The Significance of Financial Intermediaries in the Financial System

The saver is out to maximize the savings but with minimal risk, the investor is out to get money but at the cheapest rate and with fewer strings involved, while the bank is out to make the better deal of a large profit as possible. (See appendices 1).

According to J.O. Sanusi (2002), the availability of investible funds is a key factor in the growth process of any economy and may be seen as a necessary condition for output and employment growth. This can only be achieved through efficient financial intermediation which of course contributes to higher levels of output, employment, and income which invariably enhance the living standards of the population. Countries that have enjoyed or are enjoying economic prosperity such as the Western countries can be linked with such an efficient mechanism for mobilizing financial resources and allocating the same for productive investment.

The best monetary intermediary from time immemorial is the banks since they provide an important positive externality as mobilizers of savings, allocators of resources to the investors, and providers of liquidity in the whole monetary system and payment services, as well as a fulcrum for monetary policy implementation by influencing the savings-investment process that helps accelerate the rate of economic growth and poverty reduction. This is done by allocating the bulk of loanable funds to the financial markets and sectors such as industries, agriculture, and mortgage firms at affordable low-interest rates to generate investments and output growth in the economy. In this light, the banks are able to control and direct the flow of bank credit that is required to make economic growth through direct control of credit allocation and interest rate structure.
The most important condition for banks to be able to amply perform their role as financial intermediaries all lies with the Central Bank who have to make sure that there is a sound, stable, and efficient banking sector through effective surveillance and enforcement of prudential standards by using a licensing procedure that places an emphasis on a fit proper paper criteria that should make the bank owners trustworthy persons.