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The Contemporary Issues in Financial Intermediaries Report

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Updated: Aug 20th, 2019

Executive Summary

From recent and past reports, it is clear that the growth and development in the financial sector is of great interest not only to the government but also to everyone since it affects all our lives.

This interest has led to significant changes in this sector. Different institutions in the sector together with the process of financial intermediation have changed which is for the good of the economy. The roles of different financial institutions are almost blurred with a very thin line separating the roles of financial intermediaries from those of financial institutions.

However, it is very clear that financial intermediaries play a major role in the economy. The first part of this paper looks at the contemporary issues in financial intermediaries.

We will then look at the types of financial institutions which are also known as Authorized Deposit Taking Institutions (ADI’s) and types of financial intermediaries. The role of financial intermediaries in the economy is discussed at length with examples from Australia.


According to Siklos (2001: p. 35), a financial intermediary is a financial institution that joins agents with surpluses with agents with deficits. The process of financial intermediation occurs when surpluses or deposits are transformed into loans.

In other words, it allows either an individual or an organization to obtain investment funds from third party institutions like banks and mutual funds. The funds or loans are issued in form of mortgages and other types of debts that are seen as liabilities to the borrower.

In recent years, there has been an increased interest on the contribution of financial intermediaries to economic growth. This has led to the realization that financial intermediaries influence the economy through their ability to make resources available to those who are in immediate need.

This is together with the provision of a universally accepted medium of exchange. The two basic roles could be defined as the epitome of economic sustainability especially in Australia. The lack of expertise would make depositors unable to provide investment funds directly to borrowers (Scott & Eugene 2011).

The first important issue in achieving a sustainable economy is a trusted payment system so that the process of financial intermediation is efficient.

This is where the question of currency comes in. The currency should be convertible to facilitate trade across countries. Davids & Dennist (2001) agree that insurance companies play a major role in the country by contributing to a modern market economy.

Other financial intermediaries include commercial banks, pension funds, savings and loan associations and pension funds. This paper will examine the types and roles of financial intermediaries and their contribution to economic sustainability in Australia.

Financial Intermediation

According to the Reserve Bank of Australia (2006), there are three types of financial intermediaries in Australia.

These are those that are Authorized Deposit Taking (ADI’s), the Non-authorized Deposit Taking (Non ADI’s) and those that are put under the category of funds managers and insurers. The three categories are discussed in detail below:

Authorized Deposit Taking Institutions (ADI’s)

There are various forms of Authorized Deposit taking Institutions in Australia and other developed nations in the world. These include banks, building societies and credit unions. These are analyzed below:


There are quite a number of banks in Australia which are both foreign owned and government owned. In the past, their main function was deposit taking but due to the changes that have occurred in the financial sector over the years, they have started offering other services. These are services such as funds transfer among others. However, it should be noted that foreign banks are only allowed to take deposits. National Australian Bank is an example of a government owned bank that can take deposits and offer other services.

Building Societies

These are the kinds of institutions that accept deposits from households. Their function as financial intermediaries is to provide mortgages and other payment services. They are an important source of credit facilities for low income earners. This is especially so considering that they offer credit at very low rates as compared to other lending institutions.

Credit Unions

These are formed when mutually owned institutions come together. They offer deposits to other financial intermediaries and at the same time, they offer personal loans. Just like in the case of building societies analyzed above, the credit advanced by these agents is affordable to the common man.

Non-Deposit Taking Institutions (Non- ADI’s)

Again, there are various forms of non- deposit taking institutions in Australia and other nations around the world. These are analyzed below:

Money Market Corporations

These kinds of organizations operate in wholesale markets where they borrow and lend to the same markets. They also carry out foreign exchange, manage investments and give investment advice.

Finance Companies

In Australia, the kinds of finance companies that fall under this category are those with assets greater than $50 million.

They take deposits from retail investors in form of debentures as well as from wholesale markets. They play the role of financial intermediation by using the funds to provide loans to households and medium sized businesses.

Securitization Vehicles

These kinds of organizations have the special purpose of pooling assets and issuing them as securities.

Fund Managers and Insurers

These include life insurance companies, superannuation and approved deposit fund, public trust units and friendly societies among others. These are analyzed in detail below:

Life Insurance Companies

This is simply security acquired against life. Such companies obtain assets and funds in form of premiums. It is noted that these companies have recently offering the same in form of loans.

