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Intermediation: Critical Part of Financial World

Financial intermediation is an essential part of the economy of the countries of the world. Though many people may not understand economics or the way businesses and markets operate, the reality is that these processes are vitally important to the success, prosperity, and continuance of any country. Money, as people have long understood, really is a driving force and affects many different aspects of people's lives. Capitalism is centered on money because it is the ultimate goal business people seek and what is also required to reach that goal. In this complex environment of spending, earning, and negotiation, financial intermediation has an important role.

What is Financial Intermediation?

Most people probably know that financial intermediation exists and takes place without recognizing it by name. To put it simply, financial intermediation is the process by which the financial intermediaries--usually banks or other similar firms--borrow money from one source to give it to another company that needs funding, investment or resources. Basically, when people put their money in a bank or other savings fund, these financial intermediaries can then use, or "borrow," this money, allowing other companies to use to create or expand their own businesses. Since the money is not being used sitting in the bank, it seems clear that it would be put to better use by allowing it to serve as investments for others.

Anyone who has any basic idea of how the economy and financial world operates understands that borrowing money is an integral part of life. Nearly everyone has borrowed money at some point, whether it is to make a large purchase, like buying a house or car, or simply to acquire goods now that they will pay for later (credit). Any big endeavor requires an initial outlay of money that most people do not have at their disposal. Therefore, any time anyone wants to create a new business, borrowing money for investment and funding is critical to the success of the fledgling company. Clearly, this money that is to be borrowed has to come from some source, and in many cases this source is financial intermediaries.

Financial intermediation is so important because banks are responsible for most of the financing that occurs in economies. Although it seems risky to give one person's money to someone else while it is not being used, the reality is that this operation actually benefits people a great deal because new businesses stimulate the economy and the money the banks can make from this lending procedure helps keep them in operation, as well.

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