IMPACT OF FINANCIAL INTERMEDIARIES ON

ECONOMY

GROUP MEMBERS..

Nosheen Ameen

Nida Fatima

Shaista aziz

Hina bashir

FINANCIAL INTERMEDIARIES

Financial Intermediaries are: any institution that moves money between savers and borrowers.

A financial intermediary is a financial institution such as bank, building society, insurance company, investment bank or pension fund.

A financial intermediary offers a service to help an individual/ firm to save or borrow money. A financial intermediary helps to facilitate the different needs of lenders and borrowers

EXAMPLE:

• For example, if you need to borrow $1,000 – you could try to find an individual who wants to lend $1,000. But, this would be very time consuming and you would find it difficult to know how reliable the lender was.

• Therefore, rather than look for individuals to borrow a sum, it is more efficient to go to a bank (a financial intermediary) to borrow money. The bank raises funds from people looking to deposit money, and so can afford to lend out to those individuals who need it.

ROLE OF FINANCIAL INTERMEDIARIES

Financial intermediaries is the middlemen providing funds resources from individuals who have surplus funds with no investment opportunities to the individuals who have investment opportunities but no funds available to invest. This process is facilitated by financial intermediaries in the form of loans on which they earn interest on the loans as their profit margins.

THEORY OF FINANCIAL INTERMEDIATION:

This theory argues that intermediaries financing has better economy growth than direct financing .intermediaries have better and complete information than ourselves about market and from that true and better information they can make better decision.

TYPES OF FINANCIAL INTERMEDIARIES:

There are three types of financial intermediaries.

1. Depositing financial institutions:

2 Non depositing financial institutions:

3. Federal government financial institutions:

•

DEPOSITING FINANCIAL INSTITUTIONS:

• Where frequently withdrawing and depositing of cash occurs .e.g banks.

• Depositing financial institutions include..

• Banks

• Commercial banks

• Islamic banks

• Thrifts institutions

2 Non depositing financial institutions:

Where not frequent withdrawing and depositing of cash occurs.

it includes..

1.Insurance companies

• Life insurance companies

• Non-life insurance companies

2.Pension and retirement fund

3.Mutual funds

• Open ended mutual funds

• Close ended mutual funds

3. FEDERAL GOVERNMENT FINANCIAL INSTITUTIONS:

• An institution that provides financial services for its clients or members. These are owned by federal government e.g. national saving center. No risk or minimum risk and low rate of return.

LELAND AND PYLE:

• In 1977 le land and pyle provided a description of informational advantages of financial intermediation. According to them intermediaries help to remove informational asymmetric and help to make informed and better decisions. They also said that in order to remove uncertainty u need to have information of market which can give us bank/ intermediaries and by which we can be able to make better decisions on the right information.

REDUCE ASYMMETRIC INFORMATION

Asymmetric Information in financial markets - one party often does not know enough about the other party to make accurate decisions. Adverse Selection (before the transaction)—more likely to select risky borrower.

Moral Hazard (after the transaction)—less likely borrower will repay loan.Financial intermediaries are important in the production of information.

They help reduce informational asymmetries about some unobservable quality of the borrower for example through screening, monitoring or rating of borrowers, Net worth and collateral.

FUNCTIONS OF FINANCIAL INTERMEDIARIES

• Saving and pooling system

• Transaction and cost reduction

• Liquidity assurance

• Information sharing coalition

• Delegated monitoring aspects

BENEFITS OF FINANCIAL INTERMEDIARIES

• Spreading risk. Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers – if one fails, you won’t lose all your funds.

• Economies of scale. A bank can become efficient in collecting deposits, and lending. This enables economies of scale – lower average costs. If you had to sought out your own saving, you might have to spend a lot of time and effort to investigate best ways to save and borrow.

• Lower search costs. You don’t have to find the right lenders, you leave that to a specialist

• Convenience of Amounts. If you want to borrow £10,000 – it would be difficult to find someone who wanted to lend exactly £10,000. But, a bank may have 1,000 people depositing £10 each. Therefore, the bank can lend you the aggregate deposits from the bank and save you finding someone with the exact right sum.

• Facilitate both borrow and savers.

WHY FINANCIAL INSTITUTIONS ARE IMPORTANT?

• Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow.

• In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost disadvantages of direct finance.

WHY IT IS BETTER THAN DIRECT FINANCING?

Indirect financing is better than direct financing due to following reasons,,

• Risk factor increases in case of direct financing .

• A lot of problems have to face in direct financing

• Wastage of time

• Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy.

• Without the existence of these intermediaries, savers would have to buy the securities directly from the borrowers. As savers prefer to provide finances at short-term maturity period whereas borrowers prefer to borrow at long-term maturity period, this would have created incongruity of the maturity needs of borrowers and lenders. FI’s execute significant role of maturity intermediation to generate savers investments and borrowing money for borrowers

SUMMARY AND CONCLUSION

• Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow, Indirect finance fulfills the need of lenders and borrowers by providing profitable saving opportunities.

• By lowering transaction costs, promotion of risk diversification between the intermediary and the investor and reduction of the asymmetric market information effects.

• financial intermediaries play a significant role in the financial market by the civilizing its proficiency as well as assisting the continuance of operations at minimal costs to investors and they facilitate both borrowers and savers.