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Essay Example: Financial Systems and Development Economics

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Middlebury College
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Information-Theoretical Analysis Of The Borrower-Lender Relationship Is A Powerful But Limited Basis On Which To Analyze Finance. Discuss.

Finance is abroad word with several meanings in itself. It can be used to describe money, its creation, study, and management; assets and liabilities that make up the financial system as well as financial instruments and obtaining of funds/capital through financing. It can be divided into three categories. These include corporate finance, public finance and personal finance (Lin, 2015).

One of the most important and critical decisions that are made by a business person is choosing a lender. In this case, there should exist a good relationship between the borrowers of the lender for both the businesses to succeed. The borrower and lender should be in a position to access high expectation for what is brought in by the business. In line to this, there are some issues that are supposed to be looked at by both the lenders and the buyers (Jorda, Schularick & Taylor, 2016).

For instance, issues that are supposed to be looked at when selecting a lender should dwell on. First, the lender chosen should be who understands your industry and the people in it. This will have an effect of deciding on the amount of interest to be charged and the trust that the lender will build on you. Secondly, meeting the lender that is capable of meeting all your borrowing needs. Lastly, selecting a lender that is treating you with some dignity as more than a transaction partner and is interested in a long-term relationship (Rousseau & Wachtel, 2017).

Similarly, the borrower should be in a position to provide the lender with a complete and accurate financial information. A good borrowing relationship is ensured by mutual understanding of a business financial condition and itself (Amissah, Bougheas, Defever & Falvey, 2016). Also, the borrower should provide annual marketing and business plan to the lenders and lastly should be in maintaining an ethical and honest relationship with the lender so that a good working relationship is ensured.

One above description of finance is financing. Financing refers to the process by which people and institutions obtain funds to invest or cater to their needs. At any moment in our economy, there are people who might have resources whose consumption they would like to postpone to the future while there those who would like to consume their resources in the present but are deficient. Financing, in this case, ensures that the lenders or the savers can postpone the utilization of their resources through lending the money to the borrowers. The borrowers with the help of the lenders can obtain resources and utilize them for the intended purpose which would be an investment in the projects intended for value addition or personal use (Lin, 2015).

The financial system plays a critical role in ensuring that resource allocation is achieved. Some of the uses of the financial system by people include saving for the future, borrowing money for current use, raising equity capital, managing risks, exchanging assets in spot markets, and information-motivated trading. The major roles of the financial system include the attainment of the purposes for which people use the financial system; the discovery of rates of return that equate aggregate savings with aggregate borrowings and efficient allocation of capital (Philippon, 2015).

The financial system includes markets and various financial intermediaries that help transfer financial assets, real assets, and financial risks in various forms from one entity to another, from one place to another, and from one point in time to another (Philippon, 2015)

Without the financial system, borrowing and lending of capital resources would not be possible or as easy as depicted in our economies today. Financial intermediaries are individuals or institutions that are of help to entities in achieving financial goals. Some of these entities are for example mortgage, commercial and banks of investment, credit card and union companies, clearing houses and depositaries and insurance companies. The products and services that are provided by financial institutions allow enterprises to be in a position of solving their debts and increasing their stocks. The financial intermediaries are of importance in making good financial systems (Greenbaum and Thakor 2010)

The name given to financial intermediaries is so because the products and services that they give to help sellers and buyers to come to the connection in various ways. Even if the connections are easy to involve and identify, it's upon financial intermediaries has the responsibility of coming in between to help in transferor off capital and other services between them. The activities of financial intermediaries give sellers and buyers the opportunity of getting the benefits of trading mostly without having the better knowledge of the other (Amissah, Bougheas, Defever & Falvey, 2016).

Depository institutions are a type of financial intermediaries. They may as well be one of the most commonly known types of financial intermediaries. These, for example, include savings and loan banks, commercial institutions and other institutions that lend money to borrowers at an affordable rate (Greenbaum and Thakor 2010). The role of the bank, in this case, is to give depositors transaction services and interests for example check cashing and interest which is an exchange for using the money. Cash can also be raised by them by selling equity or bonds to the bank.

