Financial intermediaries are institutions which operate in the financial market by channeling savings from lenders to borrowers who wish to invest.
These are institutions that help to connect surplus spending units (lenders) to deficit spending units (borrowers).
Financial intermediaries trade in money as their commodity and charge a price called interest. They accept deposits from customers and extend loans to investors.
TYPES OF FINANCIAL INTERMEDIARIES
There are two types financial intermediaries namely;
Banking financial intermediaries.
Banking financial intermediaries refer to financial institutions that primarily engage in banking activities and provide a wide range of financial services to individuals, businesses, and governments. These intermediaries play a crucial role in mobilizing funds from savers and channeling them towards productive activities through lending and other banking services. Here are some examples of banking financial intermediaries:
- Commercial Banks: Commercial banks are the most common type of banking financial intermediaries. They accept deposits from individuals and businesses and provide various financial services, including loans, credit facilities, checking and savings accounts, payment services, and investment products.
- Savings Banks: Savings banks are financial institutions that focus on promoting savings and providing mortgage loans. They typically serve individuals and small businesses, offering deposit accounts and mortgage financing options.
- Cooperative Banks: Cooperative banks are owned and operated by their members, who are often individuals or small businesses within a specific community or industry. They provide a range of banking services, including deposits, loans, and other financial products, with a primary focus on meeting the needs of their members.
- Credit Unions: Credit unions are member-owned financial cooperatives that provide banking services to their members, who typically share a common bond such as being employees of the same company or members of a specific organization. They offer savings accounts, loans, and other financial products with favorable terms to their members.
- Development Banks: Development banks are specialized financial institutions that focus on providing long-term financing for economic development projects. They often support sectors such as infrastructure, agriculture, and small and medium-sized enterprises (SMEs) to promote economic growth and address developmental needs.
- Investment Banks (Commercial Banking Division): In addition to their investment banking activities, some large financial institutions have commercial banking divisions that provide traditional banking services, including accepting deposits, lending, and offering other financial products and services to businesses and individuals.
- Central Banks: While central banks are primarily responsible for monetary policy and maintaining financial stability, they also act as financial intermediaries. They provide banking services to commercial banks and serve as the lender of last resort, ensuring the stability and functioning of the financial system.
Non-banking financial intermediaries.
Non-banking financial intermediaries (NBFIs) refer to financial institutions that provide financial services and intermediation but do not have a banking license. They operate alongside traditional banks and play an important role in the financial system. Here are some examples of non-banking financial intermediaries:
- Insurance Companies: Insurance companies are NBFIs that provide various types of insurance coverage, such as life insurance, property insurance, health insurance, and liability insurance. They collect premiums from policyholders and provide compensation in case of covered events or risks.
- Pension Funds: Pension funds are financial institutions that manage and administer pension plans. They collect contributions from employers and employees, invest the funds to generate returns, and provide retirement benefits to individuals upon reaching retirement age.
- Mutual Funds: Mutual funds pool money from multiple investors and invest in a diversified portfolio of securities, such as stocks, bonds, and other financial instruments. Investors in mutual funds own shares or units in the fund and benefit from the collective investment management expertise.
- Investment Companies: Investment companies manage investment funds and provide investment services to clients. They offer various investment options, including managed portfolios, unit trusts, and other investment products, catering to different risk profiles and investment objectives.
- Finance Companies: Finance companies specialize in providing loans and financing options to individuals and businesses. They may focus on specific sectors or types of loans, such as consumer finance, automobile financing, equipment leasing, or commercial lending.
- Microfinance Institutions: Microfinance institutions (MFIs) offer financial services, such as small loans, savings accounts, and insurance products, to low-income individuals and small businesses. MFIs aim to promote financial inclusion and provide access to financial services for underserved populations.
- Venture Capital Firms: Venture capital firms provide capital and investment expertise to early-stage and high-growth companies. They typically invest in startups and emerging businesses with high growth potential in exchange for an equity stake in the company.
- Credit Rating Agencies: Credit rating agencies assess the creditworthiness of individuals, corporations, and governments by assigning credit ratings. These ratings provide investors and lenders with an indication of the borrower’s ability to meet its financial obligations.
- Stockbrokers: Stockbrokers are intermediaries that facilitate buying and selling of securities, such as stocks and bonds, on behalf of investors. They execute trades on stock exchanges and provide investment advice and research to clients.
- Leasing Companies: Leasing companies offer equipment and asset leasing services to businesses. They purchase assets and lease them to companies for a specified period, allowing businesses to use the assets without the need for a large upfront investment.