Question

What are financial intermediaries? What do they play in the economy?

Answer 1

Financial intermediaries are various financial institutions which act as middlemen among various parties to facilitate financial transactions. In simple words, financial intermediaries mobilize funds from people having surplus funds to people in need of surplus funds of various economic activities. So, financial intermediaries channelize funds from borrowers to lenders through various financial instruments. Some examples of financial intermediaries include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges.

Financial intermediaries have a very important role in an economy. By channelizing funds from, financial intermediaries help in utilizing idle funds in productive economic activities. This helps in stimulating investment, output, and economic growth. Similarly, by making credit available, financial intermediaries help in mobilizing savings to investments for economic activities and growth. Also, financial intermediaries help savers earn interest income, which promotes saving and makes more credits available.