Disintermediation In Banking

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Banks and other financial institutions plays an active role in meeting the financial needs of individuals and corporate entities. One of the principal activities performed by banks is to serve as intermediary between lenders and borrowers. Indeed, banking can be said to thrive principally on intermediation which is the process of lending money out to borrowers at a relatively high rate compared to the deposit interest rate. However, some conditions subsist that leads to the erosion of this role performed by banks and this is referred to as disintermediation. In the general sense, disintermediation refers to a situation where the activities of middlemen are avoided in the course of a transaction. The concept can be traced way back
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This is called securitisation and has constituted an alternative fund raising avenue for firms from the capital market. and renders traditional band services less attractive. Disintermediation also occurs due to high inflation rates but, bank interest rates remain stagnant which is often associated with government control. Therefore, where depositors are able to get better returns for their investment in mutual funds or securities, disintermediation…show more content…
This might however have a negative impact on return on equity (Aktan et al., 2013).
Through disintermediation, banks cease to be financial intermediaries (their lending power eroded) and become financial agents with interest in investment advisory and related services. Since banks tends to have less funds at their disposal to loan out, their profits can no longer be on a cost-plus basis but rather will tend to be determined by market forces. This reduces to some extent some level of certainties and volume in banks turnover.
Disintermediation "unbundles" risks on the part of the fund providers. Funding risk used to be borne by banks as a single entity, however, going through securities, the risk is now spread across several individuals and funding entities.
Disintermediation has implication for economics of scale with respect to pooling resources towards funding. This is because the scope to attract funding is now considered to be larger. Resource Utilisation is increased with disintermediation. This is because several funding entities have more opportunities to buy into securities and bond. This is often done with funds that might have ended up lying
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