Transferring Capital Or Funds From Savers To Borrowers

The financial institution is the process to provide the financial service to the people. It can also say is the institution collecting the funds from the public into the financial assets. It also verifies by the government, so it is safe for the people to using. The main function of the financial institution transfers the capital between savers and those who need capital. The financial activities and function provide by the financial institution are bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirement planning, investment, portfolio management, and many other types of related functions. The way use by financial institution to transfer the fund can be defined by 3 ways; there are direct transfers, indirect transfer and financial intermediaries.

The first way of a financial institution is Direct transfer can also call ask direct transfers of money and securities. Direct transfer means the organization sells its stocks or bond directly to savers and without any type of financial institution. For example, the party A and B is the relatives and the parties A want to transfer the money to invest the party B organization by using direct transfer; it is without any financial institution or financial market so this is call direct transfer. The advantage of direct transfer is saving the money, it because using direct transfer is without any taxable. Direct transfer is without any taxable because direct transfer is a process straight transfers the money to other account and is won’t going through any financial institution so the government will not charge the tax because government is not know about it. The disadvantage of using direct transfer is complex. It is possible become complex because direct transfer is making by the two party without any financial institution and it not have the professional person to help properly transfer the money and making the agreement, so in future maybe will happen conflict between the parties.

The second way for transferring capital or fund from savers to borrowers in the financial market is indirect transfer by using banking house. Indirect transfer is a process to transfer the capital or funds through the financial institution such as investment banking house. Investment banking house is like the agency to help the organization to transfers the bond or stock into the money. It normally use by an organization that underwrites and distributes new investment securities to help the organization obtain their financial. An underwriter serves as a middleman and facilitates the issuance of securities to the investor. For example, an organization sells the stocks or bonds to the investment bank and investment bank sells these same securities to the savers.

The advantage of this financial institution is more efficient and fast to transfer the bond or stock into the financial assets. It is because investment bank has required the professionals to given the organization accurate information and help organization to make the transfer process more efficient and won’t getting problem. The disadvantage of investment banking house is need to spend more time to wait the process done by the investment banking house. It is because company need to waiting the investment banker sell the bond or stock into the money. The banker could not be estimate when can sell the bond and stock to the saver.

Next, investment banking house give more confidence to the saver. Investment banker will provide fully information about company to saver review and give professional guideline about the investment to avoid wrong investment. Therefore, the investment risk will decrease and the percentages of faced loss also will be reduce by using the investment banking, but it will increase the cost because need to pay the intermediaries fees.

The third way for transferring capital or fund from savers to borrowers in the financial market is indirect transfer buy using financial intermediaries. The indirect financial institution can be separated into three types such as “Investment Intermediaries”, “Contractual Saving Institutions”, and “Depository Institutions”. Financial intermediary is an institution that acts as the middleman between investors and firms raising funds. Financial intermediary will using the funds from the saver to purchase other securities from other organization and hold it for gain the profitability. The three major functions of the financial intermediaries are maturity transformation, risk transformation and convenience denomination. Maturity transformation is converting short term liabilities to long term assets. Risk transformation is converting risky investments into relatively risk-free ones. Convenience denomination is matching small deposits with large loans and large deposits with small loans.

Financial intermediaries accept the saver to use the loan or securities to invest their funds. The financial intermediaries will provide the loan plan to the saver to properly using the loan to invest. Financial intermediaries can help to reduce the time. It is because financial intermediaries can transfer the financial assets into the money by the faster way. This is mean financial intermediaries will buy the assets from the customer and sells it in future, so it can reduce the time because some of the assets need longer of period to sell it or transfer into the money. Therefore, some of the people will use financial intermediaries to solve their emergence financial problem. Financial intermediaries can also help the saver to reduce the transaction cost such as consulting fee for getting information. In this situation, financial intermediaries will provide the completely information or professional advice to help the investors making the decision. Financial institution can be separated into three types such as “Investment Intermediaries”, “Contractual Saving Institutions”, and “Depository Institutions”.

Depository institution is a channel to receive the funds from the public or manage their funds to invest other organization to gain the profit. When gain the profit Depository institution will return some interest to the people who are invest the funds in the depository institution. Depository institution can be defined in few types, there are commercial banks, savings and loan associated credit union and mutual saving bank.

Commercial bank is the financial institutions provide the loan, saving, transactional, money market account, insurance, and stock brokerage service to the public. The examples of the commercial bank in the Malaysia are Affin Bank, Arab-Malaysian Banking Group, Bank Simpanan Nasional (BSN), Citibank Malaysia, Exim Bank Malaysia, Hong Leong Bank and other. The advantage of using the commercial bank is the risk is lower. It is because commercial bank has stronger financial background, so it will not easy bankrupt or facing the financial problem such as facing loss in investment. The disadvantage of the commercial bank is the percentage of interest maybe lower than other financial institution. For example, interest rate provide by the insurance institution always higher than the commercial bank.

Moreover, a savings and loan association (or S&L), also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. Mortgage means using the something such as house, land or assets to make the loan with the savings and loan association. If the people cannot pay back the loan, the house will be taken over by the savings and loan association. The advantage of the savings and loan association is interest of saving deposit is higher than the commercial bank. Therefore, people will choose it to saving their money to gain more interest.

In the additional, mutual savings bank is also a type of thrift institution. The function just seems like saving and loan associations which obtain the funds from other and make loan such as mortgage loan. Credit union is a non-profit financial institution that is owned and operated entirely by a group of members such as employee. Credit unions provide financial services for their members, including savings and lending. The condition to join a credit union is a person must ordinarily belong to a participating organization. When a person deposits money in a credit union, the person will become the member of the credit union.

Last, contractual saving institution is an institution that obtains funds at periodic intervals on a basis contractual. It is normally use for the longer period of time. It is mean if the contract dead line is not yet reach, the saver cannot taking back the money from the contractual saving institution. Contractual saving institution can be defines into two types, there are insurance institution and pension institution. Insurance institution normally provide some of insurance services such as investment insurance, life insurance, endowment insurance, accident insurance and other. Examples of the insurance institution in Malaysia are Potential, AIA, Am insurance, Greaten Eastern and some more. Pension Institution is an associated that collects the funds from the retired person to help them invest the funds and getting back the interest or profit.

In conclusion, using indirect transfer way is more efficient and safe then using the direct transfer way. Indirect transfers way have more benefit to the user. It also provides more service to the user. So, based on my opinion, I encourage the people to using indirect transfer way to manage money or making the loan.