Republic of the Philippines

ST. LOUISE DE MARILLAC COLLEGE OF SORSOGON

Sorsogon City

ADVANCED FINANCIAL MANAGEMENT

BANKS AND OTHER FINANCIAL INTERMEDIARIES

By: John Paulo H. Poblete

FINANCIAL INTERMEDIARY
❖ A financial intermediary is an institution or individual that serves as a middleman among diverse
parties to facilitate financial transactions.

❖ A financial intermediary is typically an institution that facilitates the channeling

of funds between lenders and borrowers indirectly. As such, financial intermediaries channel
funds from people who have surplus capital (savers) to those who require liquid funds to carry
out a desired activity (investors).

Functions Performed by Financial Intermediaries

• The hypothesis of financial intermediaries adopted by mainstream economics offers the
following three major functions they are meant to perform:

1. Creditors provide a line of credit to qualified clients and collect the premiums of debt
instruments such as loans for financing homes, education, auto, credit cards, small
businesses, and personal needs.
2. Risk transformation
3. Convenience denomination

Advantages and Disadvantages of Financial Intermediaries

• There are two essential advantages from using financial intermediaries:

1. Cost advantage over direct lending/borrowing

2. Market failure protection: The conflicting needs of lenders and borrowers are
reconciled, preventing market failure.

• There are various disadvantages that include a lack of transparency, inadequate attention to
social and environmental concerns, and a failure to link directly to proven developmental
impacts.
Types of Financial Intermediaries

• Banks

▪ A bank is a financial institution that accepts deposits from the public and channels
those deposit into lending activities. Banks primarily provide financial services to
customers while enriching investors.

➢ The basic function of a Bank is to collect deposits from the public and lend
those deposits for the development of Agriculture, Industry, Trade and
Commerce. Bank pays interest at lower rates to the depositors and receives
interests on loans and advances from them at higher rates.

➢ Commercial Roles
1. Issuance of Bank Notes
2. Processing of Payments by way of telegraphic transfer, Electronic
Funds Transfer at Point of Sale (EFTPOS), internet banking or other
means
3. Issuing bank drafts
4. Accepting money on term deposit
5. Lending money by way of overdraft, installment loan or otherwise
6. Safekeeping of documents and other items in safety deposit boxes
7. Currency change

➢ Economic Functions
1. Issue money, in the form of banknotes and current accounts subject to
cheque or payment at the customer’s order.
2. Netting and settlement of payments
3. Credit intermediation
4. Credit quality improvement
5. Maturity transformation

Types of Banks

✓ Retail Banking
✓ Business Banking
✓ Corporate Banking
✓ Private Banking
✓ Investment Banking
✓ Central Banking

• Savings Banks

▪ A savings bank is a financial institution whose primary purpose is accepting savings

deposits and paying interest on those deposits.
 • Credit Unions

▪ A credit union, a type of financial institution similar to a commercial bank, is a

member-owned financial cooperative, controlled by its members and operated on a
not-for-profit basis. Credit unions generally provide services to members similar to
retail banks, including deposit accounts, provision of credit, and other financial
services.

• Financial Advisers or Brokers

▪ Such intermediaries may or may not offer a financial product but advises investors
to help them achieve their financial objectives. These financial advisors usually
undergo special training.

• Insurance Companies

▪ A company, which may be for-profit, non-profit or government-

owned, that sells the promise to pay for certain expenses in exchange for a regular f
ee, called a premium.

• Pension Funds

▪ A pension fund, also known as a superannuation fund in some countries, is any plan,
fund, or scheme which provides retirement income.

• Stock Exchanges

▪ A stock exchange does not own shares. Instead, it acts as a market where stock
buyers connect with stock sellers.

Conclusion
Reading the above points, it is clear that financial intermediaries play a very important role in the
economic development of the country. They play even bigger role in the developing countries, including
helping the government to eliminate poverty and implement other social programs.

However, given the complexity of the financial system and the importance of intermediaries in affecting
the lives of the public, they are heavily regulated. Several past financial crises, like the sub-prime crisis,
have shown that loose or uneven regulations could put the economy at risk.