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Financial Intermediaries - Meaning, Functions and Importance
Financial Intermediaries - Meaning, Functions and Importance
Financial Intermediaries - Meaning, Functions and Importance
Importance
A financial intermediary is an entity that facilitates a financial transaction
One can also say that the primary objective of the financial intermediaries is
their services.
Financial intermediaries have emerged as a useful tool for the efficient market
system as they help channelize savings into investment. However, they can
Bank: These intermediaries are licensed to accept deposits, give loans and
offer many other financial services to the public. They play a major role in the
markets. A fund manager oversees a mutual fund and allocates the funds to
but advises investors to help them achieve their financial objectives. These
Credit Union: It is also a type of bank, but works to serve its members and
not public. They may or may not operate for profit purposes.
surplus cash and then loan them to entities in need of funds. Intermediaries
give the loan at interest, part of which is given to the depositors, while the
grow their money via investment. Intermediaries like mutual funds and
investment banks use their experience to offer investment products to help
They help in saving time and cost. Since these intermediaries deal with
services for their client. For instance, banks can customize the loans for small
and long term borrowers or as per their specific needs. Similarly, insurance
asymmetric information.
advantages better. Suppose you need some loan, but you don’t know who
has enough money to give you. So, you contact a middleman, who in turn is
profits. Or, due to poor management, they may invest money in schemes,
Such issue (or issues) with the intermediaries, however, are avoidable.
Moreover, after the 2008 crisis, financial intermediaries are facing increased
CONCLUSION
Reading the above points, it is clear that financial intermediaries play a very
important role in the economic development of the country. They play even
However, given the complexity of the financial system and the importance of
intermediaries in affecting the lives of the public, they are heavily regulated.
Several past financial crises, like the sub-prime crisis, have shown that loose