FINANCIAL INTERMEDIARIES

Definition:

A financial intermediary is an institution, firm or individual who performs intermediation

between two or more parties in a financial context. Typically the first party is a provider
of a product or service and the second party is a consumer or customer.

Financial Intermediaries are financial institutions that accept money from savers and
use those funds to make loans and other financial investment in their own name. These
intermediaries come between ultimate borrowers and lenders by transforming direct
claims into indirect claims. Financial intermediaries purchase direct securities and in
turn, issue their own indirect securities to the public.

Financial Intermediation:

Financial intermediation is the process of savers depositing funds with financial

intermediaries and letting the intermediaries do the lending to the ultimate investors.

Types of Financial Intermediary:

Financial intermediaries include:

• Deposit Institutions
• Building societies
• Credit unions
• Financial advisers or brokers
• Insurance companies
• Collective investment schemes
• Pension funds
 Deposit Insitutions

Among the various Financial intermediaries, some institutions invest much more heavily
in the securitiesof business firms than others. Deposit institution such as commercial
banks are the most important source of funds for business firms in the aggregate.

Definition of Bank:

A banker or bank is a financial institution that acts as a payment agent for customers,
and borrows and lends money.

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers on the bank, and collecting cheques
deposited to customers' current accounts. Banks also enable customer payments via
other payment methods such as telegraphic transfer and ATM.

Definition of Commercial Bank:

Commercial banking refers to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses, as opposed to normal
individual members of the public (retail banking). Commercial Banks in Pakistan include
National Bank of Pakistan, First Women Bank Ltd., Bank Al Falah, Habib Bank Ltd. Etc.

The Role of Commercial Banks

Commercial banks engaged in the following activities:

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 • processing of payments by way of telegraphic transfer, internet banking or other
means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by way of overdraft, installment loan or otherwise
• providing documentary and standby letter of credit, guarantees, performance
bonds, securities underwriting commitments and other forms of off balance sheet
exposures
• safekeeping of documents and other items in safe deposit boxes
• currency exchange
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts
and similar financial products as a “financial supermarket”

Other Deposit Institutions

Other deposit institutions include:

• Mutual Saving Banks

• Saving and loan associations
• Credit Unions

Mutual Saving Banks:

A mutual savings bank is a financial institution chartered through a state or federal

government to provide a safe place for individuals to save and to invest those savings in
mortgages, loans, stocks, Bonds and other securities.

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Saving and Loan Associations:

A savings and loan association is a financial institution that specializes in accepting

savings deposits and making mortgage loans.

Some of the most important characteristics of a savings and loan association are:

• It is generally a locally owned and privately managed home financing institution.

• It receives individuals' savings and uses these funds to make long-term
amortized loans to home purchasers.
• It makes loans for the construction, purchase, repair, or refinancing of houses.
• It is state or federally chartered.

Credit Union:

A credit union is a cooperative financial institution that is privately owned and

controlled by its members. Credit unions differ from banks and other financial
institutions in that the members who have accounts in the credit union are the owners of
the credit union and they elect their board of directors in a democratic one person-one
vote system regardless of the amount of money invested in the credit union.