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FINANCIAL INTERMEDIATION
Financial intermediation is the transfer of funds from the surplus unit to the deficit units through the purchase
of primary securities. Financial disintermediation means the withdrawal of funds from an intermediary by
ultimate lenders(savers) and the lending of those funds directly to ultimate borrowers.
FORMS OF FINANCIAL INTERMEDIATION

Denomination intermediation: Accepting savings ir bits and pieces, then lend it out in a lump sum to
the deficit income units
Maturity intermediation: Savers want to retrieve their money anytime (usually short periods) and
lenders payback in the long term
Risk intermediation: The risk of the deficit unit defaulting is substituted by the financial
intermediaries
IV. Liquidity intermediation: The securities can be turned into cash at a short period
V Information Intermediation: Financial intermediaries provides information to the both parties
PROCESS OF FINANCIAL INTERMEDIATION

The process of channeling funds from savers to borrowers has three (3) varieties, namely;
A. DIRECT FINANCE: This involves direct contract, negotiation and exchange of funds and primary
securities between the savers and the borrowers. The borrowers contact the saver to negotiate the
nature, size and terms of the fund required, issue security to the saver in exchange for funds. The
asset or security issued is an evidence of the transaction e.g. Lending funds to friend/family, buying
public offers

LIMITATION OFDiRECT FINANCE

Double coincidence of want

Size and duration(Maturity) of the assets
It is risky i.e. there is a possibility of default
IV.
Inadequate information about the deficit income unit available to the saver
borrowers
V It is time wasting (ie. unable to get a saver to fund) a saver will have to contact many
before completing investment of savings
costs
VI. It is low in volume of funds, slow to accomplish and high transaction
B. SEMIDIRECT FINANCE
parties) and dealers
This are brokers (Financial match maker. They provide information to the
with information
-A finance broker brings together the savers and the borrowers and provides them
between buvers and
respectively to facilitate their contracting. A brokerage acts as an intermediary
sellers to facilitate securities transactions. Brokerage companies are compensated via commission after
for a stock is caried
the transaction has been successfully completed. For example, when a trade order
execute the trade.
out, an individual often pays a transaction fee for the brokerage company's efforts to
with tha bTrrowers by
-A Finance Dealers goes beyond the broker's function in that it can contract
pericd when it can
buying securities issued by them, hold the securities in inventory until a later
favorably sellthe securities to savers
C. INTERMEDIATED (INDIRECT) FINANCE
 Financial intermediaries mobilize funds from savers by issuing them their securities,
The characteristics of the secondary securities depend on the liquidity, size and maturity preferen ces
for savings channel the funds to the deficit income units through the purchase of primary securities
from the deficit income units. This process is known as intermediation

FINANCIAL INTERMEDIARIES

between the surplus income

It is a person, group of people or a firm/institution that act as a pivot
financial
units(Savers/lenders) and the deficit income units (Borrowers/Businessmen). In other words, a
They are the lubricant
intermediary acts as a middle man between aproviders of service and the consumers.
of finance.
that keeps the economy going. It can be referred to as indirect method
capital mkt facilitators
Financial intermediaries link people together bytransforming assets unlike the
financial intermediaries buy and
(e.g. brokers) who buy and sellsame securities to various parties,the
sell instruments with different risk, return and liquidity characteristics
organization. They
Financial intermediaries are an important source of external funding for corporates
borrow from lenders and lend to the companies that needs investments

TYPES OF FINANCIAL INTERMEDIARIES

There are two major types of financial intermediaries

banks and insurance companies
A. ASSET BASED FINANCIAL INTERMEDIAIRIES: These are institution like
(e.g. Banks financial institutions and non-banks financial institutions)
portfoiio management
B. FEES BÁSES FiNANCIAL INTERMED0ARIES: These are firms that provide
services and syndication services
EXAMPLES OF FINANCIAL INTERMEDIARIES

a) Deposit money banks

investors into financial markets. A fund
b) Mutual Funds: They help to pool savings of individuals products.
different investment
manager oversees a mutual fund and allocates the funds to
special training helps to advise investors in
c) Financial Advisers: Financial advisor who undergo
achieving their financial objectives for a fee.
members and not public.They may or may not
d) Credit Union: It is a type of bank that works to serve its
operate for profit purposes.
buyers for a fee
e) Brokers: They matches seller with
service to large traders
f) Block Brokers: They provide brokerage
clients, hoping to find another client
g) Dealers: unlike brokers, dealersdirectly buy fromor sellto their
to take the opposite side of the trade.
issuing a wide range of securities including common
h) Investment Banks: Helps corporate customers in
clients with potential take over targets.
stock, preffered stock, bonds in addition to assisting their
can meet to arrange their trade
i) Stock Exchanges: It provides places where traders asset in
)) Arbitrageurs: Aims to profit through buying an asset in one market and selling an identical
sellers across different markets.
another market at a higher price. They provide liquidity to buyers and
k) Pension funds
CHARACTERISTICS OF FINANCIAL INTERMEDIARIES

i. Reallocation of capital to productive companies

i Allocation of funds from surplus to deficit income units
ii Reduces the cost of financial transactions
iv. Eliminates the need to search/time saving
To reduce risk
vi. Regulation
vii. Economics of scales

FUNCTIONS OF FINANCIAL INTERMEDIARIES

i. Acceptance of deposit
ii. Payment Mechanism
iii. Credit facilities/ loan granting
iv. Advisory services
V. Custodial services etc.

