Financial Intermediation

Abstract

Financial intermediation refers to the activity of (mainly) banks by which they allocate the funds received (deposits) to productive activities and at the same time monitor the behaviour of the receivers of funds (loans). At the same time as the transfer of funds takes place, a transfer and allocation or re-pooling of risks occurs. For the economy to grow, it is important that the allocation of funds is efficient and that financial intermediation runs deep (Cull and Xu, 2000). Poor financial intermediation can be the result of information asymmetries, loans rationing, mispricing of transactions, poor monitoring of behaviour, and so on. All other things being equal, banks should be in a better position to allocate funds than bureaucrats because of their expertise in the analysis and management of risks.