Institutions in the economy that help to match one person's saving with another person's investment are collectively
known as financial intermediaries. Financial intermediaries play a vital role in the economy by connecting individuals or entities with surplus funds (savers) and those who need funds for investment purposes (borrowers or investors). These intermediaries facilitate the flow of funds between these two parties, thereby ensuring efficient allocation of resources in the economy.
Now, to understand the specific institutions that fall under financial intermediaries, let's break it down into two categories:
1. Banks: Commercial banks, savings and loan associations, and credit unions are some of the most common examples of banks that provide financial intermediation services. They collect deposits from savers and use those funds to provide loans or make investments to borrowers. Banks act as the middlemen in this process, managing the risks associated with lending and investment activities.
2. Non-Bank Financial Institutions: In addition to banks, various non-bank financial institutions also serve as intermediaries in the economy. These include investment banks, mutual funds, insurance companies, pension funds, and finance companies, among others. These institutions mobilize funds from savers through various financial instruments such as stocks, bonds, or insurance policies. They then channel these funds into investments, either directly or through financial markets.
Overall, these financial intermediaries play a crucial role in mobilizing savings and directing them towards productive investments, which ultimately supports economic growth and development.