Question

With a clearly labelled diagram, explain how funds flow from lenders to borrowers

Answer 1

20 DATE: 1 PAGE No tunds Direct finance Financial markets Money market Borrowers Households Capital market funds . Government Lendess Houschollens firms Goverment Non-resident Non-residente finencial Intermediares Credet institutions other monéting financial institutions funds

Funds flow from lenders to borrowers via two routes. In direct or market-based finance, debtors borrow funds directly from investors operating on the financial markets by selling them financial instruments, also called securities (such as debt securities and shares), which are claims on the borrower's future income or assets. If financial intermediaries play an additional role in the channelling of funds, one refers to indirect finance. Financial intermediaries can be classified into credit institutions, other monetary financial institutions and other financial intermediaries, and they are part of the financial system. The most important lenders are normally households, but firms, public entities and non-residents may also lend out excess funds. The principal borrowers are typically non-financial corporations and government, but households and non-residents also sometimes borrow to finance their purchases. So, in essence, Savers/lenders have excess funds and they lend it to borrowers either through financial markets or financial intermediaries.