Financial intermediaries such as banks facilitate the flow of money between savers and borrowers. They pool funds from many depositors and use these funds to issue loans to borrowers, helping overcome mismatches in maturity needs. Intermediaries also reduce information asymmetry and transaction costs. By acting as intermediaries, banks are able to efficiently channel funds to productive uses in the economy.

2. IMPACT OF FINANCIAL
INTERMEDIARIES ON
ECONOMY

3. GROUP MEMBERS..
Nosheen Ameen
Nida Fatima
Shaista aziz
Hina bashir

4. FINANCIAL INTERMEDIARIES
Financial Intermediaries are: any institution that moves money between savers and
borrowers.
A financial intermediary is a financial institution such as bank, building society,
insurance company, investment bank or pension fund.
A financial intermediary offers a service to help an individual/ firm to save or borrow
money. A financial intermediary helps to facilitate the different needs of lenders and
borrowers

5. EXAMPLE:
• For example, if you need to borrow $1,000 – you could try to find an
individual who wants to lend $1,000. But, this would be very time consuming
and you would find it difficult to know how reliable the lender was.
• Therefore, rather than look for individuals to borrow a sum, it is more efficient
to go to a bank (a financial intermediary) to borrow money. The bank raises
funds from people looking to deposit money, and so can afford to lend out to
those individuals who need it.

7. ROLE OF FINANCIAL INTERMEDIARIES
Financial intermediaries is the middlemen providing funds resources from
individuals who have surplus funds with no investment opportunities to the
individuals who have investment opportunities but no funds available to invest.
This process is facilitated by financial intermediaries in the form of loans on
which they earn interest on the loans as their profit margins.

8. THEORY OF FINANCIAL INTERMEDIATION:
This theory argues that intermediaries financing has better economy growth
than direct financing .intermediaries have better and complete information than
ourselves about market and from that true and better information they can
make better decision.

9. TYPES OF FINANCIAL INTERMEDIARIES:
There are three types of financial intermediaries.
1. Depositing financial institutions:
2 Non depositing financial institutions:
3. Federal government financial institutions:
•

10. DEPOSITING FINANCIAL INSTITUTIONS:
• Where frequently withdrawing and depositing of cash occurs .e.g banks.
• Depositing financial institutions include..
• Banks
• Commercial banks
• Islamic banks
• Thrifts institutions

11. 2 Non depositing financial institutions:
Where not frequent withdrawing and depositing of cash occurs.
it includes..
1.Insurance companies
• Life insurance companies
• Non-life insurance companies
2.Pension and retirement fund
3.Mutual funds
• Open ended mutual funds
• Close ended mutual funds

12. 3. FEDERAL GOVERNMENT FINANCIAL INSTITUTIONS:
• An institution that provides financial services for its clients or members. These
are owned by federal government e.g. national saving center. No risk or
minimum risk and low rate of return.

13. LELAND AND PYLE:
• In 1977 le land and pyle provided a description of informational advantages of
financial intermediation. According to them intermediaries help to remove
informational asymmetric and help to make informed and better decisions.
They also said that in order to remove uncertainty u need to have information
of market which can give us bank/ intermediaries and by which we can be
able to make better decisions on the right information.

14. REDUCE ASYMMETRIC INFORMATION
Asymmetric Information in financial markets - one party often does not know
enough about the other party to make accurate decisions. Adverse Selection
(before the transaction)—more likely to select risky borrower.
Moral Hazard (after the transaction)—less likely borrower will repay
loan.Financial intermediaries are important in the production of information.
They help reduce informational asymmetries about some unobservable quality
of the borrower for example through screening, monitoring or rating of
borrowers, Net worth and collateral.

15. FUNCTIONS OF FINANCIAL INTERMEDIARIES
• Saving and pooling system
• Transaction and cost reduction
• Liquidity assurance
• Information sharing coalition
• Delegated monitoring aspects

16. BENEFITS OF FINANCIAL INTERMEDIARIES
• Spreading risk. Rather than lending to just one individual, you can deposit
money with a financial intermediary who lends to a variety of borrowers – if
one fails, you won’t lose all your funds.
• Economies of scale. A bank can become efficient in collecting deposits, and
lending. This enables economies of scale – lower average costs. If you had to
sought out your own saving, you might have to spend a lot of time and effort
to investigate best ways to save and borrow.

17. • Lower search costs. You don’t have to find the right lenders, you leave that to
a specialist
• Convenience of Amounts. If you want to borrow £10,000 – it would be
difficult to find someone who wanted to lend exactly £10,000. But, a bank
may have 1,000 people depositing £10 each. Therefore, the bank can lend you
the aggregate deposits from the bank and save you finding someone with the
exact right sum.
• Facilitate both borrow and savers.

18. WHY FINANCIAL INSTITUTIONS ARE IMPORTANT?
• Financial institutions (intermediaries) perform the vital role of bringing
together those economic agents with surplus funds who want to lend,
with those with a shortage of funds who want to borrow.
• In doing this they offer the major benefits of maturity and risk
transformation. It is possible for this to be done by direct contact
between the ultimate borrowers, but there are major cost
disadvantages of direct finance.

19. WHY IT IS BETTER THAN DIRECT FINANCING?
Indirect financing is better than direct financing due to following reasons,,
• Risk factor increases in case of direct financing .
• A lot of problems have to face in direct financing
• Wastage of time

20. • Indeed, one explanation of the existence of specialist financial intermediaries
is that they have a related (cost) advantage in offering financial services,
which not only enables them to make profit, but also raises the overall
efficiency of the economy.

21. • Without the existence of these intermediaries, savers would have to buy the
securities directly from the borrowers. As savers prefer to provide finances at
short-term maturity period whereas borrowers prefer to borrow at long-term
maturity period, this would have created incongruity of the maturity needs of
borrowers and lenders. FI’s execute significant role of maturity intermediation
to generate savers investments and borrowing money for borrowers

22. SUMMARY AND CONCLUSION
• Financial institutions (intermediaries) perform the vital role of bringing together
those economic agents with surplus funds who want to lend, with those with a
shortage of funds who want to borrow, Indirect finance fulfills the need of lenders
and borrowers by providing profitable saving opportunities.
• By lowering transaction costs, promotion of risk diversification between the
intermediary and the investor and reduction of the asymmetric market information
effects.
• financial intermediaries play a significant role in the financial market by the civilizing
its proficiency as well as assisting the continuance of operations at minimal costs to
investors and they facilitate both borrowers and savers.