Banking and Finance

This essay discusses distribution channels in banking, differences between physical and financial assets, roles of banks as financial intermediaries, and advantages of financial intermediaries. It also provides expert advice on investing in SBC bank.

Running head: Banking and Finance
Banking and Finance
Essay
System04104
12/8/2018

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Answer-1
A distribution channel in banking is a route of lending or borrowing money from different
financial institutions to the borrower. If we consider bank services, then distribution channel
is the way of delivering banking products or services to its customers. Apart from this, there
are several economic units such as households, governments, and firms. Each economic unit
has to consider their income for the expenses and these economic units can have one of these
three budget positions; a balanced budget position, a surplus budget, or a deficit budget. The
mismatch between expenses and income provides creates an opportunity for trade or
borrowing from other financial institutions. The financial institutions (lenders) provide
money to borrowers by following two channels; direct channel and indirect channel (Hubbard
and Varma, 2014). Therefore, to meet the requirements of the customers, bank provides
multiple channels to provide service to their customers. In recent times, bank provides wide
services to its customers through different distribution channel such as ATM’s, bank
branches, online facilities such as net banking, separate mobile app of a particular bank,
portals, and web banks etc.
Direct Channel: direct channels are those channels that provide direct money transfer to the
borrower. Where a borrower can directly contact with the bank or other financial institutions
for money borrowing and even directly invest the money in those financial institutions. These
financial intermediary can be in form of an institution, market, or a person itself through
which money can be borrow by a borrower. Banks are the large financial institutions that
provide direct facilities to its customers for money borrowings and also one can invest their
money in the banks. Apart from this bank, also involve in several bank products such as
insurance and loans etc. If a person borrowing money from the friend, this is also type of a
direct financing or direct channel of financing. The direct channel of financing also considers
those markets in which lenders directly lend their money to borrowers. The direct channel of
financing also involves those lenders in the rural areas, which lend money on high interest to
the borrower (Pedersen, 2015). Generally, they charge a very high interest rate on the money
they lend to other people.
Indirect Channel: Indirect channel are those channels through which borrower can borrows
money or funds via a financial intermediary. Purchase of stocks and bonds directly from the
companies that are selling or issuing shares in the market is also a type of an indirect channel

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of financing, where people indirectly invest their money in those corporate companies, those
issues shares, and bonds etc. These indirect financial arrangements take place through
financial markets where large numbers of financial institutions are working to lend money to
its investors. This is different from the indirect finance channels where people can direct
borrowing money form the lenders through initial public offerings (IPO) or auctions (where
price is not determined in advance, rather depends on the bid value), while in indirect channel
there will be intermediate financial institution involves to lending the money to borrows and
invest their money somewhere else.
However, in above discussed distribution channels, banks are the major source of financing
to the people and also borrow money form people and paid them interest in return. Bank is
the largest means of direct financing to the people. While if we consider, indirect channel
then stock markets where large number of financial institution involves in lending and
borrowing money on behalf of different corporate companies. Bank are the safe side for
borrowing or investing money, because there very minimum risk involved in bank
borrowings or investing the money in banks, while in stock market is the highly risky channel
for investment and borrowing money via intermediary.
Answer-2
Assets are commonly represents the economic resources or ownership that can be converted
in cash in future. The financial and physical assets both are different from each other in terms
of their value, feature, and characteristics. These differences are explained below:
Physical Asset Markets vs. Financial Asset Markets
Physical assets are those assets that can be seen, touched, and it is in form of identifiable
physical form that can easily be identified. We can say that physical assets are tangible.
Example of such assets is land, building, machinery, tools, gold, silver, vehicles etc. If we
consider the accounting point of view, then it can be liquidated when these resources wound
up its interest. These type of assets usually loss its value which is termed as depreciation,
because of its regular use and due to wear and tear of the asset because of continuous use.
Some tangible assets are perishable in nature such as container of fruits, flowers that are not
used within the time period etc. (Ahrne, Aspers, and Brunsson, 2015).

