There are many possible advantages of financial intermediaries for individuals, groups, industries, government and society at large and it is not possible to deny the importance of financial intermediaries because it these intermediaries help in accessing international money and capital markets. There are many forms and shapes of financial intermediaries which are working market these days. These are all the important types of financial intermediaries because people cannot get benefits and loans himself/herself from any person directly due to many security and risk issues (Viney, 2009).
The major purpose of this report is to evaluate the link between economic growth and financial intermediaries by trading in Australian and international money and capital markets. The major types of financial intermediaries are banks, mutual funds, pension funds, credit unions, savings and loan associations and to some extent insurance companies. There are two types of financial intermediaries, private and government level financial intermediaries. These all intermediaries are important to access international money and capital markets to achieve the overall growth of economy (Brimble, Beal & Willis, 2007).
Financial intermediaries are important part of financial system because it leaves a strong impact on the local and international economy because when people deposit money in a financial intermediary then it forwards the same deposit money to businesses, individuals and government as loans on higher interest rates for creating credit. These loans are utilized by these people in the form of education fee, material purchasing and miscellaneous procurement and for other developments works. Financial intermediaries are also very helpful in trading on national and international scale such as in bond, currency, gold, securities and derivatives markets.
Financial intermediaries play a role of middleman between loan takers and loan givers. The question arises here that a person who has extra money could, of course, seek out borrowers himself and bypass the intermediary. By eliminating the middleman, the saver could get a higher return but they do not practice the same activity in direct way.
There are many advantages of financial intermediaries such as low risk and liquidity associated with trade. In any country such as Australia, there are certain laws and legislations to form a financial intermediary. A bank, mutual fund and insurance company work according to Australian laws locally and they are secured by the government and other sub-government authorities such as central bank. Financial intermediary is much helpful for smooth working and trading locally and internationally.
The second use of financial intermediary is the liquidity; financial intermediary may quickly get cash for the depositor in case of need ad requirement. Like if you have bought bonds and but you need in replacement of bonds then you can just sell that bond to the financial intermediary or to any other person to fulfill your cash needs because of its liquidity but if you lend directly by leasing a house so you cannot quickly get cash against house because of other formalities and agreements between you and borrower.
There are numerous advantages of financial intermediaries which are as follows:
- A reliable way of making payments that is, exchanging value
- A means for pricing and pooling certain types of risks
- A way of transferring resources from savers to borrowers
- A way of transferring the returns back again, which requires that the savers’ money is not lost and which, in turn, requires monitoring of borrowers and managers; and
The discussion on this topic is actually helpful for those people who still believe that financial intermediaries are not useful for national and international transactions such as payments, cash withdrawal, cash receiving, interest income, and profits from online trading because of some severe risks and security issues. It is an argument that can best describe the prominent role of financial intermediaries and it is very helpful for whole society of a particular country and other countries of the world.
Australia is one of the advance countries of the world. It is a first world country that cannot be run and operated on the basis of conventional and direct ways of running financial systems. Due to the introduction of financial systems, major improvements have been witnessed in different areas and sector of Australia which is a great sign for the development of the economy. The vital improvements are shows as economic stability, control inflation, smooth business operations, secure transactions, and 24 hours trading possibility is only because of new automatic financial system (Lewis & Wallace, 1997).
The role of financial intermediaries has been increasing on every passing day. The major impact of financial intermediaries has been seen in Australia in terms of opening up of new productive land, or a technological change, or a rise in the terms of trade, or even just greater confidence in economic policy’s capacity to solve problems (Mishkin & Eakins, 2006).
It is true that the link of financial system with the economy of the country is very strong because when real value of markets, amount of gross derivative positions grow together then GDP of the country also grows considerably which is a clear indication of the growing economy of the country. In Australia, Total assets of financial institutions relative to the size of the economy have increased from the equivalent of around 100% of annual GDP in the early 1980s to almost 350 per cent in recent years (Figure: 2).
Financial systems have greater effects over the economy of Australia in a huge manner. As stated earlier, it is not possible to run the economy without denying the role of financial institutions. In Australia, financial institutions are introducing modern and fastest ways of development and establishments. Due to financial system, unemployment rate, inflation rate, income levels, labor force, demography, production, consumption, investment, and GDP has been increasing (ref).
In Australia, it is not possible to get large investments loans from people directly. People only provide loans to credible and known people. Large investments create employments, developments, prosperity, huge per capita income, and also reduce many social problems.. These social problems can be reduced because when everyone will be employed, wealth will be distributed equally among all the citizens, no racial and income level discrimination then there will be less cases of theft, robberies in the country. And there will be a authentic control over law and order situations, support to citizens of Australia from the revenue generated.
Financial intermediaries are playing their roles in reducing unemployment and stabilizing the rate of unemployment in Australia in a way that they provide secure and risk free loans to those people who wants to start their businesses in Australia on soft ways. They provide soft loans to those people and charge low interests’ rate on those loans. Businesses are developed with the help of soft credits and it eventually creates employement.
