Financial Intermediaries

Financial Intermediaries

DOI: 10.4018/978-1-7998-1643-0.ch002

Abstract

Effective financial systems provide significant benefits for the sustainable development of the countries. Therefore, most governments aim to take some actions to increase the effectiveness of the financial system. In this framework, financial intermediaries play a crucial role for this purpose. Financial intermediaries can be mainly classified into two different categories: banks and nonbanking organizations. In this chapter, the responsibilities of the financial intermediaries are explained. Within this context, first of all, the different types of the banks are identified. In addition, nonbanking organizations are defined. It is concluded that financial intermediaries should work effectively to increase the performance of the financial system. This situation has a positive influence on the economic growth of the countries.
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General Information About Financial Intermediaries

Financial intermediaries mean the institutions, such as banks, leasing or insurance company that bring fund suppliers and fund demanders together. Hence, it is obvious that they play a crucial role in the effectiveness of the financial system by making connection between these two different parties. Owing to this condition, it is possible to talk about many different advantages of the financial intermediaries for both the performance of the financial system and the development of the economies (McLeod et al., 2018; Piskorski et al., 2015).

Firstly, financial intermediaries lead to have easy and fast exchange of the funds among the parties. For instance, there may be an individual or a company that needs money in the north of a country. In addition to this situation, assume that there is also an individual or a company who has some savings, but he lives in the south of the country. In this circumstance, it can be seen that it is very difficult for these parties to bring together without a financial intermediary (Alberici & Querci, 2016; Dinçer, Yüksel and Adalı, 2018). With the help of a financial intermediary, these parties can reach to each other and fund demanders can have the funds easily. On the other hand, fund suppliers can get a chance to earn income by using their savings (Tagoe, 2016).

Another important benefit of the financial intermediaries is that it has a role to provide the convenience of the amount. For example, there can be an individual or a company who needs $500,000 for his needs. However, there may be 2 different fund suppliers who have the saving amount of $400,000 and $100,000. If there is no financial intermediary in the country, none of the fund suppliers can satisfy the needs of the fund demander by himself. Therefore, owing to the financial intermediaries, these parties can become together, and the convenience of the amount is provided (Chen et al., 2017; Dinçer et al., 2019).

Furthermore, financial intermediaries play also a significant role in order to decrease the risk in this transaction. Although there are lots of different risks, such as liquidity risk, market risk, currency risk, the most outstanding risk for the fund suppliers is accepted as the credit risk which means the possibility that fund demanders cannot pay the debt (Brogi & Lagasio, 2018). When there is no financial intermediary, fund suppliers do not have a chance to analyze the financial performance of the fund demander in a detailed aspect. However, financial institutions have qualified personnel and necessary technological background to make this kind of analysis (Tunay et al., 2019; Yüksel, 2017). Hence, it shows that financial intermediaries have a contributing effect to decrease the credit risk.

While considering the information emphasized above, the effectiveness of the financial intermediaries is very important in the performance of the financial system. When these institutions do not perform effectively, it will cause significant problems in this system, such as bankruptcy. Similar to this issue, this condition has also negative influence on the improvement of the economy of the country. The most popular financial intermediary is accepted as the banks (Atanasov et al., 2015). However, there are also non-banking financial institutions in the market, such as leasing, factoring companies. The details of these institutions are given on the following subtitles.

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