Question

what benefits for the financial system do financial intermediaries provide??( 500 words,
FI.) 20 marks .

Answer 1

• A financial intermediary channels savings into investment.
• Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking and asset management.
• Through a financial intermediary, savers can pool their funds, enabling them to make large investments, which in turn benefits the entity in which they are investing. At the same time, financial intermediaries pool risk by spreading funds across a diverse range of investments and loans. Loans benefit households and countries by enabling them to spend more money than they have at the current time.
• Benefits provided by the financial intermediaries are broadly categorized as

  - cost advantage over direct lending/borrowing which includes economies of scale and economies of scope

  - market failure protection

• Some of the other benefits are as follows:

1. They help in lowering the risk of an individual with surplus cash by spreading the risk via lending to several people.
2. They thoroughly screen the borrower, thus, lowering the default risk.
3. They help in saving time and cost. Since these intermediaries deal with a large number of customers, they enjoy economies of scale.
4. Since they offer a large number of services, it helps them customize services for their client. For example, banks can customize the loans for small and long term borrowers or as per their specific needs.
5. They accumulate and process information, thus lowering the problem of asymmetric information.