Superannuation and Approved Deposit Funds (ADFs)

These organizations accept contributions from employed and self employed individuals for the purpose of retirement. Recently, they have started offering loans and other similar services offered by financial intermediaries.

Public Trust Units

Their main function is to pool investors’ funds in form of cash and assets like property and even deposits. These are then held in trust on behalf of the investors.

General Insurance Companies

As the name suggests, they offer all types of insurance and sometimes them to offer loans to borrowers. It is noted that a person can use their policy as a security for a loan. This is for example where one uses their life insurance to secure a mortgage or such other financial services.

Friendly Societies

These are formed from a mutual agreement between the members. The members can benefit by accessing investment products or even education bonds.

Each of the above institutions is unique in the services they offer and how they offer them. They are classified like this by the Reserve Bank of Australia together with the government. Different factors are put into consideration when doing this classification.

These are factors such as the assets owned and the amount of money they have in form of investments. It should also be noted that they are all owned by Australian nationals or the Australian government.

Despite their differences in mode of operation, they all play a major role in building the economy especially in Australia. Below are some of the roles of financial intermediaries in the economy.

The Role of Financial Intermediaries in the Economy

The role that these financial intermediaries play in the Australian economy cannot be downplayed. The benefit of these intermediaries is perhaps one of the reasons why they have persisted in the financial market.

The benefits include reduced costs, risk diversification, pooling of funds among others. These roles will be analyzed below:

Reduced Costs

Financial intermediaries are more cost effective because they reduce the cost of borrowing. Apparently in the absence of financial intermediaries, individuals with funds would be forced to find borrowers on their own and in the process the net cost of borrowing would be greater (Scott & Eugene 2011).

This would also happen in case borrowers seek individuals with funds. There are various ways through which financial intermediaries make borrowing more cost effective.

One of them is the fact that they do product mix analysis by finding financial products that match borrowers’ and savers’ needs. The cost of borrowing and lending is spread out over a number of transactions.

Their rates of borrowing are much lower than those of the other institutions. This helps in reducing the costs as output increases and thus economies of scale are achieved (Bijit & Mervyn 2007).

When it comes to purchasing assets such as stocks, financial intermediaries help in reducing costs by splitting transaction costs among several people or organizations.

This especially applies to those people with small funds and who wish to purchase assets. This way they are able to access assets at lower costs.

To emphasize on this point, think of a scenario where an individual needs to buy stocks online but does not have enough funds. A financial intermediary can pool a number of people with interest in the same stock and buy it for them at a commission but at the same time, at reduced transaction costs (Claran 2008).

Most financial intermediaries have also been able to develop better enterprises that have spurred reduction in costs. For instance they have websites and toll free telephone lines which enable customers to check on their transactions individually.

This saves their customers the cost of using somebody else to perform these duties for them and in the process, saving their money.

All this help the economy by first making it possible for more people to invest. This creates income for many people as well as the realization of extra money for the government.

Of course, income means lack of poverty for a nation and this can be interpreted as development. Secondly, people are able to develop themselves in many other ways like better education and better health services by using the funds availed by these intermediaries.

Lastly, reduced transaction costs benefit many businesses by making their products and services affordable which may have otherwise been too expensive especially for the common man (Graham et al. 2009). This then means that the businesses will continue to thrive and provide more taxes for the government.

Risk Diversification

In the process of borrowing and lending, so many risks are involved and that is the reason why lenders sometimes ask for some sort of securities as a guarantee for loan repayment.

Financial intermediaries try to overcome such risks by offering loans to different types of borrowers and also giving different types of loans (Scott & Eugene 2011). This would basically be interpreted by the phrase not putting all eggs in one basket (Green & Kerl 2002).

In addition to this, financial intermediaries carry out risk screening, evaluation and monitoring before lending to any individual or organization. This way, they invest where the risks are minimal.

This screening also gives the borrower an idea of how much risk they are getting into when investing (Claran 2008). According to Valentino et al. (2006) returns are less when one invests through a financial intermediary but the risk of losing all the funds invested is much lower.

The ability to invest where there are fewer risks encourages more people to invest in the process adding to tax collected by the economy and thus its growth.

Pooling Funds

Usually, funds are available from an array of organizations. What financial intermediaries do is to find where these funds are and making them available to the borrower.

In some instances, a lender may be unable to provide the full amount of loan to the borrower and this is where financial intermediaries come in. From the funds they have pooled from different lenders, they are in a better position to offer a big loan to a specific borrower.

