Financial Intermediaries

Financial Intermediaries

A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges.

There are three major function of financial intermediary.

.                   Lower transaction cost

                    Reduce risk

                Asymmetric information

Advantages and disadvantages of financial intermediaries

There are two essential advantages from using financial intermediaries:

1. Cost advantage over direct lending/borrowing
2. Market failure protection; The conflicting needs of lenders and borrowers are reconciled, preventing market failure

The cost advantages of using financial intermediaries include

1. Reconciling conflicting preferences of lenders and borrowers
2. Risk aversion intermediaries help spread out and decrease the risks
3. Economies of scale - using financial intermediaries reduces the costs of lending and borrowing
4. Economies of scope - intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

Various disadvantages have also been noted in the context of climate finance and development finance institutions. These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.

Types of financial intermediaries

• Banks
• Mutual savings banks
• Savings banks
• Building societies
• Credit unions
• Financial advisers or brokers
• Insurance companies
• Collective investment schemes
• Pension funds
• cooperative societies
• Stock exchanges