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Financial assets are those assets, which are intangible in nature, it means we cannot see,
touch, or feel that particular portion of the assets, rather it is represents by a piece of paper or
document that represents the ownership or interest held in the asset. This is also considerable
that the paper or certificate that represents the financial asset does not have any intrinsic
value. For example of such financial assets are including funds, stocks, bonds, copyrights,
investments, accounts receivable, patents, fixed deposits certificates, company goodwill, etc.
Even though the financial assets are not kept in physical form, they are still recorded in a
firm’s balance sheet, to represent the value that is held by them (Gamayuni, 2015).
Money Market vs. Capital Market
Money market is a short-term period market and in this market, return is expected less in
compare to capital market. Institutions like central banks, financial institutions, and other
finance companies involve in financial transaction. These markets allows the individual
investor to transact but do not normally do so. Money market deals in short term financial
instruments such as T-bills, certificate of deposits, commercial paper, and trade bills etc.
transaction in money market requires huge amount of money and are quite expensive in
nature in compare to capital market instruments. In money market, instruments are normally
used for one day to one year. Actually maximum tenure of the money market instruments is
only one year; it means this investment is done for short time of period. To invest in money
market is a safe side for investor because normally issues are from government agencies and
for a short time period.
Capital market is long-term investment oriented market and more risky in compare to money
market. The capital market does not require huge amount of money rather a small amount can
also be invested in this market. Generally, financial institutions such as banks, foreign
investors, government institutions, and retail investors involve in the capital market. The
capital market deals in shares, preference shares, binds, and debentures etc. The instruments
of capital market termed as a liquid instruments as it can be easily convertible in cash by
selling the instruments in the market. It has been also considerable that sometimes it is hard
to find the buyers for selling the capita market instruments.
Primary Market vs. Secondary Market
Primary market is also considered as a fresh market where companies directly issues their
securities or shares in public and people can direct buy the shares by bidding on it. Many

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times, it takes the form of IPO. When investor buys the security from primary market, they
directly issues their shares via a underwriting firm who review the offering and create a
prospectus outline for the selling of securities. In primary market underwriter treated as
intermediary and they work on behalf of the companies. The price of instruments in primary
market generally fixed and sales amount is received by the company who issue shares
(Morgan, 2018).
Secondary market is the place where those instruments are traded which are already in
operation in the market. Secondary market is also known as ‘After Market.’ In secondary
market, broker (treated as intermediary) typically purchase the shares on behalf of others. The
speciality of secondary market is that anyone purchases the shares or securities if he/she
willing to pay the amount on which securities are traded. The price paid by investors no
longer related to the initial price of the same security and it is also considerable that price of
shares can be fluctuated at every movement. The risk in investing in secondary market is too
high as it is based on stock exchange performance.
Answer-3
Banks play an important role in the economy of any country. The banking system is the
important factor of any financial system or economy. A financial intermediary is an
organisation or institution that facilitates the borrower to lend money on slightly higher rate
and borrowing money as an investment of customer on slightly low interest rate (Pringle,
2017). In other words, a financial intermediary is generally treated as a bank, which
consolidates deposits, and uses the funds in transform them in to loans by lending them to
their customers. Through the process of financial intermediaries, a bank transforms certain
asset and liability in to different asset and liabilities (Abel, 2016). Direct lending between
savers and borrowers is like a barter system. Thus, to complete a financial transaction it is
needed that there should be double interest or wants. Some of the roles played by a bank as a
financial intermediate are as follow:
1. Pooling the resources of small savers: Bank accept the savings from a small amount
investor, and also provide facilities to them to withdraw or lending any amount of
money on a small interest rate. Bank also accept these small amounts of money such
as $1000 from 100 people and convert these collection in to a big amount loan such as
loan of $100,000.

