Management Issues Facing Global Managers as We Enter the 21st Century
Financial Intermediation
Introduction “In this chapter we introduce the process of financial intermediation. We consider its nature and explain why most lending/borrowing takes place through intermediaries rather than lenders lending directly to borrowers. In considering this issue we are also considering the fundamental reasons for the existence of banks. We identify the advantages that institutions such as banks have which enable them to undertake intermediation. However we also argue that traditional intermediation services provided by banks have declined in many countries in recent years and banks have sought to maintain profits by expansion into other areas of business” The nature of financial intermediation A company planning to invest in a new production line may not be able to finance all the investment from his/her own resources and will have to borrow some or all of the required funds. An individual with surplus funds out of his/her current income may want to lend these funds in order to obtain a return. It would therefore seem logical for the firm wanting to borrow funds to seek out the individual wanting to lend funds, and vice versa. In practice direct lending, like this, does not generally happen and instead funds are channeled through a financial intermediary such as a bank.
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Prepared by : Prabath. S . Morawakage |B.B Mgt (Finance) Special, 1st Class Honours
To ask the question why does most lending/borrowing take place through a financial intermediary is to also ask the question of why financial intermediaries exist. There are three main reasons why financial intermediaries exist: 1. Different requirements of lenders and borrowers 2. Transaction costs 3. Problems arising out of information asymmetries.
Different requirements of lenders and borrowers Firms borrowing funds to finance investment will tend to want to repay the borrowing over the expected life of the investment. In addition the claims issued by firms will be have a
Introduction “In this chapter we introduce the process of financial intermediation. We consider its nature and explain why most lending/borrowing takes place through intermediaries rather than lenders lending directly to borrowers. In considering this issue we are also considering the fundamental reasons for the existence of banks. We identify the advantages that institutions such as banks have which enable them to undertake intermediation. However we also argue that traditional intermediation services provided by banks have declined in many countries in recent years and banks have sought to maintain profits by expansion into other areas of business” The nature of financial intermediation A company planning to invest in a new production line may not be able to finance all the investment from his/her own resources and will have to borrow some or all of the required funds. An individual with surplus funds out of his/her current income may want to lend these funds in order to obtain a return. It would therefore seem logical for the firm wanting to borrow funds to seek out the individual wanting to lend funds, and vice versa. In practice direct lending, like this, does not generally happen and instead funds are channeled through a financial intermediary such as a bank.
1
Prepared by : Prabath. S . Morawakage |B.B Mgt (Finance) Special, 1st Class Honours
To ask the question why does most lending/borrowing take place through a financial intermediary is to also ask the question of why financial intermediaries exist. There are three main reasons why financial intermediaries exist: 1. Different requirements of lenders and borrowers 2. Transaction costs 3. Problems arising out of information asymmetries.
Different requirements of lenders and borrowers Firms borrowing funds to finance investment will tend to want to repay the borrowing over the expected life of the investment. In addition the claims issued by firms will be have a