Financial Intermediation And Its Importance

2015 Words9 Pages
Drawing upon examples of depository and non-depository institutions, explain the process of financial intermediation and its importance in the provision of liquidity in the financial system Every economy and financial market has its own shortcomings in regards to employment of funds. The prosperity and equilibrium of a financial market is determined by the allocation of surplus. In a huge market, most participants are unaware of others, and therefore it is crucial to have an intermediary system that will reallocate funds from the surplus areas to the places where funds are actually in demand. This gives mobility and liquidity to financial markets. Among all other participants, the role of financial intermediaries is played by the depository and non depository institutions. While the depository institutions borrow money for the surplus possessing individuals and businesses to lend money to others in need, non depository institutions don’t take direct borrowings but use other methods to gather funds and lend them to borrowers. The function of both kinds of the institution is the same- the mobilize funds and offer liquidity to financial markets. Need for Financial Intermediation: The function of financial intermediaries is excessively critical for the economy, as well as for financial market. Financial intermediation is essential for the productive use of surplus funds. For the financial market, it helps to distribute the funds and aids the process of optimum use of surpluses. For the economy, it creates greater demand for services and goods and helps in generation of incomes and employment opportunities. In the past few years, the importance of financial intermediation has doubled in all small and large economies as it acts as channelized energy for entrepreneurial activities. Benjamin M. Friedman stated in his studies, “The principal

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