Business, Legal & Accounting Glossary
A financial intermediary can be referred to as institution or individual that bring together investors and firms requiring funds. More commonly, a financial intermediary is referred to as a financial institution. Examples of a financial intermediary include insurance firms, chartered banks, mutual funds, credit union, and investment dealers. A financial intermediary, for instance, a bank, accepts money from savers and lends it to borrowers. Loans or mortgages are two products offered by banks while enacting their role as a financial intermediary.
A financial intermediary helps in reducing the risk element attached to a money lending process. Another advantage provided by a financial intermediary is that of liquidity. Size of financial intermediaries allows them to offer liquidity to individual depositors. Classification of financial intermediaries includes advisory financial intermediaries and asset-based financial intermediaries. These institutions have a key role to perform in poverty eradication.
Advisory based financial intermediaries offer their services to investors and firms for certain fees. Some major services of advisory, financial intermediaries include issue management, portfolio management, underwriting, syndicated credit, stockbroking, and mergers and acquisitions.
Asset-based financial intermediaries provide assets to their clients on a rental basis or for interest. Difference between interest earned and interest paid is calculated as income generated by asset-based financial intermediaries.
Financial intermediaries have a major role to play in poverty eradication. High-risk factor discourages financial institutions from dealing with people who are economically weak. But financial institutions by offering their services to that segment of society can help in alleviating their problems.
Some economists point towards disadvantages that financial intermediaries can cause to an economy. Interdependence between financial intermediaries, vis-a-vis debt and assets, will have adverse effects when any one of these institutions collapse.
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This glossary post was last updated: 27th March, 2020 | 8 Views.