The Role of Financial Intermediaries in the Economy

Financial intermediaries, such as banks, credit unions, building societies, and insurance firms, play a very important role in growing economies, especially the economy of the United Arab Emirates. As an institution, a financial intermediary performs the function of linking lenders and borrowers concurrently while providing certain fundamental services that aid the conversion of liabilities into assets. Through the process of intermediation, these institutions support activities, such as indirect loaning and borrowing, by offering a platform where borrowers and lenders can interact.

The economic roles executed by financial intermediaries comprise convenience denomination as well as maturity and risk transformation. The intermediaries play an important role of transforming investments, which are perceived as risky into risk-free ones. Other ways in which financial intermediaries can facilitate economic efficiency include reducing household liquidity restrictions, stretching risks over time, assisting in transactions, aiding in portfolio creation, and facilitating the reduction of the drawback of asymmetric information.

In the UAE, there is a two-way causal relationship between the development of financial institutions and the rate of economic growth. This means that a properly oiled financial sector can stimulate national economic growth by augmenting technological advancement and initiating fresh innovative products and services that increase the need for financial services. As banks and other financial intermediaries respond to this new demand for financial services, the modifications that take place are likely to boost economic growth.

Financial intermediaries also aid the economy by pooling the resources obtained from small scale savers so as to enable those, borrowing large sums of money, to access the funds. For instance, an investor who needs to borrow five hundred thousand dirhams can access the funds from the pool collected from many small-scale savers by financial intermediaries. The intermediary needs to attract as many savers as possible to enhance its image of reliability and soundness. Besides pooling resources, banks also aid in the diversification of risks for investors.

Banks also provide custody, accounting and means of payment for resources. Such payment mechanisms include checks and debit cards. By taking advantage of the economies of scale available to them, the financial intermediaries are able to offer these services at a low cost and more efficiently. These services facilitate economic growth as they make the playing field safe. Financial intermediaries also help the economy by providing liquidity, which means that assets are transferred into instruments of payment easily and effectively.

Financial intermediaries also perform the function of collecting and processing information in order to help investors assess risks and investment opportunities. This helps to solve the problem of information asymmetry. Financial intermediaries reduce the cost of financial information. In essence, all the economies depend on the services provided by financial intermediaries. They are the middlemen between borrowers and lenders that make the financial playing field leveled.