Definition

Financial Intermediaries are formed in order to create a bridge between the borrowers and lenders, in order to facilitate the transaction between both the parties.

Therefore, in this regard, it becomes highly essential to ensure that both the borrower, as well as the lender are able to establish a reliable, safe, and convenient communication channel so that the transaction can be carried out in a smooth fashion.

Given the fact that financial intermediaries are formed on a different basis for different purposes, it can be seen that their underlying functionality tends to stay the same – to establish the link between the borrowers and lenders.

Characteristics of Financial Intermediaries

As mentioned earlier, Financial Intermediaries are mainly formed in order to ensure that borrower are able to meet lenders. In this regard, financial intermediaries have a given number of characteristics that are necessary to carry out their functions.

Firstly, it is absolutely pivotal that Financial Intermediaries are able to create a viable spread between the interest paid to the lender, and the interest received from the borrower.

This setting of interest rate is a very crucial role for any financial intermediary, because they have to account for a number of things, which include the market positioning and competitiveness, so that they are able to sustain in the market.

Setting of interest rates, is therefore, a very important characteristic of the financial intermediaries, because that determines the overall propensity with which it is feasible for the borrowers are able to afford the finance cost of the money. This tends to be a fundamental function, because it directly impacts the profitability of the financial intermediary.

Related article  Types of Financial Intermediaries

Another important characteristic of the financial intermediary is the fact that they are supposed to do an inherent risk assessment for the individuals they lend out this money too. Risk assessment is an extremely crucial part because it gauges the overall probability with which the borrower will honor its debt and pay back the amount.

Hence, this also tends to be a characteristic of the financial intermediary, because they are supposed to take the risk on behalf of the lender, subsequently creating it necessary for them to carry out a risk assessment for the buyers.

However, regardless of the basic functionality of financial intermediaries, it is also inherently important to realize the fact that the main characteristic on basis of which these organizations were formed were to establish trust between the borrower, and the lender. This is because the lender in this case, transfers the risk to the borrower.

This means that regardless of the borrower paying back the amount to the financial intermediary or not, the lender is going to be paid by the financial intermediary. Therefore, the risk spread that is created and subsequently borne by the financial intermediary tends to be one of the main characteristics which justify the creation and subsequent establishment of the financial intermediary.

Additionally, when it comes to risk-related profiles, it is also important to realize the fact that financial intermediaries provide the borrowers with collaterals and contingencies in the case where lender is unable to pay the amount back.

Lastly, another important characteristic of financial intermediaries is provision of services to both the parties, in case of any disagreement, or nay unprecedented circumstance. The main rationale in this regard is to facilitate both the borrower and the lender in the situation where there are any deviations from the agreed plan.

Related article  Accounting Profit Vs Economic Profit

For example, the borrower might need finance before the agreed amount, in case of which there might be disagreement and unnecessary conflict between both of these parties. In this case, an important role of the financial intermediary can be defined to act as a mediatory between both parties.

Conclusion

Therefore, it can be seen that the role of financial intermediaries in the modern day and age cannot be undermined. As a matter of fact, it is increasingly important to recognize the fact that financial intermediaries play a very important role to create sense and harmony within the financial transaction, so both parties feel safe and secure.

In this regard, it should also be highlighted that depending on the type of financial intermediary in place, the role and characteristic might change, should also be accounted for.

However, the characteristic that stays consistent across different financial intermediaries regardless of their specific functionality is their ability to set interest rates, diversify the risk portfolio of the investor, and facilitate loan processing on behalf of the borrower.