Indirect Financing Through Financial Intermediaries
When your rich uncle lends you $10,000 this is known as direct financing
. There is no go between you and your uncle. There is only the amount that is limited and a gentlemen's agreement to repay.
It would not be out of the question for uncle to ask for a small amount of interest as the purchasing power of the dollar declines over time and for all intents and purposes your uncle will have less money once you pay him back despite the fact that the principal is paid back in full due to inflation.
Direct lending is difficult enough amongst relatives much less telling your uncle that you lost it all acting on forex trading tips you got at the barbershop. Could you imagine what it would be like dealing with complete strangers on these terms? Most direct lenders can which is why they don't directly lend money. Financial intermediaries act as the go-between for lenders and borrowers. In this scenario terms and needs can be met for the borrower and lender alike. Financial intermediaries therefore tailor the characteristics of the indirect securities they issued to the desires of the lenders. They engage in one or more distinct types of intermediation which is the denomination intermediation, currency into mediation, risk of intermediation, maturity intermediation and liquidity into mediation.
The borrowers or lenders choice between the direct credit market in the intermediation market depends on which market best meets their needs typically consumers whose transactions are small and dollar amount find that the intermediation market is most cost-effective. In contrast economic units that deal in large dollar amounts can switch back and forth between the two markets select in the market that offers the most favorable interest rate or the best forex trading. For example, many large businesses take out loans from commercial banks, an intermediation transaction, and also raise money by selling commercial paper in the direct credit market. You can see that the part that the financial intermediary plays is vital indeed.