Financial intermediaries are governed by the characteristics of financial intermediaries as they are basically the main facilitators of financial flows. They operate between savers and users of funds and facilitate the issue and exchange of financial instrument.
Explain The Role Of Financial Intermediaries
Some of the foremost financial institutions that acts as intermediaries as recorded in many of the financial system rely on the characteristics of financial intermediaries which helps them to excel.
- The banking sector (commercial banks, merchant banks, community banks.. etc).
- Specialized non-bank banking institutions (Development banks, People Banks.. etc)
- Investment banks or companies and finance companies.
- Primary mortgage institution
- Unit trust scheme
- Insurance companies and re-insurance companies
- Other financial market facilitator like stock brokers, registrars, Bureau de change etc.
The banking sector as one the financial intermediaries is the pre-eminent sector. It controls the bulk of assets in the system, attracts most of the deposits and supplies the bulk of lending and fund transfer services. It is the most watched and perhaps until recently, the most regular sector of the economy.
The central bank is a system unto itself. It is the apex institution in most of the developing economies, they moderate the enter financial system. It operations are governed by the central bank degree.
Commercial banks as well as merchant banks operate under the banks and other financial institutions decree. The increasing competitiveness of banking, people are realizing and exploiting the fact that the distinction between both types of banks is very thin. Meanwhile, the effectiveness in understanding the characteristics of financial intermediaries has indeed driven up the universal banking gains and has increased the momentum.
There are non-bank bankers who can as well be categorized into little segments, they are mostly not banks as they can be strict interpretation of their roles and the term and conditions holding them, because these bankers are not licensed under the guideline of the BOFID guideline. Meanwhile, these non bankers are involved in the delivery of a number of financial services hitherto associated only with banks.
Indeed the demarcation between these institutions and banks will shrink even further in the near future. Non bank bankers are already competing aggressively with banks in savings mobilization and credit delivery as well as in providing facilities services in the rapidly expanding securities industry in United States of America. Most of them have started package and offer a variety of investment products that are virtually close substitutes for income earning bank deposits.
The insurance industry as one of the financial intermediaries constitutes a major sub sector of the financial system; they are a few sectors of the economy that was set up to restore individuals or organisation into their normal or formal state, due to the understanding and the utmost regards for the characteristics of financial intermediaries. The main or the considered types of companies/firms that operates in many third world or developing countries such as Nigeria including insurance companies, re-insurance companies and insurance brokers. There are three types of insurance companies, life policy companies, non-life policy companies and composite companies which both life and non life policies.
Stock brokers are the dealing members of the stock exchange. They deal on securities quoted on the exchange either as principals or as agents. Most stock brokers in the stock market, however, deal in dual capacity, in essence they operate as principal as well as agents for buyers and sellers of securities. Some stock brokerage firms also provide issuing house services.
The biggest institutionalized investors in the states financial system I the social securities and trust fund (formerly provident fund). Other major institutional investor include pension funds, superannuation schemes etc. one institutional investors that was designed to play a major role in the future is the unit trust which receive legal approval under the companies and allied matters decree.
Under the decree, a unit trust scheme is an arrangement whereby the public is allowed to buy units into which they are divided the beneficial interest in a unit scheme. Every unit trust shall be a body corporate that the incorporated is under the companies and allied matters decree have paid the minimum paid up capital. The properties of the unit shall be vested in a trustee which shall be body corporate such a bank or insurance company, licensed under the relevant Act and having a stipulated minimum paid up capital.
Financial Intermediaries And Their Type | Characteristics Of Financial Intermediaries
Knowing the activities and the characteristics of financial intermediaries does not end with the banks and bad debt, insurance companies and other financial institutions; it extends to the financial markets. The financial system transactions are carried out in the financial markets which simply refers to the operating framework provided b the financial system for the origination, custodianship and distribution of financial assets and liabilities.
The formal financial market has a well organized system; it has definite operating rules, norms of behaviour as well as an identifiable structure of market rates for fund. However, the financial sector controls a very substantial flow of the fund in the economy. Activities of the financial market dominate the economies of most rural areas. There are informal financial market recognised by the economy, they are also other factors that as well included can be personalized, both in form as well as in their operating procedures and processes.
The financial market is an important segment of the economy, they are classified as an agent, they as well can be considered as financial intermediaries who possess the complimentary segments of the system. This sector provides assistance and they also determine the major characteristics of financial intermediaries that should be regarded, all these boils down to providing the needed help both the money market as well as the capital market needs. The precise point of separation between the two segments is however, difficult to identify being very often as thin as the divide between evening and night fall in the tropical region.
By and large, the money market lies at the lower and end of maturity spectrum of financial claims and obligations that are of short term maturities, a euphemism which accommodates a wide range of transactions varying from those of over night maturities up to those of maturities of one fiscal year.
The capital market as one of the financial intermediaries on the other hand is the market that deals with financial claims and obligations that stay outstanding for longer periods of time. Many people often associate the capital market solely with the stock exchange. The conception may have risen from the fact that the stock exchange is the only part of the capital market that has a physical location like other conventional market places. But the capital market or indeed all the financial market refers to conceptual rather than to physical or geographical phenomena. A lot of capital market transactions take place through contracts which are not confined to any physical location.
Similarly, the capital market accommodates a wide range of exchange mechanism. Transaction could be carried out through direct negotiation between suppliers and raisers of funds, by knowing the characteristics of financial intermediaries; you know who operate on their behalf of the market.
To conclude the discussion on financial markets, mention need be made of the foreign exchange market. The typical transactions either the money or capital market is denominated in the local currency, naira in Nigeria. Some transactions may however involve foreign units of account, the United State of America dollar, British pounds sterling or any other foreign currency. Such transaction arises from cross border (international) trade as well as from transaction capital flow.
Transactions of that nature involve currency conversions and exchange which are carried out in the foreign exchange market. As in the case with the other markets, the foreign exchange market has formal as well as an informal sector. The informal sector of the financial intermediary an as well be called the parallel market, alternate black market. What ever the name, the major feature of this market is the informality of operations and the absence of definite rules of conduct.
The formal foreign exchange market is represented by transactions in the inter bank foreign exchange market (IFEM) as well as operations at the bureau de change.
Financial Instrument – A financial instrument is a documentary medium for raising funds. It could be a money or capital market instrument. It could be Pound sterling denominated or other foreign currency dominated. One of the things the Characteristics Of Financial Intermediaries have done is in the facilitating of business dealings among the different arms of the financial institutions, and also in enhancing the use of financial instruments.
Financial instrument are of two broad categories, they include the following; those that cover debt obligations (debt instruments) and those that represent ownership interest or rights (equity instrument). Some financial instrument are negotiable, other are not.
The primary money market instruments in most countries like Nigeria are the Federal government treasury bills and treasury certificates, trade bills, commercial papers and certificates of deposit. New types of money market instruments are now being packaged by banks to meet the increasing competitiveness of the industry.
The major capital market instruments are government development loan stock, equity shares, debenture stocks, mortgage loan stock and preference shares. The other capital market instruments that are getting increasingly popular are lease and hire purchase contracts.