Question

Why do we call a bank a financial intermediary?

Short answer

A bank is called a financial intermediary because it serves as a mediator between depositors and borrowers, facilitating the flow of funds within an economy. Banks provide essential services such as deposit-taking, loan-granting, payments facilitation, and investment services, which allow them to allocate resources efficiently and promote economic growth and development.

Step-by-step solution

1. Define Financial Intermediary

A financial intermediary is a financial institution that serves as a mediator or "middleman" between savers, who deposit money, and borrowers, who take loans. It facilitates the allocation of funds between these two groups, thus promoting the efficient flow of money within an economy.

2. Functions of a Bank

Banks play a vital role in the financial sector as they perform several important functions, including: a) Deposit-taking: Banks accept deposits from individuals, businesses, and other organizations, providing them with a safe and secure place to store their money. b) Loan-granting: Banks provide loans to individuals, businesses, and governments in need of funding for various purposes, such as purchasing a home, starting or expanding a business, or financing public projects. c) Payments facilitation: Banks provide payment services that enable their customers to conduct financial transactions, such as transferring money to another account, paying bills, or using debit cards for purchases. d) Investment services: Banks offer a range of investment products and services helping individuals and businesses to manage, grow and diversify their wealth.

3. Bank as an Intermediary: Examples

Here are some examples illustrating a bank's role as a financial intermediary: - When an individual deposits their savings into a bank, the bank has more funds available to lend to others, such as businesses or other individuals in need of financing for investment, consumption, or personal needs. This transfer of funds promotes economic growth and development. - A business may need a loan to expand its operations or invest in new technology. The bank uses funds from depositors to provide this loan, enabling the business to grow and create more jobs. The bank takes on the risk of lending to the business while providing interest to depositors, acting as a mediator between these two parties.

4. Summary

In conclusion, a bank is called a financial intermediary because it serves as a mediator between depositors and borrowers. It provides deposit, lending, payment, and investment services that facilitate the flow of funds within an economy. This intermediation process allows banks to allocate resources efficiently, helping to foster economic growth and development.