FINANCIAL INTERMEDIATION

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Concept of Financial Intermediation


                 Suppose you want to start a restaurant and at the same time , a woman name urshula, who lives in another state, has money to invest in a start-up business. if you and urshula could somehow cross paths, she could invest in your business and you could fulfill your dream of entrepreneurship. since you probably would never find urshula on your own. because she lives in another state, there's a process called financial intermediation that can ensure both of you meet your goals.

 According to this example the basic idea of financial intermediation; connect borrowers with savers; these intermediates help channel funds from one person, or entity to another.



Borrowers and Savers


 There are two main roles in the financial intermediation process; borrowers also known as spenders and savers also called lenders,let's look at who's borrowers and savers.
Borrowers - Borrowers need money for various reasons; to start business, to purchase a home, pay for business expenses and fund programs. they need money to spend . borrowers include individuals, companies and government.  

Savers - Savers have money. they have money to lend. savers not only have money in saving account, they have money deposited in other interest earning products. such as retirement accounts and certificate of deposits. savers include individuals, companies and government. 


According to that individuals, companies and government can be both borrowers and savers. they all do both borrow and save money.

Let's look at who channels these money back and forth between borrowers and savers.


Financial Intermediary


Financial intermediary helps move funds from lenders to borrowers.
  • Main type of financial intermediary is bank. where savers deposit money and spenders borrow the money.
  • Another type of financial intermediary is a non-depository institution, such as an insurance company, they collect money premiums for various types of coverage; auto, home and liability. they do not immediately pay out all of the premiums in losses, they invest the money channeling funds from spenders.  
  • The last type of financial intermediary is an investment intermediary, such as investment bank. they take in money from investors and spenders and invest the money in interest and profit-earning product








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