Financial Markets and Institutions Essay Example | Topics and Well Written Essays - 1500 words

Financial Markets and Institutions - Essay Example Financial intermediaries have played a major role the development and growth of the world’s economy. The financial institutions such as banks and other financial institutions such as microfinance institutions, investment ventures, and Sacco’s provide funds for the development of businesses operations. The Financial intermediaries help investors to save to improve their living conditions. For example, finance institutions give loans to small enterprises and individuals who make take less risky loans but give high returns in terms of interest rates. These returns are used to provide loans for other investors. Banks and credit unions take money that has been saved and use the money to give loans to investors; mutual funds take contributions from a group of investors and invest in a high investment requiring assets which individual investors would not have been able to invest in alone thereby spreading the risk. Financial intermediaries that encourage savings include retire ment benefits institutions, housing finance institutions, insurance companies, and mutual funds where members of the public are encouraged to save for their old ages, investment purposes, and better housing. In a country where a culture of savings and borrowing is encouraged there is a significant change in the living standards of the citizens leading to development and growth of the country’s economy in general. The financial institutions encourage savings while using those savings to lend out to the individuals or the organizations that want to borrow money to invest. Financial intermediaries receiving capital from those willing to invest and in turn disbursing it to those willing to borrow capital achieve this. Allen and Santomero (1999, pp. 1-42) reported that financial intermediaries play a role in providing an avenue for organizations to access the financial markets. Financial intermediaries have been known to undertake underwriting and acting as agents to the stock exc hange. When financial intermediaries undertake underwriting they are able to market the shares and other instruments on behalf of their clients as well as advise their clients on the best offer that they can attain maximum capital. The Financial intermediaries provide a channel to the financial market to their clients through underwriting. Financial intermediaries also play a role in providing credible information to their clients. The Financial intermediaries are able to represent their clients in the market by providing consultative services about the stock market. Most banks in the twenty first century have formed a different department that deals with stock market consultative services. The financial intermediary investigates for the best possible investment venture for its clients both individuals and organizations. This accrues a fee to the clients who pays the financial intermediary for the services offered (Allen & Santomero 1999, pp. 1-42). Consequently, Allen and Santomero (1999, pp. 1-42) documented that financial intermediaries reduce the lending risks upon utilizing its lending services. There are many syndicates and pyramids in the economy who want to exploit individuals and organizations by providing loans at very high rates. The financial intermediaries have been created by law and are governed by the government through the central bank. The law ensures that all financial intermediaries use a lending rate that does not exploit the members of