In an economy, the control on inflation is also very important at any level. Central banks are responsible to control this rate. There are several roles that central bank performs on the behalf of government. In Australia, Reserve bank of Australia is the largest bank, its main roles are to grow the economy, provide sufficient funds when required, and sufficient financial resources to the banks. It helps in developing commercial banks through proper training and security at the time of their bankruptcy and liquidation. It performs and controls commercial banks with the help of bank rate, variable cash-reserve ratio. Central bank can control inflation by following monetary policy of the country. It issues currency in the form of paper money as well on the basis of gold reserves (Sinha, 2012).
There are two types of market such as primary and secondary financial markets. Primary market are those markets where direct sale and purchase of any security is taken place such stock Exchange. On the secondary market is the market where sale and purchase is taken place indirectly and the example of secondary markets is also Stock exchange where brokers buy shares on the behalf of buyer. Financial intermediaries such as brokers, mutual funds and so on support Australian markets very prominently. Financial intermediaries guide to the investors that to invest money and where to invest money. They are the proper institutes that motivate and encourage consumers to invest and spend money in financial markets for high potential of profits. For this type of guidance, they charge commission on a certain percentages. Some other current markets of Australia that are contributing to the economy are foreign exchange, bonds, money, future and equities markets (Nissanke and Stein 2003).
In Australia, the key roles of financial intermediary are to convert the surplus funds from one person to the borrowers. The intermediaries such as banks save the money in deposit and give some percentage as interest to customers and on the other hand they give loans to people and businesses for fulfilling their need. The whole system is revolving around saving and investment which ultimately benefits to the economy and society at large. It is beneficial for the society in terms of low unemployment rate, high GDP, GNP, stable inflation rate, soft loans and so on.
How International Financial Markets Support.
International financial markets are also same as national financial markets. There are few differences as compare to national markets. Usually, international markets are the source of doing business and personal transaction on the large levels but national markets are not. There are several international markets that are currently working all over the world. Some of the major international financial markets are Nasdaq, Dow Jones, ASX stock, currency markets, gold markets, agriculture trading markets, derivatives, bonds and NY stock exchanges and so forth. In these markets, international money and security trade takes place 24 hours a day. One of the other major markets is gold market. All these capital, money and securities markets determine the sale price of money, bonds, shares and securities rate of a country. If the rate of any security and commodity increases then it ultimately increase the cost of products and reflection of the country. The high price of security shows that how country is stable and growing. The position of the economy can also be seen by reviewed at the position of securities over these international financial markets. The financial intermediaries are the ones through that can overcome a lot of issues related to payment functions, smooth trading of securities, currency, gold; bonds and derivatives can be resolved.
One of the major researchers have identified that banks support in terms of technological innovation to their customers like online payment transfers, withdrawal through ATM etc (Schumpeter,1934).
Some other researchers also emphasized that the roles of financial intermediaries is to supply capital accumulation required in economic growth, they also proposed that by reducing market frictions, domestic savings can be increased and foreign capital is also attracted (Goldsmith 1969; McKinnon, 1973 and Shaw,1973).
Some studies have also stated that financial intermediaries have helped and supported to establish concise mechanism for economic development, for example, a model was developed in which both financial development and growth and determined equally. Furthermore, this model also explained and argued on the growth effects of financial development. He concluded that by eliminating and pooling idiosyncratic investment risks and eliminating ex ante indecision about rates of returns, financial development can help to quicker growth (Greenwood & Jovanovic, 1990, p.1076-1107).
One other study particularly observed that development of financial intermediaries helps to access national and international markets and ultimately resulted in economic growth in a huge manner. It can be witnessed through channeling savings to the high productivity activities if individual or depositors reduce risk as per the liquidity needs (Bencivenga and Smith, 1991, p.195-209).
The crux of the issue is that financial intermediaries are solving many problems associated with financial markets while trading for the development and growth of economy. The major influences of financial intermediaries are in international markets in terms of low cost of transaction and authentic intermediation in bills of exchange. The overall effects of using financial intermediaries are beneficial and positive on both saver and investor. For instance, under certain neoclassical conditions such as the existence of perfectly competitive markets, no information friction and absence of transaction cost and externalities, free capital mobility, would result in funds flowing from low marginal product of capital.
Financial intermediaries are providing heavy support to resolve so many issues of individual and business in automatic and advanced manners. Now, it is possible to send payment within minutes through western union money transfer service which is a kind of financial intermediary for transferring payments. People can do business transactions really easily and speedily now. Sale and purchase of any commodity, currency, goods and services is only easily possible with the help of financial intermediaries. The access that is crucial and guidance towards the financial market is provided by financial intermediaries. Due to these intermediaries, a lot of advanced and quick ways of trade have been incorporated.
Overall, the strong financial system is a sign of strong economy of the country. If there is no facility available in the financial systems then education, business, charity and other several types of quick constructions and developments can be restricted. Companies are getting rich due to financial intermediaries by keeping their profits with financial intermediaries and by getting interest as profits. For example, if a company earns profits and keeps it with the banks for one day, they can get interest on that money on daily basis on a particular percentage and so is the case of bonds, currency and gold investments.
Apart from several existing and potential fraud and theft issues due to the involvement of money and capital, the overall impact of the financial intermediaries and financial markets is positive because the range of investment and development has increased these days. Strong financial systems have a positive effect on inflation, GDP, unemployment and many other economic indicators in a great manner.