Five importance of financial intermediary

Financial intermediary is a middleman in the financial market. Imagine a surplus funds holder looking for an individual with a deficit fund. This process will not be an easy one. With financial intermediation, these economic agents can get what they want with ease.

1. What's a financial intermediary?

An individual, group of individuals, a corporation or government and international institution that service those in need of funds and persons with surpluses. The financial intermediaries are middlemen in the financial market. Therefore involved in the market but not as economic agents but as other actors that ease the problem of deficit and surplus agents.

Some financial intermediaries serve in the capital market while others focus on the money market. Microfinance banks focus on the money market while the insurance companies are well known in the capital market. These players are heavily regulated so as to avoid gaining from the flaws of the market. 

2. Importance of Financial Intermediary

2.1 Assets safekeeping 

Economic agents with surplus funds can save their funds in the form of assets such as cash, fixed deposit, Forex, treasury bills, insurance premium, commodities, stocks, shares, bonds, and more. The assets are then secured by the financial intermediary to ensure its safety and boost the confidence of their customers.

2.2 Provision of loans

Banks provide loans to economic agents with deficit funds. Assets kept in the form of cash (that is, savings and fixed deposit) are pooled together by the commercial bank and are used as loans to deficit actors in the financial market.

2.3 Investing

Financial intermediaries in the capital market can help excess money holders to invest these funds in growth or dividend assets. Venture capital firms, stockbrokers, mutual funds companies, and investment firms are key providers of this medium. They assist deficit actors to get the fund they need through the financial market instruments stated above.

2.4 Risks diversification 

Those managing financial intermediaries are experts and professionals in the market. They carry out market research to enable them to provide advice to their clients. One way they do this is by encouraging their customers to diversify risks by putting their money in different investment vehicles. Thereby reducing the probability of losing their funds to the fluctuations in the market.

2.5 Intermediation

They serve as middle men in the financial market. Bringing together economic agents without funds and those with excess funds. By doing so, they remove the stress of individuals and institutions in need of fundings in getting them.

3. Conclusion

Finally, the financial system intermediaries ensure bridging the gap between when it takes for fund seekers to get them from fund givers. These middlemen operate both in the money and capital market with commercial banks’ holding companies taking the lead in Nigeria.