Question

a) what are the differences between commercial banks and finance companies?

b) discuss the importance of financial intermediation in today's competitive financial markets.

c) what are the differences between primary and secondary financial markets? why is the existance of well-developed secondary markets important to the functioning of the primary markets with the financial system?

Answer 1

a) The major difference between a commercial bank and a finance company is that banks are allowed to take deposits from retail customer while other finance companies are not allowed to take retail deposits from the customer. Banks are regulated by the central bank whereas the finance companies be it an insurance company or housing loan company, the are regulated by different types of regulator, sometimes in addition to the following guidelines of the central bank. The commercial bank can act as a money multiplier for the overall economy when deposit is put into the bank but finance companies can not do that, they basically act to promote the capital investment of the country or economy. They fund long term development projects which are of vital interest to the country.

b) The financial intermediary plays a very key role in the dissemination of the financial services to the last person in the economy. Despite the advancement of technology there has been a significant gap in the dissemination of financial services and use by the people across the economy. Those who have access to it they are able to use it efficiently but those who do not have access to it through technology are completely derived from the basic financial services and the role of financial intermediary becomes very important. The role of financial intermediary is also very important because it makes sure that the services are being provided in a cost-effective way.

c) The primary market is the market where the security is issued for the first time and this is the transaction that happens between the investors and the company, company sells the share an investor buys the share from the company where as in the secondary market the transaction happens between investors, the company does not receive the proceeds from it. An efficient and liquid secondary market is very important for the primary market because it gives the investor chance to exit the investment. High liquidity in any asset is desirable as it reflects the market price of the security and it actually helps in valuation of the security.