The joining of two distinct parties in investing and growth through financial intermediaries is mostly completed via a financial institution supported by Federal Deposit Insurance Corporation (FDIC).
In the financial intermediation process, financial institutions play a key role by channeling monies from loans and savings to needs of individuals, businesses and governments. As individual persons and businesses save their monies at financial institutions, their accounts normally collect transaction or account maintenance fees. The transaction or account maintenance fees are in turn given to another investment opportunity. A clear example of this is that the money collected from a bank's patrons is used as the bank's money for loans or mortgages.
As mentioned earlier, banks are not the only types of financial intermediaries as other organizations can as well act as financial intermediaries. These financial institutions which can play the role of financial intermediaries can be divided into two major types i.e. The depository and non-depository institutions. Savings and loan depositories, credit unions and usual banks are examples of depository institutions while insurance companies, financial brokers, financial advisors, life insurance companies, mutual and pension funds are examples of the non-depository institutions (Lennon 2009).
Basically, insurance companies function in the same way i.e. money given to others to cover for losses or repairs based on the purchased insurance type is collected when a customer pays their monthly or seasonal insurance premium. It's important for these financial intermediaries to function with care and diligence because the monies used for investments belong to the customer. These monies should also be handled with loyalty and respect because it was earned from the institution's customers.
Reasons why Financial Intermediaries Exist:
Financial intermediation process is very significant to everyone and the reasons listed below are some main reasons why these intermediaries exist.
Provision of loans:
Being financial institutions which borrow money from savers and lend to individuals or firms, financial intermediaries simplify the lending and borrowing of money. Financial intermediaries help the growth of small businesses by loaning monies to these businesses for their successful operations. Being a third party in the lending process, a financial intermediary arrange for two or more parties within the same community to help each other in growth and expansion. Lenders or savers in a particular financial institution gain interest on their savings by allowing it to be used for loans. On the other hand, the financial intermediaries earn business from both sides of the agreement.
Without financial intermediaries, it would be difficult to equal small amounts of individual savings to the larger amounts of loans desired by borrowers. The difficulty in equaling the savings and loans would have also made borrowing to be a more difficult and tedious process.
Financial Advice:
The other main reason why financial intermediaries exist is for the purpose of financial advice to companies. For example, when a rapidly expanding company decides to publicly issue its stock through the Initial Public Offer (IPO), the company is greeted with increased scrutiny from financial intermediaries. A company normally goes for the IPO to quickly gain more capital for the success of the business. These intermediaries subject the company to increased scrutiny because by financing or structuring the loan, the financial institution becomes heavily...
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