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How Financial Intermediation Increases the Efficiency in the Financial System

In: Business and Management

Submitted By moshpaperz
Words 472
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Question 2

Financial intermediation is the process of accepting funds from one entity and lending these funds to another entity. This is achieved with the help of financial intermediaries who intermediate between the net savers and net borrowers of funds in an economy.
On the other hand,
Financial system is a set of financial institutions, financial markets, financial instruments and financial services which help in formation of capital to meet the long term and short term needs of households and corporate houses.
Financial intermediation increases the efficiency in the financial system by;
Easing household liquidity constrain. Liquidity is a measure of the ease and cost with which an asset can be converted into a means of payment. Liquidity constraint is the inability to make purchases due to lack of cash. Financial intermediation offers the ability to transform assets into money at a relatively low cost. Intermediation helps provide liquidity in a way that is efficient and beneficial to household by collecting funds from large number of investors and availing the same to them. Also, through financial intermediation individuals and households are granted lines of credit inform of loans. This ability to influence the allocation of consumption and investment increase the efficiency of the financial system.
Facilitating transaction. Intermediation provides a platform for buyers and sellers to mingle and help channel funds within the economy from those with surplus to those with shortages. This help household to meet their daily demands inform of purchases and investments. Also, intermediation makes use of economies of scale so as to lower transaction cost and therefore brining consumption to an achievable level. This act improves the efficiency of the financial system by meeting the consumption and investment objective.
Reducing process of asymmetric…...

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