During the study of financial management (ACCA FM, was ACCA F9), some students are confused on the terminology "Financial intermediaries" and here I would like to explain this in a simple manner that helps student to have a brief idea.
The term ‘intermediation’ refers to the process whereby potential borrowers are bought together with potential lenders by a third party, the intermediary. Financial intermediaries can be divided into banks and non-banks.
The main bank financial intermediaries are:
Commercial bank, which offer both primary and secondary services to both corporates and individuals.
Discount houses, which deal in the secondary bill market – they do only wholesale business
The Bank of England, which is the central bank of UK and as such plays a supervisory and monitoring role in the economy.
The main non bank financial intermediaries are:
Building societies, dealing mainly with financing of houses
Finance companies, dealing mainly with the finance lease and hire purchase
Insurance companies
Unit trust and investment trust
Pension funds
Roles of financial intermediaries include:
Maturity transformation : The financial intermediary is able to give liquidity to those depositors who want it and at the same time to allow borrowers longer time to repay.
Funds aggregation : The financial intermediary accumulate funds from many small depositors and lend them to a corporate client which need huge funds.
Risk transformation : A bank provides a relatively risk free place to deposit savings. When a borrower does not repay it’s debt, the bad debt is absorbed by the bank and the depositors are not affected. However, too many borrowers not repaying their loans may cause the bank to collapse and in such rare case, the depositors lose their money.
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