Abstract
Funds can move from lenders to borrowers via indirect finance involving financial intermediaries. Financial intermediaries borrow funds from lenders/savers and then provide funds to borrowers/spenders. If it is a commercial bank it acquires funds by issuing a liability to the public in the form of saving deposits and then loans to others. Other intermediaries will borrow from savers and then pass on to the borrowers. The process of using indirect finance via financial intermediaries is called financial intermediation. Why to intermediaries exist? Intermediaries have lower transaction costs. They also benefit from higher diversification and therefore, lower risk. They are experts at managing asymmetric information i.e. the borrower has more information than the lender.
