Question

Explain four functions performed by financial intermediaries in the financial system

Answer 1

They are intermediaries, because they make a connective links between those savers and those investors. These intermediaries are banks, non-banking financial institutions, etc.

Functions:

No.1) Investments: Since they are making connective links, savings turn into investments. People used to save for their future uncertainties; banks make those savings more fruitful, since they offer interests; and at the same time banks use those savings for providing loans to others, which turns into investments.

No.2) Cash: intermediaries are sources of cash. People used to go to bank if they require cash. Various types of cash facilities are provided by intermediaries – like working capital facility, overdraft facility, current account facility, etc.

No.3) Loans: intermediaries provide loans to public after fulfilling certain formalities. Types of loans are mortgage loan, business loan, loan against inventory, etc. People take loan in exchange of interest payment, which becomes interest income of those intermediaries.

No.4) Guidance: clients are being guided by intermediaries how to use their funds or money – suppose a client has been advised not to keep his money into the savings account but should invest in mutual funds. Intermediaries usually do so for an increasing client’s income.