FINANCIAL ENVIRONMENT

Financial Environment

Financial Environment

Introduction

Financial intermediaries are entities that act as a bridge between the borrowers and lenders in the market. Basically, it acts as an agent that facilitates lenders and borrowers and contributes to the growth of overall economy.

Financial intermediaries receive money from agents with surplus funds, who generally are willing to lend for a medium and short term. These financial intermediaries provide funds to companies in the form of longer-term resources and in an amount greater than that received by a single agent in surplus (Saunders et al 2008, 20-68). This mediation helps lenders in a way that they get funds at lower costs while borrowers benefit because it facilitates them in mobilization of funding and reducing the costs associated with it.

Types of Intermediaries

There are two kinds of financial intermediaries in broad sense that facilities borrowing and lending function.

Bank Financial Intermediaries

Bank Financial Intermediaries are essentially the central Bank, private banks, savings banks and credit unions. Its liabilities are monetary liabilities generally accepted by the public as means of payment (bills and deposits) and therefore have the capacity to fund financial resources (the phenomenon of money creation) (Saunders et al 2008, 20-68).

Non-Bank Financial Intermediaries

The most relevant of Non-bank financial intermediaries are insurance companies, pension funds or mutual funds, investment companies, investment funds, mortgage companies, leasing entities, money market mediators and mutual guarantee societies. They are characterized by the fact that their liabilities are not money, so their prime activity is mediating the banking intermediaries (Saunders et al 2008, 20-68).

Borrowing and Lending Function

At first glance it may seem that the direct interaction of borrowers and lenders seems to be more advantageous from a financial point of view. However, in a developed economy, it is not the case.

For lenders, the benefits of financial intermediation are expressed since by this medium, they achieve reduction of credit risk. Incomplete and imperfect information is a characteristic of the modern market economy i.e. high credit risk; the risk of non-repayment of principal and interest. These issues are resolved with the help of financial intermediaries. Intermediaries diversify risk by allocating investments by type of instrument in time between the issuance of syndicated lenders, which leads to lower the level of credit risk. Net income is determined by the difference between the mediator rate for giving them credit and rate at which they money is borrowed less the costs of maintenance of accounts, payment of wages to employees, tax payments, etc. Financial intermediaries also facilitate other economic agents' search for reliable borrowers (Godlewski et al 2012, 113-140). The mediator is developing a system check payment status of borrowers and manages the system of distribution of their services. This is also inclined with reduction in credit risk and cost of lending. In addition to this, financial intermediaries provide the resolution of problems of liquidity of the economic agents. Financial institutions have to maintain the necessary level of liquidity of its clients which determines their ability to freely perform its obligations to counterparties. This is achieved by ensuring that financial institutions are able ...