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Financial Intermediary Essay

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Van Horne defined the financial system as the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption while Christy opined that the objective of the financial system is to "supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilisation of resources without the destabilising consequence of price level changes or unnecessary interference with individual desires."
The financial system of a country is an important tool for economic development of the country as it helps in the creation of wealth by linking savings with investments. It aids wealth creation and development by facilitating the flow of funds from the households (savers) to business firms (investors).Finance is a bridge between the present and the …show more content…

The best example of an intermediary is a bank which transforms the bank deposits to bank loans. The role of the financial intermediary is to distribute funds from people who have extra inflow of money to those who don’t have enough money to fulfil the needs. Functions of Financial Intermediary are are as follows: • Maturity transformation: Deals with the conversion of short-term liabilities to long term assets. • Risk transformation: Conversion of risky investments into relatively risk free ones. • Convenience denomination: It is a way of matching small deposits with large loans and large deposits with small loans.
Financial Intermediaries are divided into two types:
Depository institutions: These are banks and credit unions that collect money from the public and use that money to advance loans to financial customers.
Non-Depository institutions: These are brokerage firms, insurance and mutual funds companies that cannot collect money deposits but can sell financial products to financial

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