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Financial Intermediation - Giventhatdefinition, institutions

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Financial Intermediation Definition of Financial Intermediation Financial intermediation may be defined as the process of channelling funds  between those who wish to lend and those who wish to borrow. Given that definition, it is important to note that a wide range of financial  institutions   are   engaged   in   financial   intermediation   and   it   is   by   no   means  restricted to banking institutions. Any institution standing between the ultimate  lender of funds and the ultimate borrower of funds is engaging in financial  intermediation. At the same time it is important to note that many of the services offered by  financial institutions are  not  intermediation activities. Financial advisory services  provided by many financial institutions, fund management services and advice on  takeovers and mergers provided by merchant banks are all examples of non- intermediary services. An important distinguishing characteristic of financial intermediation is that  new financial assets and liabilities are created. When money is lent to a financial  intermediary the lender holds a claim against that financial intermediary, while if  money is borrowed from the financial intermediary, that financial intermediary  will be holding a claim against the ultimate borrower. Had the ultimate lender  lent directly to the ultimate borrower, only one claim and one liability would  have been created; lending through the financial intermediary has resulted in two  claims and two liabilities. In the case of a bank deposit, the nature of the claims and liabilities created  are usually straightforward. The depositor has a claim for a given amount of  money, perhaps to be repaid on demand, while the bank has a matching liability  to repay a given amount of money. If the bank onlends that deposit it has a claim  against the borrower for a given amount of money, perhaps to be repaid (with  interest) at a given point in time in the future. The borrower, naturally, has a  liability to repay that sum of money with interest on the specified date. With other financial intermediaries the nature of the claims and liabilities  created may not be so straightforward. An individual who buys a long-term  insurance policy, for example, will have a claim against the insurance company 
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for a capital sum at a date in the future or on death if that occurs earlier. The  capital sum involved will invariably   not   be for a fixed amount. The insurance  company may use the premiums from that policy to purchase a range of different 
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