Financial Intermediaries are entities that act as middlemen between two parties in a financial transaction. These entities are usually commercial banks, investment banks and other funds that pool money from people and invest elsewhere. They offer a wide range of services to the parties involved such as safety and liquidity of their money, asset management, fund transfer facilities etc. The best example of a financial intermediary is the commercial banks. They are an indispensable part of the financial system.
The business of Financial intermediaries
The main activity of the banking financial intermediaries is to act as a link between people who have excess money and people require money. They act as the pillars of the economy by providing efficient ways of conducting business and channelizing the funds appropriated in the economy. The investment advisors provide investment advice and also help is mobilizing the resources through purchase or sale of bonds, shares, and other financial products. The fund managers provide for the efficient management of the capital pooled in from the shareholders and also increase the availability of capital to the companies.
Role of the financial intermediaries in the economic development
The financial intermediaries are the backbone of the economy. Without them, the economy would not be able to function efficiently.
- Allocation of capital – The main function of these entities is to mobilize capital. They would not allow money to be idle. They find ways to efficiently utilize the excess capital. Thus it provides for the wise allocation of capital based on the requirements in the economy.
- Provides funds for self-employment – Banks are the main sources o funds for setting up of new business. Thus it increases the self –employment opportunities by lending funds to the prospective entrepreneurs.
- Provide for appreciation of capital – The intermediaries such as fund managers provide wealth appreciation to the investors by way of returns on the capital and value appreciation of stocks if they are performing well in the market.
- Indicators of the economic stability – these entities serve as indicators of the economic well-being of any country. The level of activity shows how prosperous the economy is.
- Promoters of financial independence – They also provide financial independence to both borrowers and lenders. Borrowers -by helping them to fund their business or trade. Lenders- by providing various income generating options.
The services of these entities do not come for free. They have a cost attached to it. It depends on the type of services availed. They can be in form of fee or commission. Read this review for further details.
A system that is causing a slight threat to these institutions is the crypto currency system where the use of intermediaries is almost absent. Ethereum code is one of the popular online trading software that promotes investment and trade in the second largest crypto currency.