Financial Intermediaries in the Modern World

A financial intermediary is a person or an entity, which connects provider of a financial service to a buyer of a financial service, or the vice versa. Thus, a financial intermediary plays “an important role in the transfer of funds from savers to the final users”. A bank is the typical example of a financial intermediary, collecting funds (deposits) and lending the same, without any intervention of the depositors.

Presently, with barriers being removed for cross border trades and other similar measures, flow of resources from one place to other; from one country to another, has become easy, and this ensures speedy and efficient productive deployment of financial resources. Despite this the importance of financial intermediary continues to be significant even in today’s modern world. One of the major reasons is that most people or users of financial resources rarely come into direct contact of the lenders of these resources.

Herein lies an important role, which a financial intermediary plays: lending directly is always riskier than lending through an intermediary. Secondly, a financial intermediary has the capacity to diversify by lending to multiple people and corporations, which an ordinary lender does not have. Secondly, a financial intermediary acquires specialization, knows the financial market well, and is able to raise and lend funds in an efficient manner.

Thirdly, modern financial markets are marked by “financial innovation and the process of securitization”, and they require not only a large capital and resource base but also a deft handling of the activities like the ones seen in forex market or derivative market. The foregone conclusions are obvious: the `modern world` with its great allocative efficiency and productivity could not exist without financial intermediation. The modern world with all the globalization and integration of economies requires financial intermediaries for still more efficient allocation of financial resources.