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2. Mobilising wholesale finance and lines of credit: Bank mobilise the large financial
resources from the wholesale market to small borrowers across the various productive
sectors. Examples of such facilities are offshore credit facilities raised by banks to
fund SMEs or mortgages locally (Sunderam, 2014).
3. Provide safety for financial resources: Bank also provides safety to financial
resources such as providing locker facilities of the people’s precious metals and
financial resources on minimal charges (Dang, et.al. 2017). Banks are also an
excellent example of safekeeping of money in accounts, deposits, and payment
records, and also keeping records of transactions through ATM’s by credit or debit
card.
4. Diversifying risk: Bank as in the role of intermediaries’ helps its investors to
diversifying the risk associated with the financial investment of people and diversifies
in such as way in which people do not able do on their own way.
5. Providing liquidity: Bank facilitates its users as a financial intermediaries that banks
make it so easy to transform the various assets in liquid cash and allow them to
withdrew through ATM’s, credit card, or Debit cards. In such process bank manages
many short-term outflows and investments with long-term outflows and investments
(Gertler and Kiyotaki, 2015).
Advantage of Financial Intermediaries
There are several advantages of financial intermediaries such as lower search costs, spreading
risks, economies of scale, and convenience of amounts. Bank provides facility to its customer
that they do not have to search for lenders rather they can easily reach out for their
borrowings and investing money. Bank as an intermediary utilise your fund in different
segment of borrowers and minimise the risk (Frieden, 2015). If one of the borrowers is fail to
give return, you will not lose your all amount. Thus, bank also spreading risk associated with
your investment. Banks also help in enabling economies of scale on lower average cost by
collecting deposits and lending money to others.
Answer-4
Proper investment or use of funds is the financial need f anyone. However, it is not an easy
when you do not have any knowledge about the financial distribution channel. The two-
distribution channel, direct and indirect channel helps a person to invest or borrow their

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money in the market (La Spada, 2018). However, knowledge of market is also essential
because every market involves some risk. Banking system is an essential factor of any
economy, and every economy depends on how their banks are performing in the country
(Gitman, Juchau, and Flanagan, 2015). Although managing funds as a financial intermediary
is the primary role of a bank. Nevertheless, there are several other options for people to invest
their money or borrowing money for their needs. However, bank is common option for every
people for financial transaction because it not only easily available for every person rather it
also provides safety for public funds (Allen, Carletti, and Marquez, 2015). The risk
associated with funds are minimise by the bank by investing the money of its customers in
different group of borrowers that minimise the risk of loss. Bank also provides interest on the
money invested by its customer in the bank. It then utilise this fund for distributing loans and
earn slight higher interest rate in compare to the interest rate it gives on the invested money
of people (Hanson, et.al., 2015). Therefore, a person who wants to invest their money and
wants to earn some interest on it, then he/she should invest their money in the banks. Banks
not only provide interest on their money, rather provides security and safety on your funds as
well.
On the basis of above discussion, as a consultant of SBC bank I would like to suggest Ms
Jenet to invest their money in banks, as it provides high interest rate and also ensure her about
the guaranteed return on her investment. The another benefit to invest the money in SBC
bank is that it provide risk free interest rate with higher interest rate if she invested her
substantial amount in the bank as a fixed-deposits (FD) for longer time of period. The role of
bank is not only providing profit on her investment rather it also provide safety of her funds,
by investing the money in other borrowing partners or in other sources where bank can get
higher interest rate. In case of any risk occurrence is happen then its bank’s responsibility to
bear the risk on the funds, thus Jenet will be free from any tension about her invested funds.

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References
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https://www.herald.co.zw/banks-as-financial-intermediaries/ [Accessed: 7/12/2018].
Ahrne, G., Aspers, P. and Brunsson, N. (2015) The organization of markets. Organization
Studies, 36(1), pp. 7-27.
Allen, F., Carletti, E. and Marquez, R. (2015) Deposits and bank capital structure. Journal of
Financial Economics, 118(3), pp. 601-619.
Dang, T.V., Gorton, G., Holmström, B. and Ordonez, G. (2017) Banks as secret
keepers. American Economic Review, 107(4), pp. 1005-29.
Frieden, J. (2015) Banking on the world: the politics of American international finance.
Routledge.
Gamayuni, R.R. (2015) The effect of intangible asset, financial performance and financial
policies on the firm value. International journal of scientific & technology research, 4(1), pp.
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Gertler, M. and Kiyotaki, N. (2015) Banking, liquidity, and bank runs in an infinite horizon
economy. American Economic Review, 105(7), pp. 2011-43.
Gitman, L.J., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance. UK:
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Hubbard, R.G. and Varma, S. (2014) Money, banking, and the financial system. Boston:
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La Spada, G., (2018) Competition, reach for yield, and money market funds. Journal of
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secondary-market/ [Accessed: 7/12/2018].

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Pedersen, L.H. (2015) Efficiently inefficient: how smart money invests and market prices are
determined. USA: Princeton University Press.
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Financial Studies, 28(4), pp. 939-977.