Financial inter mediation is the backbone of saving and investment cycle, it refers to the function of giving funds to the person who needs it called investor from the person who has excess funds called savers. Given below are the various types of financial inter mediation which are provided by the banks or financial institutions –
- Denomination inter mediation – Under this type of inter mediation banks or financial institutions accept deposits in small amounts from many people and give that money to borrowers who require large sums of money. So for example if 1000 depositors deposit $100 each in the bank and if an borrower wants to borrow $100000 than he or she does not has to collect $100 each from the depositors but he has to borrow $100000 from bank in one single transaction.
- Default inter mediation – In this type of inter mediation bank or financial institution take the risk of giving loan to the borrower and the depositor enjoy risk free return in the form of interest on deposits. For example if you have $10000 and you want to give loan to the borrower at 12 percent rate of interest than it is very risky for an individual to give loan to the borrower, however as far as bank or financial institution are concerned they having financial expertise can carry out all the formalities with respect to loan and you can enjoy risk free return in the form of interest.
- Liquidity inter mediation – Under this inter mediation banks or financial institutions provide liquidity to both savers as well as borrowers. For example if you have money deposited in the bank and you require it urgently than you can go to bank and take that money out and banks will never say no if you have money in your account and as far as borrower are concerned if they have proper documents than bank is the best place as they will give the required money at reasonable rate of interest and hence solve the problem of shortage of funds.
As one can see from the above that financial inter mediation is at the core of banking and any person who is interested in studying banking should have an idea about the above types of financial inter mediation.