Understanding Financial Intermediaries and Their Functions
Financial Intermediaries and the Financial System
The Financial System consists of institutions that mediate between claimants (borrowers) and suppliers (savers) of financial resources. Financial intermediaries are the key elements of this system. They can be classified into two main types:
Types of Financial Intermediaries
- Banking Intermediaries
- Non-Banking Intermediaries
1. Banking Intermediaries
Banking intermediaries include banks, savings banks, and rural banks. They possess the capacity to produce money, and their financial assets are widely accepted in payment of debts or transactions.
Definition and Role of a Bank
A Bank is a financial intermediary that receives funds from customers (deposits) to lend to others. Banks pay depositors a certain amount (interest paid) for the money received and charge borrowers a higher amount (interest charged) for the loans granted. The amount charged or paid by banks to capture or lend money is called interest.
Besides interest income, banks often generate profit through:
- Charging commissions for certain transactions (e.g., wire transfers, card issuance).
- Investments made with their customers' deposits.
2. Non-Banking Intermediaries
These entities, which include investment companies, insurers, leasing entities, and factoring firms, do not have the ability to create money.
Key Non-Banking Intermediaries
Insurance Companies
These entities issue insurance policies as a financial asset, offering customers the ability to cover specific risks by charging a fixed compensation (premium) in advance.
Investment Funds
These are entities whose assets are owned by participants who expect to obtain a certain profit. The funds are formed by investing in a diversified basket of securities managed by a specialized management company.
Pension Funds
These institutions (often composed of financial institutions and insurance companies) receive regular contributions from participants. These contributions are allocated to various investments. When participants reach retirement age, they recover the accumulated money over their life.
Leasing Institutions
These companies offer a special type of lease for movable or immovable property. A key particularity is that at the end of the set lease term, the lessee can choose between three options:
- Purchase the property.
- Renew the contract.
- Not exercise the purchase option.
Factoring Institutions
Factoring involves the assignment of bills or letters of credit that firms hold from their clients to a specialist firm. The factoring entity takes responsibility for collecting these documents. Factoring entities receive a commission for their management and assume the risk of debtor insolvency.
Mutual Guarantee Societies (SGRs)
These societies are typically composed of small and medium enterprises (SMEs). They aim to facilitate access to credit for their members.
Objectives of the Financial System
The financial system serves crucial economic functions, including:
- To encourage private savings.
- To offer various alternatives to make savings productive.
- To effectively allocate available financial resources to meet the needs of the economy.