Financial Intermediation
Introduction
The flow of capital is important in the business world. Entrepreneurs are constantly in need of capital to start new businesses or to keep the flow of current operations moving. This means that the demand of capital is also constant. Unfortunately, it is a fact that current business operations are not also up to the challenge of supplying the capital needed to support the continuation of the business endeavors. This means that entrepreneurs are always on the lookout for sources of capital.
Banks and other financial firms are usually on the rescue to businesses that are in need of capital. They offer loans that would allow businesses to get the capital they need. Banks and other financial institutions that offer loans to businesses are important. This is the case since money borrowing is an integral part of business and economic life. It is the case that almost everyone has experienced borrowing money at one point or another.
The activity of bowing money brings about the subject of financial intermediation. However, this business activity occurs without people recognizing it by name. With this, it is the objective of this paper to define financial intermediation and provide examples to better illustrate how this business activity takes place. The following discussions in the paper will be focusing on the process of financial intermediation in the hopes of making people aware about the nature of the activity.
Financial Intermediation
As stated earlier, financial intermediation occurs without people recognizing it by name. Therefore, there is a need to provide a clear definition of the term financial intermediation as well as provide examples of the business activity to illustrate its clockwork. This section of the paper will be discussing views about financial intermediation to be able to adequately define the term.
Views regarding financial intermediation is divided there are those who believe that it is important in the success of the business world in general, while there are some who believes that it does not have any real affects on businesses. According to (2001), financial intermediaries can ignored since it do not have a significant effect. Allen supported this claim by stating that the Journal of Finance’s millennium issue surveyed corporate finance, asset pricing and continuous time finance but not financial intermediation.
On the other hand, there are those who believe that financial intermediation is pervasive, which makes it a crucial part of business life, but what exactly is financial intermediation and what makes it important? Financial intermediation is the process of using existing money in a bank to serve as loan for others. For example, client A deposited a certain amount of money in bank A and client B asks bank A for a loan, it can be the case that bank will loan client B the money deposited by client A. Since the bank do many transactions in a day client A will not have to worry about his or her money since the bank can provide him or her with money in case he or she decides to withdraw them.
The premise of financial intermediation is borrowing the money of other people to loan to other people. Banks serve as the intermediaries between the person whom the money was borrowed and the person who borrowed the money. However, the two clients do not negotiate with each other. The borrower and the lender both transact with the bank and thus the term intermediary.
Financial intermediation takes place since money being deposited in banks will be any good just sitting in vaults. Therefore, it would be more beneficial if they were used as capital to start or maintain business operations. As such, banks and financial institutions can profit form financial intermediations through interest rates that add to the payment of the loans. In addition, other bank clients can also benefit from financial intermediation through interest rates that will be added to their savings.
This means that financial intermediation is crucial in the business world. (1990) supports this, stating that every dollar financed outwardly comes form banks. Financial intermediation is the root of savings-investment process. As such, being able to get a loan is crucial in the growth of business as well as the expansion of existing ones. As first glance, it may seem that the risks involved in lending other people’s money to too great, the utilization of loans to produce more business helps in stimulating the economy.
Conclusion
In conclusion, financial intermediation helps business to pursue their business objectives. In addition, it also helps in boosting the economy o a country. The risks of lending other people’s money it off-set by the potentials of the new businesses or business expansions on the country’s economy. Furthermore, the loans are secured by contract so banks are confident that they will be able to regain the loaned amounts of money in times that they need to be regained.
The circulation of cold cash ensures that there will be much more to circulate in the future. This means that financial intermediation contributes to the creation of wealth by capitalizing on exiting ones and attempting to make them profitable.
Reference
Credit:ivythesis.typepad.com
0 comments:
Post a Comment