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12/24/21

What is Financial intermediation

 

Financial intermediation


Financial intermediation is the process by which financial intermediaries provide a linkage between surplus and deficit units in the economy. Surplus units are firms and individuals which have excess funds above their immediate needs . This who need the funds for immediate investment programme are referred to as deficit units. It is the financial intermediaries that develop the facilities and instruments,which make lending and borrowing possible. 

There are four aspect of the intermediation functions namely;

  1. Maturity intermediation
  2. Liquidity intermediation
  3. Size denomination intermediation
  4. Risk intermediation

Maturity intermediation

A large portion of the  deposit mobilize by banks have short term maturity since most customers withdraw on demand , whereas the banks will lend the money for a longer period of time. The satisfaction of these two contracdictory objective, that the depositors an borrowers is that is reffered to as maturity intermediation.

Liquidity intermediation

Despite the short duration of the deposits, they mobilize and the tenor of the loans they give ,banks still need to ensure the liquidity of the economy as a whole.

Size/denomination intermediation

Banks accept both small and large deposit from diverse customers and make these available as loans to their customers. Without financial intermediaries,it can be imagined how difficult it would be for a deficit unit to move from one small surplus unit to another in search of investment funds.

Risk intermediation

Banks spread out deposit risk by accepting deposits from heterogeneous depositors ,such as individuals and companies in various industry of various sizes. Banks minimize lending risks by making loans available to diverse borrowers of various sizes.

The financial market

There are various facilities and institutions provided by the financial system for the creation ,custody and distribution of financial assets and liabilities. The market has two major segment,namely the money market and the capital market.

The money market

This market creates opportunities for raising or investing short term funds as intermediaries. The tenor may range from overnight to about one or two years . Various financial instruments are exchange in the money market.
These include;
  1. Treasury bills
  2. Treasury certificate
  3. Bills of exchange
  4. Certificate of deposit
  5. Commercial papers
  6. Bankers acceptances
Banks are the major participants in this market . Other participant include non bank financial institutions such as insurance companies,national social insurance trust fund, mortgage banks and financial houses and microfiber banks and pension fund administration.

The capital market

There are the institutions, structure and mechanism where by medium term loans of up to ten years maturity and long term funds ,longer maturity loan and corporate stocks are pooled  and made available to business, government and Individuals which are already outstanding are transferred.

Characteristics of the capital market

Below are the essential characteristics of the capital market namely;
  1. Objective of trading are long term financial instruments. Which are newly issued and already on issue
  2. The operators in the market are mainly specialize institution well informed in the tradition and practice of in trade.
  3. As with all other market , the forces of supply and demand come into play in the determination of prices.

Financial intermediation provide business Enterprise with opportunities to acquire loan and financial services to enable them grow their businesses and make profit in the capital market, financial intermediation is very important for the economic growth and development of any society.

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