? Lastly write your suggestion based on your knowledge.

Answer 1

Financial markets are huge and there are different parties with different function and duties assigned to them. Financial intermediaries are one such party that are generally people or institutions that act as middleman among different market participants to ensure smooth operation of financial markets. Financial intermediaries can be anyone, commercial banks, investment banks, brokers, traders, individuals etc who can aid the execution of any trade or financial transactions.

Role of financial intermediaries are:

1. Facilitate availability of funds: Intermediaries like banks help provide funds to agents who need fund for business or personal reasons by using the excess funds with other agents like business or household. Thus they provide liquidity in markets

2. Reduce information cost: intermediaries like banks decrease information costs to all agents by facilitating spread of all necessary information to all

3. Decrease risk in system: acting as the main intermediary helps 2 different agents to proceed with financial transactions which could not have been possible without a intermediary known to both parties due to lack of trust in system. Thus intermediaries reduction risks for both parties and facilitate smooth operation of financial system.

4. Increases stability in system: financial intermediaries bring stability in system by fostering a culture of trust and good faith. They bring diversified financial services to economy which helps in catering to the needs and requirements of different classes of economy like businesses or households and thus helps in the growth of overall economy.

Thus intermediaries have an important role in helping the economy grow and proper.