FINANCIAL MARKET

facilitates the purchase and sale of financial

Financial market is an organized network of institutions that
derivatives etc. it is one of the components
assets such as stocks/ equities, debenture, bonds, currencies and
of the financial system. It is a place where funds from
the surplus income units' exchange hands with the
mechanism in which surplusand deficit units of an
deficit income units. In other words, it can be said to be a
financial markets are individuals, business or firms,
economy can be brought together. The main players of
markets are typically defined by having
private owned, government agencies and the general public. Financial
market forces determining the prices of
transparent pricing. basic regulations on trading. costs and fees, and
securities that trade.

FUNCTIONS OF FINANCIAL MARKETS

financial market is to enable funds to be efficiently
Fund mobilization: The primary function of a
units for productive investment.
allocated from the surplus units of the economy to the deficit
securities of varying maturies
It facilitates the issue of instruments or
economy.
ii. It facilitates the growth rate of the allowing them to
allows investors the opportunities to invest in a wide range of enterprise thus
iv. It
spread risk.
Price determination
Vi. Payment mechanism
of terms of the flow of funds from savers to
vii. Transmutation: it is the process of changing the package the
hoUsehold-short term funds while investor want long term funds. It is to over
investor e.g.
imbalance desire of the tWo parties

ROLE OF REGULATORS ON FINANCAL INTERMEDIARY

financial
encouraging transparency i.e. to ensure that both
1o reducCe asymmetric information by
accurate information to investors in a clear and
market participants and intermediaries discloses its
timely manner.
 institution (i.e. introduction of
Il. To protect consumers from fraudsters/ scammers or poor run
minimum reserves and capitalization).
and efficiency.
To promote financial system competition
of last resort mandating deposit
IV To ensure soundness of the financial system by acting as a lender
restriction on entry and interest rates
insurance and limiting competition through
TYPES OF FINANCIAL MARKET

1. MONEY MARKET
and
market in which financial instruments with high liquidity
The money market is a segment of the financial and
market is used by participants as a means for borrowing
very short maturities are traded. The money participants include
year. The money market
lending in the short term, from several days to just under a
various government agencies.
private individuals, banks, business firm's agents, brokers and
2. CAPITAL MARKET

A capital market is one in which individuals and

institutions trade financial securities. Organizations and
on the capital markets in order to raise
institutions in the public and private sectors also often sell securities
funds. Thus, this type of market is composed of both the primary and secondary market.

TYPES OF CAPITAL MARKET

first chance to participate in

PRIMARY MARKET: The primary markets are where investors have their
group receives cash proceeds from the sale, which is
a new security issuance. The issuing company or
primary market. The primary
then used to fund operations or expand the business. (For more on the
market, prices are often set beforehand,
market is where new issues are first offered In the primary

traded. The secondary market is

ii. SECONDARY MARKET: This is a market where existing stocks are
other investors, rather than from issuing
where investors purchase securities or assets from
forces like supply and demand determine
companies themselves. Prices in this market are set by basic
of exchange trading occurs each day
the price of the security. It is the market where the bulk
CAPITAL MARKET REGULATORS
Exchange Commission, Chartered Institute of Stock
a) The NigeriaStock Exchange, Securities and
Brokers, Central Bank of Nigeria.
3. BOND MARKET
(corporate or
an investor loans money to an entity
A bond is a debt investment in which
periodof time at afixed interest rate. Bond is
gOvernmental), which borrows the funds for adefined credit or
municipal, government. This market is alternatively referred to as debt.
used by companies,
fixed income market.
4 DERIVATIVE MARKET
of the core
contract, but in this case the contract price is determined by the market price
A derivative is a another layer of
because it is. The derivatives market adds yet
asset. If that sounds complicated, it's it can be used
traders looking to speculate. However,
complexity and is therefore not ideal for inexperienced value is
program. derivative is named so for a reason: its
quite eftectively as part of arisk management
derived from its underlying asset or assets. Examples of common derivatives are forwards, futures, gptions,
Swaps and contracts-for-difference (CFDs).
5. FOREIGN EXCHANGE MARKET

The forex market is where currencies are traded. The forex market is the largest, most liquid market in the
world in terms of the total cash value traded, and any person, firm or country may participate in this market.
There is no central marketplace for currency exchange; trade isconducted over the counter.The forex market
is open 24 hoursaday, five days a week and currencies are traded worldwide.

6. OVER THE COUNTER MARKET (OTC)

The over-the-counter (0TC) market is a type of secondary market also referred to as a dealer market.
The term "over-the-counter" refers to stocks that are not trading on a stock exchange