Financial Intermediaries

Topics: Money supply, Federal Reserve System, Monetary policy Pages: 3 (793 words) Published: August 10, 2008
Financial Intermediaries
Financial intermediary is an institution, firm or individual who performs intermediation between two or more parties in a financial context. Typically the first party is a provider of a product or service and the second party is a consumer or customer. In the U.S., a financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers give funds to an intermediary institution, and that institution gives those funds to spenders. This may be in the form of loans or mortgages (Tobin, 2002). Alternatively, they may lend the money directly via the financial markets, which is known as financial disintermediation Financial intermediaries can be: Banks; Building Societies; Credit Unions; Financial adviser or broker; Insurance Companies; Life Insurance Companies; Mutual Funds; or Pension Funds (Schenk, 2008). The borrower who borrows money from the Financial Intermediaries/Institutions pays higher amount of interest than that received by the actual lender and the difference between the Interest paid and Interest earned is the Financial Intermediaries/Institutions profit. Financial Intermediaries are broadly classified into two major categories: 1) Fee-based or Advisory Financial Intermediaries 2) Asset Based Financial Intermediaries (Schenk, 2008). Fee Based/Advisory Financial Intermediaries: These Financial Intermediaries/ Institutions offer advisory financial services and charge a fee accordingly for the services rendered. Finding innovative ways to provide financial services to the poor so that they can improve their productive capacity and quality of life is the role of the financial intermediaries in the 21st century (Tobin, 2002). Most of the poor live in the rural areas, and are engaged in agricultural activities or a variety of micro-enterprises. The poor are vulnerable to income...

References: Tobin, J (2002). Monetary Policy. Retrieved July 28, 2008, from The Concise Encyclopedia of Economics Web site:
Schenk, R (2008). Intermediaries. Retrieved July 28, 2008, from Financial Intermediaries Web site:
Board of Governors, (7/28/2008). Board of Governors of the Federal Reserve System. Retrieved July 28, 2008, from Board of Governors of the Federal Reserve System Web site:
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