A large proportion of borrowing is needed to finance investment by firms in both the private and public sectors. The investment in new capital equipment is a means by which the community / economy maintains and increases its stock of capital and this together with technical improvements, permits increase in productivity.
This brings about a rise in the productive capacity in capital goods of industries that is sufficient to meet demand. Financial intermediaries are important institutions that can help to remove impediments.
The possibility that potential lenders are unprepared for the risk associated with the direct financing of firms . Financial intermediaries are able to reduce the risk facing the individual lender. By reducing the risk of the ultimate lender , the financial intermediaries encourage the potential lenders to lend.
This, the total funds available to firms that wish to invest is larger than would otherwise be the case. Another possible impediment to the flow of savings for investment is the lack of suitable assets for ultimate lenders which are issued by ultimate borrowers. For example, a firm may be engaged in risky business venture perhaps developing a new product.
The assets which such a firm may offer in exchange for fund may be unacceptable to many lenders and the firm may be unable to obtain the necessary funds. However, the intervention of a financial intermediary would allow the borrower to issue the sort of assets which is most suitable to the lender and convenient for the borrower .
Thereby obtaining the funds in return. The risk spreading operation of financial intermediaries allow this to take place. It is likely that the existence of financial intermediaries provides a general benefit to the community/ economy whether such intermediaries are public or private sector firms. This is by aiding the transmission and growth of funds for investment and thereby meeting the needs of both lenders and borrowers.
