What is Financial Intermediation

Financial intermediation is an integral part of the economy

, the process by which banks or other financial institutes mediate transactions between two parties (a buyer and a seller). The majority of people prefer commercial banks for personal finance, while many hold bank accounts, very few are actually aware of how the banking system works. The money deposited in accounts or saving funds is used by banks as loans for businesses that require funds for various business operations or inventory. These loans can also be assigned to home buyers for mortgage, to students for tuition, or someone who needs car financing. Hence, the money does not sit idle in banks instead it is borrowed by businesses and invested in some form or the other. A simple example of financial intermediation is the process of buying a house not many people have enough resources to purchase a house which makes them turn to banks for financial help. Banks after undergoing a series of credit checks then mediate the entire process by providing a mortgage to the buyer after finalizing terms and conditions for the loan. The buyer, after receiving the mortgage, pays the seller and makes monthly mortgage payments to the bank.

Financial intermediaries are not just limited to commercial banks but they include mutual funds, pension funds, credit unions, loan associations, financial brokers and some insurance companies. Financial intermediaries have a thorough process and great expertise hence it is less risky to lend through them not necessarily the person applying for loan will be approved hence reducing the risk of suffering financial loss. Another added advantage is liquidity- the process of quickly converting assets into money- banks have reserved funds to provide liquidity which enables banks to pay account holders any time they need to withdraw their funds.

HSBC, a leading bank in UK, offers personal loans and different mortgage plans for remortgage and first-time buyers with competitive rates for new and existing customers. Provident Personal Credit, a UK company, offers cash loans of 50-500 that are delivered at the borrower's doorstep without any hidden charges or arrangement fees. Vehicles in Practice, financial brokers, offer both personal and commercial vehicle finance at special rates for customers.

For more information on Financial Intermediation, visit our UK business directory

What is Financial Intermediation

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