MIFS DOCS
MIFS Assignment 1
Name: Sudipt Kumar
Section: FWF1 12-14
Question
What is the role of financial intermediaries in conduct and development of economy? And what are the sources affecting the growth of financial system?
Answer
FINANCIAL INTERMEDIARIES
A financial intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers and produces a set of services which facilitate the transformation of its liabilities (such as deposits) into assets (such as loans). The function of facilitating liabilities (or assets) into assets (or liabilities) is called intermediation. Through intermediation financial intermediaries allow indirect lending (and borrowing) between savers and borrowers.
Direct lending between savers and borrowers is, like barter, inefficient. In order for financial transactions to be completed there must be a double coincidence of wants. People with savings will have a given amount of funds that they will want to lend for a particular time period. They will need to find someone to lend to with matching circumstances, the same approximate amount of funds and the same time period. Direct lending will necessitate a contract of some sort which will have to be negotiated. Subsequent transactions involving repayments of interest and principle will have to be accounted for. A further problem to be encountered by lenders is that they will have limited ability to diversify and minimize their exposure to default risk. They could try to do this by lending very small sums to many borrowers, but the transaction costs would be prohibitively high. Financial intermediaries exist because they can simultaneously reduce transaction costs and minimize risk..
THE FUNCTIONS OF INTERMEDIATION
Financial intermediation can improve economic efficiency in at least five ways, by:
1) facilitating transactions;
2) facilitating portfolio creation;
3) easing household liquidity constraints;
4) spreading risks over time; and
5) Reducing
Name: Sudipt Kumar
Section: FWF1 12-14
Question
What is the role of financial intermediaries in conduct and development of economy? And what are the sources affecting the growth of financial system?
Answer
FINANCIAL INTERMEDIARIES
A financial intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers and produces a set of services which facilitate the transformation of its liabilities (such as deposits) into assets (such as loans). The function of facilitating liabilities (or assets) into assets (or liabilities) is called intermediation. Through intermediation financial intermediaries allow indirect lending (and borrowing) between savers and borrowers.
Direct lending between savers and borrowers is, like barter, inefficient. In order for financial transactions to be completed there must be a double coincidence of wants. People with savings will have a given amount of funds that they will want to lend for a particular time period. They will need to find someone to lend to with matching circumstances, the same approximate amount of funds and the same time period. Direct lending will necessitate a contract of some sort which will have to be negotiated. Subsequent transactions involving repayments of interest and principle will have to be accounted for. A further problem to be encountered by lenders is that they will have limited ability to diversify and minimize their exposure to default risk. They could try to do this by lending very small sums to many borrowers, but the transaction costs would be prohibitively high. Financial intermediaries exist because they can simultaneously reduce transaction costs and minimize risk..
THE FUNCTIONS OF INTERMEDIATION
Financial intermediation can improve economic efficiency in at least five ways, by:
1) facilitating transactions;
2) facilitating portfolio creation;
3) easing household liquidity constraints;
4) spreading risks over time; and
5) Reducing