Q. Describe about Financial intermediation?

Financial intermediation refers to the role of a bank or else other financial institution that serves to bring together lenders and borrowers. Investors are seeking avenues to place excess funds whilst companies are seeking sources of finance. For the reason that of the disparate nature of both investors and companies it is difficult to match investors to a company where the requirements of the investor are met and the requirements of the company are satisfied. Therefore, banks (as an example) act as a conduit through which investors can place funds and companies can borrow funds. In return, investors acquire interest on their deposits and the banks obtain interest on their loans. Obviously, the interest charged by the bank to the company is higher than it pays out to investors.

The role that financial intermediaries carry out is to pool together investor funds to facilitate easy access by companies. With no financial intermediaries companies would almost certainly face capital shortages.