Financial Intermediaries - Meaning, Role and Its Importance 

 Introduction

 A financial intermediary is a firm or entity that acts as an intermediary between a service provider and a consumer. It is an entity or individual that is between two or more parties in a financial context. In theoretical terms, a financial intermediary makes savings in investments. Financial intermediaries exist for profit in the financial system, and sometimes there is a need to regulate the activities of the same. Furthermore, recent trends suggest that the role of financial intermediaries in savings and investment functions can be exploited for an efficient market system or that sub-prime crises suggest that they may also be a cause for concern.  

 Financial Intermediation

 Financial intermediaries act as a channel for finance between borrowers and lenders in the savings/investment cycle of an economy. In the financial system, intermediaries such as banks and insurance companies play a large role, given that it is estimated that a substantial portion of every dollar financed externally is made by banks. Financial intermediaries are an important source of external funding for corporates. Unlike capital markets, where investors directly contract with companies producing marketable securities, financial intermediaries borrow from lenders or consumers and lend to companies that require investment.

 Role of the Financial Intermediaries 

 The reason for the ubiquitous nature of financial intermediaries such as banks and insurance companies lies in their uniqueness. As noted above, banks often act as "intermediaries" between those who have the resources and those who want the resources. Financial intermediaries like banks are asset based or fee based depending on the kind of service they provide as well as the nature of the clients they handle. Asset-based financial intermediaries are institutions such as banks and insurance companies, while fee-based financial intermediaries provide portfolio management and syndication services.

 Need for regulation

 The nature of the complex financial system we have at the moment makes the need for regulation all the more urgent and necessary. As the sub-prime crisis has shown, no financial institution can be made to hold the financial system hostage to its questionable business practices. As the manifestations of the crisis are being felt and it is now clear that asset-backed derivatives and other "foreign" instruments amount to trillions, the role of central banks or monetary authorities in reining in rogue financial institutions is essential to the systemic collapse. Stop it.

As capital becomes dynamic and autocratic, it is up to monetary authorities to step in and ensure that there are proper checks and balances in the system to prevent damage to investors and the economy in general.

 Recent trends

 Recent trends in the development of financial coordinators, especially in developing countries, have shown that these institutions have an important role to play in poverty alleviation and other debt reduction programs. Some of the programs such as small loans that reach the masses have boosted the economic status of the previously marginalized sectors of the population.

In addition, financial advisors such as banks are now transforming into umbrella institutions that meet the full needs of investors and borrowers alike and are growing to become “financial hyper marts”.

 Conclusion

 As we have seen, today financial intermediaries play an important role in the world economy. They are the "lubricant" that keeps the economy running. Due to the increasing complexity of financial transactions, it becomes imperative for financial intermediaries to reinvent themselves and meet the diverse portfolios and needs of investors. Financial intermediaries have a significant responsibility towards the borrowers as well as the lenders. The word arbiter itself would suggest that these institutions are vital to the functioning of the economy, and they must, along with monetary authorities, ensure that loans reach the needy without jeopardizing the interests of investors. This is one of the major challenges before them.

Financial intermediaries have a central role in a market economy, where efficient allocation of resources is the responsibility of the market mechanism. In these days of increasing complexity of the financial system, banks and other financial intermediaries have to come up with new and innovative products and services to meet the diverse needs of borrowers and lenders. It is the right mix of financial products along with the need to mitigate systemic risk that determines the efficacy of a financial intermediary.