Financial intermediaries are institutions or entities that act as intermediaries or middlemen in the

financial system, facilitating the flow of funds between savers and borrowers. They play a crucial
role in the allocation of capital and the efficient functioning of financial markets. Financial
intermediaries help channel funds from those who have excess capital (savers or investors) to
those who need capital (borrowers or businesses). These financial intermediaries help reduce
information asymmetry, provide liquidity, and promote the efficient allocation of resources in
the financial markets. They serve as a bridge between those with surplus funds and those in
need of funds, contributing to the overall stability and functioning of the financial system.

FUNCTIONS OF A FINANCIAL INTERMEDIARIES

1. TRANSACTION COSTS – financial intermediaries improve economic efficiency by reducing the

transaction costs to substantial levels through the enjoyment of economic scale. These financial
intermediaries have enough expertise and resources to reduce the cost that us involved in
seeking the funds and in providing the funds by individuals and companies. Through the benefit
of economies of scale financial intermediaries will be able to provide funds indirectly. In addition
to this, financial intermediaries will provide liquidity services to the economy. Liquidity services
arise from the fact that banks make it easier for customers to conduct transactions easily and
thus improve economic efficiency.
2. RISK SHARING – this is sometimes called asset transformation and occurs when risky assets are
turned into safer assets for investors.
3. DIVERSIFICATION - this is another way the financial intermediaries reduce risks in the financial
markets. Diversification occurs through a pooling of funds from different individual savers, and
then invest the funds in a single portfolio. Financial intermediaries are able to pool funds from
many savers through the enjoyment of economies of scale.
4. ADVERSE SELECTION – adverse selection is the asymmetric information problem that exists
before the transaction takes place. Adverse selection occurs when borrowers who have the
greatest risk of failing to make repayments are the most immediate individuals to actively seek
out a loan. Adverse selection exists when individuals or potential borrowers who are the most
likely to produce an undesirable outcome are the ones who most actively seek out a loan and
are thus most likely to be selected. Due to the likelihood of giving loans to clients with bad credit
risk, lenders may decide not to make any loans even though there are good credit risks in the
marketplace.
5. MORAL HAZARD – in contrast to adverse selection moral hazard is created by asymmetric
information after the transaction occurs. A moral hazard is a risk the borrower might engage in
undesirable activities after the transaction has been processed. The moral hazard increase the
probability that the loan might not be paid and as result, the lender may decide not to make a
loan. An example of a moral hazard is when the borrower who asked for a loan for farming,
gets the loan and uses the funds for gambling instead of the intended actions of farming
investment.

Depository financial intermediaries are a category of financial institutions that primarily deal with
accepting and managing deposits from individuals, businesses, and other entities. These institutions play
a crucial role in the financial system by providing a safe place for people to deposit their money and
offering various financial services. The key characteristic of depository financial intermediaries is their
ability to take deposits and provide a range of banking services. Depository financial intermediaries are
subject to regulatory oversight to ensure the safety and soundness of the financial system. Additionally,
deposit insurance programs, such as the Federal Deposit Insurance Corporation (FDIC) in the United
States, protect depositors by providing insurance coverage for their deposits up to a certain limit in case
the financial institution experiences financial difficulties.

Banks: Traditional banks accept deposits from individuals and businesses and provide various financial
services, including loans, savings accounts, and checking accounts.

Credit Unions: Similar to banks, credit unions are member-owned financial cooperatives that provide
banking services to their members.

Thrift Institutions: This category includes savings and loan associations (S&Ls) and savings banks, which
focus on providing savings and mortgage services.

Contractual savings institutions are financial intermediaries that focus on accumulating and investing
funds on behalf of individuals or entities with long-term financial goals. These institutions operate based
on contractual agreements with their clients, where individuals commit to regular contributions or
premiums over an extended period. The primary objective is to generate returns that can be used to
meet specific financial needs, such as retirement income or insurance payouts. Contractual savings
institutions play a critical role in long-term financial planning and risk management. They allow
individuals to pool their resources and benefit from professional investment management to achieve
financial goals, such as retirement income or protection against unforeseen events. The investments
made by these institutions contribute to capital markets' liquidity and can impact the broader economy
by supporting capital formation and economic growth.

