Perspectives on Business Management, Economics & Information Technology (PBMEIT) Now also covers research on Psychology

PBME Volume II ISBN: 978-81-947738-1-8

THE ROLE OF FINANCIAL INTERMEDIARIES IN ECONOMIC DEVELOPMENT

Author(s): DR. VENKATA RAMAKRISHNA RAO GANDRETI

Abstract

In a financial system, financial intermediaries alongside financial instruments and financial markets have a main role to play. The financial intermediaries has improved drastically, which implies the development and growth of financial systems, which in turn leads to economic development. They mobilize savings, directs savings to investments and improve the allocation of capital, as suggested by Pagano. Moreover, credit screening, delegated monitoring with optimal debt contracts with bankruptcy costs, help in reducing informational asymmetries problems. Policy implications suggest that financial liberalization helps in removing restrictions and financial repression on financial intermediaries and stimulate economic development. In capitalist economies, savings/investment process is organized around financial intermediation, making them a central institution of economic growth. Financial intermediaries are firms that borrow from consumer/savers and lend to companies that need resources for investment. The major questions answered in this paper are:

Why do financial intermediaries exist?

What are the types of financial intermediaries?

What are their roles?

What are their functions?

And so on.

Keywords: Credit, Financial Intermediaries, Financial System, Screening, Monitoring, Economic Development

JEL Classification: O16, G21, E51, E58, O40

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