Role of Financial Institutions or intermediaries | Investment Bankers Definitions

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Role of Financial Institutions or intermediaries | Investment Bankers Definitions

Role of Financial Institutions/intermediaries

Financial institutions facilitate bringing together savers and users of funds. They accept savings from different individuals and institutional savers. In return, the savers have a claim against financial institutions. As financial intermediaries, the financial institutions make loans and investments to the businesses, corporate sectors, and government who demand funds. In this way, financial institutions play a significant role in the fund’s transformation process. The major roles of financial intermediaries are as follows:

ALLOCATE SAVINGS INTO INVESTMENT. Financial intermediaries facilitate the allocation of savings into real investment. Financial intermediaries create linkage between savers and users of funds thereby transferring the savings to economic units that have opportunities for profitable investment.

PROVIDE FINANCIAL SERVICES. Financial intermediaries, like commercial banks, also provide efficient financial services such as depository services, remittance services, investment advisory services, project support services, and so on.

PROVIDE SATISFACTORY RETURNS AND MINIMIZE THE RISK OF LOSS. Financial intermediaries are capable of utilizing funds from savers for the best productive use. Thus they provide satisfactory returns to the savers. Besides, they also minimize the risk of loss by creating a well-diversified portfolio of investments.

HELP BUSINESSES IN RAISING FUNDS. In addition to direct financing through business loans, financial intermediaries also help business organizations in raising funds by selling securities like shares, bonds in primary markets. They work as the distributor and risk bearer in the process of selling securities in the primary markets.
  • Financial institutions in Nepal are broadly classified into depository institutions and non-depository institutions.
  • Financial institutions play role in allocating saving into investment.

Investment Bankers

As noted earlier, when securities are issued for the first time, they are traded in the primary market. The proceeds from the issue of securities in this market go to issuing corporations. It is the market for the first and additional issue of securities by corporations, in which they raise new capital. In issuing securities, the issuing corporation could take the service of another corporation known as investment bankers. Investment bankers are intermediaries in the securities offering process. They purchase securities from companies and governments and resell them to the general public. Thus, investment bankers bring together savers and users of long-term funds in a capital market and thereby play a key role in the security offering process. In Nepal, a total of 16 merchant banking firms carry on the functions of investment bankers. Some of them are Ace Capital Limited, NCM Merchant Banking Limited, NMB Capital Limited, Ciåzen Investment Trust, Global IME Capital Limited, Vibor Capital Limited, Civil Capital Market Limited, GROWMORE Merchant Banker Limited, among others.
The traditional function of the investor bankers has been to act as the middlemen in channeling individual’s savings and funds into the purchase of business securities. But, they also provide advice and help in the distribution of securities. Thus, investment bankers perform four basic functions: underwriting, distribution, advising, and making the market.

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