Role of Financial

Intermediaries

G.SELVANESAN MBA
Introduction
 The term financial intermediary may refer to an
institution, firm or individual who performs
intermediation between two or more parties in a
financial context. Typically the first party is a
provider of a product or service and the second party
is a consumer or customer.
 Financial intermediaries are banking and non-banking
institutions which transfer funds from economic
agents with surplus funds (surplus units) to economic
agents (deficit units) that would like to utilize those
funds. FIs are basically two types: Bank Financial
Intermediaries, BFIs (Central banks and Commercial
banks) and Non-Bank Financial Intermediaries,
NBFIs (insurance companies, mutual trust funds,
investment companies, pensions funds, discount
houses and bureaux de change).
Financial intermediaries can be:

 Banks;
 Building Societies;
 Credit Unions;
 Financial adviser or broker;
 Insurance Companies;
 Life Insurance Companies;
 Mutual Funds; or
 Pension Funds.
The borrower who borrows money from the
Financial Intermediaries/Institutions pays higher amount
of interest than that received by the actual lender and the
difference between the Interest paid and Interest earned is
the Financial Intermediaries/Institutions profit.
The role of financial intermediaries

 While some investors make their own investment decisions

and invest directly in CIS units, many others seek financial
and investment advice from an investment professional or
financial intermediary.

 Financial intermediaries may include banks, broker-

dealers, investment advisers and financial planners. Because
of the important role these parties play in the process of
investment decision making by investors (e.g. by
recommending CIS investments to investors), regulatory
authorities may regulate these financial intermediaries in a
number of ways. Regulation may encompass requirements
that financial intermediaries meet certain competency
standards such as qualification and training criteria.
 Alternatively, a regulatory authority may not
impose specific qualifications on a class of
financial intermediary, but rather may require that
the qualifications of the person be disclosed to
potential clients.

 In addition, regulatory authorities may impose

specific standards of conduct requirements on
financial intermediaries when providing services
to investors. For instance, a requirement that the
financial intermediary make a determination that a
particular CIS is a "suitable" investment based on
the investment objectives and financial
circumstances of the investor to whom the
recommendation is made.
 Hedgers use futures or options markets to reduce or
eliminate the risk associated with price of an asset.
 Speculators use futures and options contracts to get
extra leverage in betting on future movements in the
price of an asset. They can increase both the
potential gains and potential losses by usage of
derivatives in a speculative venture.
 Arbitragers are in business to take advantage of a
discrepancy between prices in two different markets.
If, for example, they see the futures price of an asset
getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a
profit.