These banks act as a financial intermediaries because of the function of transferring funds from their investors and depositors to those borrowing them. The investors and the depositors do benefit in that they get a return in the form of interest, dividends, transaction services or appreciation on capital on their funds without having nessesarily entering into a contract with the borrowers into managing their loans. O the other hand, the benefit that the borrowers get comes because they get the fund that they are in need of without necessarily having to look for investors who will be used as a trust into repaying heir loan (Greenbaum and Thakor 2010).

Quite a lot of financial corporations give credit services. For instance, cooperation, acceptance, discount corporations to borrowers by giving the money secured by assets such as machinery, consumer loans, accounts receivable and future paychecks. The finance to these loans is done by selling comical paper, shares, and bonds to investors. These corporations are intermediaries because of the connection that they do between the investors and the borrowers. Investors get investments that are that is secured by the right order of portfolio while the borrowers get funds without having to look for the investors.

Insurance companies are of help to people and companies in coverage of risks that may be a bother to them. This is done by creating an insurance contract that pays back in case the insured risk occurs. The insured will have the potential of buying these contracts to help in covering a loss in case it happens. The most common examples of insurance can be said to include, life, fire, auto, theft, medical and disaster insurance contracts (Glewwe, & Bellemare, 2014).

Insurance contracts do a transfer of risk from those that are taking the opportunity of buying those contracts to those that are selling them. Even if the insurance companies are most of the time brokers who take the responsibility of being brokers between the insurer and the insured, they most of the time give the insurance themselves. In that context, the owners of insurance companies and the creditors take the position of risks that the insurance company assumes. Mostly, insurance companies transfer risks that they do not in a way wish to cover by insurance policies obtained from the reinsurers (Glewwe, & Bellemare, 2014).

Insurers can be termed as financial intermediaries because of the connection that they provide between the buyers and the investor, reinsurers and the investors who are in a position of bearing the insured risk. The buyers do benefit because they can easily obtain the risk transfers that they are seeking without having to look for entities that will be willing to cover such risks.

Brokers are the agents that have the responsibility of filling orders for their clients. There is no trading activity that they do with their clients. But rather have the responsibility of looking for traders who are willing to take the orders side of the client's orders. Individual brokers may have the task of working for big firms or at the exchange. Quite some brokers do match clients to clients personally while other put into application the computers systems in identifying potential traders as they help their customers in feeling their orders. On the side of the brokers, they assist their clients by coming in to reduce the risks of finding other counterparts of their traders (Glewwe, & Bellemare, 2014).

Brokers also take the position of acting as financial intermediaries when they are in a position of giving funds to clients who are having the intention of buying securities on a margin basis. The funds are obtained from different clients who use their accounts to deposit them. Such brokers who give out these services into hedging funds and other similar institutions are known as prime brokers (Freixas and Rochet, 2008).

Investment banks take the responsibility of advising their determined and respected clients by helping them arrange their transactions for example seasoned and initial security offerings. Cooperate finance division assist corporations to give to their businesses financially by giving out securities, for example, preferred and common shares bonds and notes. The other duty of co-operating finance divisions is giving help to companies identify and get to other companies in mergers and acquisitions.

Dealers fill the orders of their clients by taking the responsibility to trade with them. In case their clients are in need of selling securities, dealers do sell securities that they have gathered or borrowed. After the transaction is completed, dealers do hope to reverse the transaction by entering into another contract of trading with another client to the different side of the market. When the transaction is successful, they in an effective way connect a buyer with a seller who arrived at a different time that the buyer arrived.

Liquidity is the service that the dealers provide. Liquidity can be defined as the ability to sell or by with cheaper transactions when there is need to transact. This is of importance when a customer relationship should be maintained. By giving the clients the responsibility of trading when they want, dealers give liquidity to them, and this results in a good relationship between the receiver and the lender.In the current market, liquidity is offered when the client is in need of settling for a deal. In exchange, the dealers of the market provide to settle for a deal that is favorable to both sides concerning the prevailing price.

Investment and bank companies come up with new financial goods when they buy and repackage other assets or securities. For instance, mortgage banks most of the time come up with hundreds or thousands of mortgages by giving loans to those that are owning homes. The mortgage is the placed in a pool after which the share of the pool is sold to investors as it passes through securities which are called mortgage-backed securities (Greenbaum, Thakor, & Boot, 2015). All payments of interests and principles are passed to the investors every month after a deduction is made on the mortgages. These investors who buy such pass-through securities get securities that in...

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