What Roles Do Financial Institutions Play in Financial Intermediation?

What roles do financial institutions play in financial intermediation? Businesses as well as governments sell securities to the public to raise money. In time, investors may sell the securities to other investors. "Financial Intermediaries facilitate this process". (Gallagher and Andrew, 2003, pg 25) These roles are necessary to ensure the financial system works smoothly. (Gallagher and Andrew, 2003, pg 25) "The financial system makes it possible for surplus and deficit economic unites to come together, exchanging funds for securities, to their mutual benefit.". (Gallagher and Andrew, 2003, pg 44) There are three types of financial intermediaries: investment bankers, brokers and dealers. (Gallagher and Andrew, 2003, pg 25)

In Africa, "semi-formal institutions have emerged that both mobilize and lend funds to the general public". (World Bank, 1997) "A study of both informal and formal financial markets in Ghana, Malawi, Nigeria and Tanzania, Financial Market Fragmentation and Reform in Sub-Saharan Africa, shows that informal institutions use specialized methods to serve broad segments of the population that lack access to banks. Although they have responded positively in a liberalized environment, fragmentation into isolated market segments persists." (World Bank, 1997) These informal institutions are raising funds and leading the money to its members, after a 6 month wait period. It is assisting these developing countries in their development.

It is important for companies to use financial intermediation, especially when a company first offers stock to the general public for the first time. (also know as IPO or initial public offering) (Gallagher and Andrew, 2003, pg 445) The investment bankers handle all the details associated with pricing the stock and marketing it to the public. (Gallagher and Andrew, 2003, pg 445)