Insurance Companies: These institutions collect premiums from policyholders and provide insurance
coverage. They invest the accumulated funds to generate returns.

Pension Funds: Pension funds manage retirement savings and invest them in a diversified portfolio to
generate returns for future pension payments.

Defined Benefit (DB) Pension Plans: These plans promise a specific benefit to employees upon
retirement, typically based on factors like salary and years of service. The employer bears the
investment risk to ensure that there are sufficient funds to meet future obligations.

Defined Contribution (DC) Pension Plans: In these plans, the contributions made by both
employees and employers are invested, but the final benefits are not predetermined. The
eventual retirement benefit depends on the investment performance of the contributed funds.

Investment intermediaries are financial institutions or entities that facilitate the flow of funds between
investors and financial markets. These intermediaries play a crucial role in connecting individuals and
institutional investors with various investment opportunities. Investment intermediaries typically
manage and invest pooled funds on behalf of their clients, providing diversification, professional
management, and access to a broad range of financial instruments.
These investment intermediaries provide investors with access to a diverse set of investment
opportunities, professional management, and the potential for returns. The variety of investment
vehicles allows individuals and institutions to tailor their portfolios to meet specific risk and return
objectives. However, it's essential for investors to understand the characteristics, risks, and fees
associated with each type of investment intermediary before making investment decisions.

Mutual Funds: Mutual funds pool funds from multiple investors to invest in a diversified portfolio of
stocks, bonds, or other securities.

Exchange-Traded Funds (ETFs): ETFs are investment funds traded on stock exchanges, representing a
basket of assets such as stocks or bonds.

Hedge Funds: Hedge funds cater to sophisticated investors and use various strategies to generate
returns, often involving more complex financial instruments.

Real Estate Investment Trusts (REITs): REITs are investment vehicles that own, operate, or finance
income-generating real estate. Investors can buy shares in a REIT, allowing them to gain exposure to real
estate assets without directly owning physical properties. REITs often focus on specific property types,
such as residential, commercial, or industrial real estate.

Venture Capital Firms: Venture capital firms provide funding to early-stage and high-growth companies
in exchange for equity ownership. They play a critical role in supporting innovation and entrepreneurial
activities by providing capital and expertise to startups.

Private Equity Firms: Private equity firms invest in private companies, typically through buyouts or
significant ownership stakes. They aim to improve the performance of the companies in which they
invest and generate returns for their investors over a specified holding period.

Asset Management Companies: Asset management firms manage investment portfolios on behalf of
individuals, institutions, and other clients. They offer a range of investment products, including mutual
funds, managed accounts, and other investment vehicles.

"Other financial intermediaries" is a broad category that includes various financial institutions and
entities that play intermediary roles in the financial system, connecting savers with borrowers or
facilitating the movement of funds in different ways.

These other financial intermediaries contribute to the diversity and complexity of the financial system,
offering specialized services to meet the varied needs of individuals, businesses, and the broader
economy. Each type of intermediary serves a specific purpose and plays a unique role in facilitating
financial transactions and the allocation of capital.

Finance Companies: Finance companies provide loans and financial services to consumers and
businesses. They may specialize in consumer financing, auto loans, or equipment financing. Finance
companies may operate as subsidiaries of larger financial institutions.

Money Market Funds: Money market funds are mutual funds that invest in short-term, highly liquid
instruments, such as Treasury bills and commercial paper. They offer investors a low-risk alternative to
traditional bank deposits and aim to maintain a stable net asset value (NAV).
Pawnshops: Pawnshops provide short-term loans to individuals in exchange for valuable items
(collateral). If the borrower cannot repay the loan, the pawnshop retains ownership of the collateral.
Pawnshops serve as a source of short-term, secured loans.

Microfinance Institutions: Microfinance institutions (MFIs) focus on providing financial services,

including small loans and savings accounts, to individuals in low-income communities or developing
countries. Their goal is to promote financial inclusion and support entrepreneurship at the grassroots
level.

