What Is Financial Intermediation?

Many individuals are careful not to enter financial markets on their own and seek help from financial intermediaries or middlemen as they are known. A few financial intermediaries worth mentioning include commercial banks, credit unions, savings and loan associations, building societies, insurance companies, and pension funds.

The money deposited by people in the UK banks is used to provide monetary assistance to other loan-seeking individuals. This money is typically extended as loans to homeowners, students, and businesses. The individuals depositing money in banks can of course overlook the intermediary and give out loans themselves for a higher profit, but they still choose to stick with financial intermediaries…why?

Financial Intermediaries Reduce Risk

Lending with a middleman in between reduces the risk of lending on one’s own. The greatest benefit of involving these central figures is that even if they extend loans to the wrong people, your wealth will remain unaffected. But if you consider to loan directly to the borrower, any glitch in repayment can be a costly deal for you.

In addition, financial intermediaries like renowned British financial institutes reduce risk by experience. After dealing with a number of individuals and companies, they know better whom to trust and whom not. On the other hand, an amateur in the lending business may have a poor sense of judgment and can thus end up in losing wealth.

Financial Intermediaries Offer Liquidity

Another major benefit of involving financial intermediaries is their ability to provide immediate liquidity when the creditor requires. Before explaining further, you should know that liquidity is the process of converting assets into ready-to-use cash. If a person lends money to another directly and is in a sudden need of cash, it is less likely for the borrower to return it instantly. Intermediary on the other hand has extra funds and can provide liquidity or instant cash to the depositors whenever they require.

If you are stepping into the financial market for the first time, you can consult a business directory and find a sizable number of financial intermediaries to help you in the process.