Overview Of Theory Of Financial Intermediation

Theory of financial intermediation has been successful because of reduction on information and transactions cost. The intermediaries provide liquidity especially liquid assets by reducing cost of exchange between lender and borrowers. Financial intermediaries can obtain information at lower cost than individual investors because the former does not have duplicated information. In the recent times intermediaries has increased while transaction cost and information asymmetry has declined. Growing financial intermediation can improve further through electronic banking. This theory exists to solve the following problems: transaction cost, regulatory factors and information problem. The information asymmetry leads to market imperfections which generate specific form of transaction cost.

Financial intermediaries have overcome to consider banks as conditions of depositors who help households with insurance against liquidity position shocks. Transaction cost encompass audit cost, monitoring costs ,search cost and exchange or monetary transaction cost, the proponents of this theory argue that the third approach is based on the financing of the economy and regulations of money production and of saving in which affects solvency and liquidity of banks. This showed that banks capital affects banks safety being able to extract repayment from borrowers and willingness to liquidate them. Spigely (2008), the modern theory of financial intermediation helps preventing saves and investors from trading directly because of market imperfections banks and like agents or delegated monitors of information gap between servers and investors. Two aspects of asymmetric information about the potential cash flows associated with the security than do investors. Some investors have associated with the security value than other investors that is, some investors are informed, whereas others are uniformed. Intermediaries originating loans may be less informed about the ultimate market value of their assets than are investments banks which may serve as arrangers for example who purchase the assets, repackage them by pooling them with assets originated by other intermediaries and sell the repackaged assets or securities backed by these assets. Historically, banks and insurance companies have played a central role. This appears to be true in virtually all economies except emerging economies which are at every stage. Even here, however the development of intermediaries tenders to lead the development of financial market themselves. In short, banks have existed since ancient times, taking deposits from households and making loans to economic agents requiring capital. To understand how physical coverage transactions improved usage and how particular banking models can impact financial intermediaries and financial performance by extension it is important to considers the issue of the non-exclusively of agents .Non-exclusively improves outreach by allow in agents to represents more than one financial institution in effects allowing them to some more customers.

Non-exclusively of agents is especially important in rural areas when banks branch coverage is minimal and qualified agents are also scarce. In rural areas, an agent will often be the only banking outlets available to the local population as possible, which would mean representing multiple financial institutions from mainstream commercial banks to state run development banks that cater to the needs of low income populations. This makes the theory to be relevant to the study. Financial intermediation theory has helped in cost management and financial induction by banks. This has been done by expanding the banking infrastructure to underserved reducing cost incurred but customers to reach the bank’s branches, servicing allow value account which has led to a new market needs the banks. The banking agents use technology in advancing services to customers at convenient locations. This theory of financial intermediaries reduces transaction and information cost coming from information asymmetry between lenders and borrowers leading to market efficiency. Financial intermediaries transform risk aspects as they can resolve information asymmetry .Information asymmetry arises since borrower knows more about their investment than lenders. Existence of economics of scale has made small firms to have difficulty obtaining funding from non-bank sources leaving them with banks as their lender.