This helps in ensuring that even the small savers play part in the lending process.

For instance, the Bank of Queensland in Australia, pools funds from several savers and make it available to borrowers. This ensures that those in need of the funds can easily access them. Different types of loans are offered by this bank depending on what the customer’s needs are.

They Offer Related Services

As mentioned above, one way through which financial intermediaries ensure economic sustainability is by offering an array of financial services.

They do not just provide a way through which funds can be transferred from a lender to a borrower but other financial services are also provided. Among them is insurance, retirement funds and trust funds among others (Scott & Eugene 2011).

They also provide advice to borrowers so they can select the best investments. In their dealings with different lenders and savers, they are able to gain information on borrower’s behaviour. This enables them to be prepared in case a saver needs to deposit or withdraw funds.

The saver is able to withdraw or deposit their funds without following the usual long procedures. Higher transaction and informational costs would be incurred by the borrower if they were forced to deal with individual lenders.

For instance, if you were to borrow funds, one only needs to visit a financial intermediary to gain all the information they need about borrowing and all the rates offered.

The customer is able to save money and time if he or she can get all the information from the same person or website. The economy benefits from this by saving on money and time used to research on information by the borrower or consumer.

The saved money and time can be invested elsewhere. In Australia, one financial intermediary that offers such extra services is the Bank of Western Australia.

Financial flexibility

Different types of loans and services are offered by financial intermediaries and thus borrowers have a large variety of choices to make. The fact that financial intermediaries have information about loans, the different interest rates, lesser risks and where there are better investments make them able to advice their customers.

For instance, if a borrower has little money and needs to make an investment, they would be able to offer advice on which type of investment would best suit the customer.

On the other hand, if a customer needs funding for a small business, they would advice on the kind of loan that is suitable (Viney 2009). The same would happen if the customer needs to make a large investment.

In Australia, different financial intermediaries offer services to various types of investors and borrowers. For instance life insurance companies can offer small loans while banks offer large loans. The same applies when it comes to interest rates on loans.

Financial intermediaries are able to stretch their interest rates to suit the needs of their customers. This plays a major role in the economy by allowing more people to acquire loans for investing.

The ability to stretch interest rates also gives consumers the ability to determine the kind of loans that best suits them. Many types of organizations in Australia offer these services like the Members Equity Bank and the National Australia Bank (Ronald & Edgar 2011).


An article on the structure of Australian Financial system by the Reserve Bank of Australia talks about the major transformations that have occurred in this system.

Financial systems have even gone to the extent of managing 250% of total gross domestic product of Australia which is an increase of approximately 12%. This has been attributed to the increase in demand for financial services in the past decade.

Apparently, this history began with the entry of foreign banks which changed the direction of the financial control. This is evident today where many financial companies offer services which were previously offered by financial intermediaries only (Bijit & Mervyn 2007). Similar trend is evident in many other countries.

Banks, deposit taking institutions and other financial organizations are emerging to take their place as financial intermediaries. For instance, banks started offering housing finance in the 1990’s due to low inflations during that period.


Bijit, B & Mervyn, K 2007, “The Australian financial system: evolution, regulation and globalization”, Journal of International Business, vol. 28 no. 3, pp. 23.

Claran, EN 2008, Finance and the making of modern capitalist world, Free Press, New York.

Davids, SH & Dennist, N 2001, Taxing insurance companies, Free Press, New York.

Graham, J Scott, BS & Megginson, LW 2009, Corporate finance: linking theory to what companies do, Cengage Learning, New York.

Green, D & Kerl, P 2002, Banking and financial stability in central Europe: integrating transition economies into the European Union, McGraw-Hill, Sidney.

Reserve Bank of Australia 2006, “The deregulation of financial intermediaries”, Reserve Department, Bank of Australia, November 2006.

Ronald, WM & Edgar, AN 2011, Introduction to finance: markets, investments and financial management , John Wiley and Sons, New York.

Scott, B & Eugene, FB 2011, CFIN2+ coursemate printed access card, Cengage Learning, New York.

Siklos, P 2001, Money, banking and financial institutions: Canada in the global environment. McGraw Hill Publishers, Toronto.

Valentino, TF Edwards, G Sundmacher, V & Copp, M 2006.,Financial markets and institutions in Australia, Pearson Education, New South Wales.

Viney, C 2009, McGrath’s financial institutions, instruments and markets, McGraw Hill Publishers, New York.

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