Development Banks: Development banks, often established by governments or international

organizations, provide long-term financing for projects that contribute to economic development. These
projects may include infrastructure development, poverty reduction initiatives, and environmental
sustainability efforts.

Peer-to-Peer Lending Platforms: Peer-to-peer (P2P) lending platforms connect individual borrowers
with individual lenders, bypassing traditional financial intermediaries like banks. These platforms
facilitate direct lending transactions between individuals, often using online platforms.

Leasing Companies: Leasing companies provide financing for businesses to acquire equipment,
machinery, or other assets through lease agreements. The lessee pays regular lease payments to use the
asset without necessarily owning it outright.

Remittance Service Providers: Remittance companies facilitate the transfer of funds from individuals
working in one country to their families or recipients in another country. These services are crucial for
international money transfers and supporting global migrant populations.

Factoring Companies: Factoring companies purchase accounts receivable (invoices) from businesses at a
discount, providing immediate cash flow. This allows businesses to access working capital without
waiting for customers to pay their invoices.

Central Counterparties (CCPs): CCPs are entities that act as intermediaries in financial markets by
providing clearing and settlement services for trades. They help manage counterparty risk and ensure
the smooth functioning of financial markets.

Banking institutions are financial entities that provide a range of financial services, with a primary focus
on accepting and safeguarding deposits, making loans, and facilitating various financial transactions.
Banks play a central role in the financial system by serving as intermediaries between savers and
borrowers, helping to allocate capital efficiently and supporting economic activities.
The Philippines has a diverse banking sector with various types of banking institutions, including
commercial banks, thrift banks, rural banks, and cooperative banks. Here are some of the key types of
banking institutions in the Philippines:

Universal and Commercial Banks: These are large, full-service banks that offer a wide range of financial
products and services, including deposit accounts, loans, investments, and other banking services.
Examples include BDO Unibank, Inc., Metropolitan Bank and Trust Company (Metrobank), and Bank of
the Philippine Islands (BPI).

Thrift Banks: Thrift banks in the Philippines include savings banks and private development banks. They
primarily focus on consumer and small business banking services. Examples of thrift banks include BPI
Family Savings Bank and Robinsons Bank Corporation.

Rural Banks: Rural banks are financial institutions that cater to the banking needs of rural and
agricultural communities. They provide services such as agricultural loans and small-scale financing.
Examples include Cantilan Bank and One Network Bank.

Cooperative Banks: Cooperative banks are owned and operated by cooperatives, and they serve the
financial needs of their cooperative members. These banks follow cooperative principles and are
designed to promote financial inclusion. Examples include the National Confederation of Cooperatives
(NATCCO) Central Fund Cooperative and the Cooperative Bank of Bohol.

Islamic Banks: Islamic banks in the Philippines operate under Islamic principles and offer Sharia-
compliant financial products. Al-Amanah Islamic Bank is an example of an Islamic bank in the country.

Foreign Banks: Some foreign banks have branches or subsidiaries operating in the Philippines, providing
international banking services. Examples include Citibank Philippines, Standard Chartered Bank, and
HSBC Philippines.

Government-Owned Banks:Land Bank of the Philippines and the Development Bank of the Philippines
are government-owned banks that play specific roles in supporting agriculture, infrastructure, and
economic development.

It's important to note that the Philippine banking sector is regulated by the Bangko Sentral ng Pilipinas
(BSP), the central bank of the Philippines, which oversees the stability and integrity of the country's
financial system. The BSP sets regulations, conducts monetary policy, and supervises financial
institutions to ensure the soundness of the banking industry.

Non-banking institutions, also known as non-bank financial institutions (NBFIs), refer to a diverse group
of financial entities that provide various financial services but do not hold a full banking license. Unlike
traditional banks, non-banking institutions do not accept deposits from the public in the same way that
banks do. However, they play significant roles in the financial system by offering alternative financial
services and products.

Non-banking institutions contribute to financial diversity and provide specialized financial services to
meet the diverse needs of individuals, businesses, and the overall economy. They operate within the
regulatory framework of financial markets, and their activities are often overseen by relevant regulatory
authorities.