Discuss the Importance of Banks for the Direct and Indirect Financing Channels (Coursework Sample)

Discuss the importance of banks for the direct and indirect financing channels
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Table of content
Memo…………………………………………………………………………………………….3
Executive Summary………………………………………………………………………………4
Introduction………………………………………………………………………………………5
Body………………………………………………………………………………………………6
Direct financial channels…………………………………………………………………………6
Indirect financial channels………………………………………………………………………..8
Comparison………………………………………………………………………………………10
Conclusion…………………………………………………………………………………….…12
Appendixes………………………………………………………………………………………13
References………………………………………………………………………………………. 14
Memo
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From: (you) student
Date: Submission date
Subject: Essay: Importance of banks for the direct and indirect financial channels
Banks play a crucial role in the economy since they provide a flow of cash in both direct and indirect financial channels. This essay will discuss in depth the significance of banks in the financial sector both formal and informal channels.
One of the functions of banks is to ensure that both direct and indirect channels have sufficient cash flow to build a strong financial industry through loans. The submitted essay also talks about benefits of both direct and indirect finance channel. For instance, direct finance channels help poor communities and people to improve their economic status since it is easy to access. However, Indirect financial is superior because banks offer a wide range of products to ensure a steady flow of funds, and economic growth.
Executive Summary
A financial economy consists of direct and indirect financial channels, and both are controlled by the bank. One of the purposes of banks, especially central banks is to distribute cash to other banks to facilitate trade and investment. However, it is essential to note that there is a distinct characteristic of the direct and the indirect finance channels. Direct finance channels entail borrowing money directly from the financial market without the use of a third party. For instance, when a person borrows cash from a friend, this is direct finance channel since there is no third party. Direct finance is used by people or organization in securities, and they seek to sell their bonds at a higher price when they mature. On the other hand, the indirect financial channel is where borrowers use a third party such as a financial intermediary to borrow money. Nonetheless, both channels are critical in the economy because they help people to borrow for small or large investment and facilitate the flow of funds within an economy. The purpose of this essay is to discuss the significant of banks for indirect and direct financial channels.
Introduction
The financial industry is core in the growth and development of any economy across the world. Banks as the primary financial institutions play a crucial role in lending money to other banks, and security firms directly or indirectly (Croushore, 2007). For any economy to thrive, there must be a steady cash flow, and this is element is facilitated by the banks. Although a person can obtain finance from a friend directly, banks are still involved. For example, the person lending the money either keeps his or her money in the banks, and he might use the bank to transfer the money to the borrower (Croushore, 2007). Economic growth and development entail a steady flow of cash from one person to the other within the market. For instance, if a person has money and fails to lend that capital to others to invest, the economy will characterize low economic growth (Hawawini & Viallet, 1999).
The flow of funds from lenders to borrowers in both direct and indirect financial channels is significance in the financial system. If the financial system fails to facilitate an exchange of money from borrowers to lenders, that economy encounters financial problems such as low economic growth. Therefore, banks must strive to ensure that there is a balance among borrowers and lenders because an economy can only grow when these two parties can exchange funds accordingly (Hawawini & Viallet, 1999).
Therefore, the flow of cash function of the banks ensures that capital is circulating from one person or business to the other, and make people can make profits. For instance, in direct financial channels, a person or institution can obtain cash directly from the bank and sell securities to others. Upon maturity, the security bonds make high profits and both the borrower and the lenders achieve financial growth and stability. The same happens with indirect channels since people and companies get money from a third party and facilitate economic growth, and flow of cash within a market (Hawawini & Viallet, 1999).
Body
The function of cash -flow among banks is fundamental in creating a stable financial system (Mishkin & Eakins, 2009). A smooth financial system characterizes an economy where intermediaries, market infrastructure, and markets take part in building an economy through an exchange of funds. If borrowers and lenders can exchange funds, the economy will have steady growth. However, if there is a problem of flow of cash, the outcome is economic growth delays and struggles. Therefore, economic growth requires banks to facilitate cash flow from lenders to borrowers to promote growth (Mishkin & Eakins, 2009). The inability of the banks to ensure that both direct and indirect financial channels are functioning according results to financial instability (Mishkin & Eakins, 2009). Financial instability is a negative element in economic growth, and this problem can only be fixed if banks control financial system in both direct and indirect financial channels.
Direct financial channels
The primary characteristic of direct finance channels is the ability of borrowers to ask for finances from financial markets directly without using a third party (Mishkin & Eakins, 2009).
Thus, a borrower can borrow cash from financial markets, and sells those shares and securities to raise money w...