From traditional banking to modern financial intermediaries

Backlash from the financial crisis hasn't put a dent in the world's largest banks, which combined have eye-popping assets of about US$25.5 trillion (about 56,100trn/-). Most of the world's largest

The financial system can be divided into two main categories, which are directand indirect funds transfers.

The direct transfer of funds happens without aid of any financial intermediaries through financial markets, and the indirect transfer of funds involves agents, who act between investor and saver.

The theory impliesthat the direct transfer commonly causes several difficulties for investors and savers as a result of asymmetric information.

Thus these difficulties are eliminated by some fund institutions called financial intermediaries (agents), whose fundamental role is to collect information on behalf of savers so that they will have not to incur direct and opportunity costs (Miller and VanHoose, 2004).

Another key reason for the existence of financial intermediaries is “the reduction in average operating costs that can be achieved as a financial trader's scale of operations increases” (Millerand VanHoose, 2004).

The Forbes Global 2000 is a comprehensive list of the world’s largest, most powerful public companies, as measured by a composite score of revenues, profits, assets and market value.

This year’s Global 2000 companies hail from 61 countries and account for combined revenues of US$39 trillion, profits of US$3 trillion, with assets worth US$162 trillion, and a market value of US$48 trillion.

The top 10 banks in the world are ICBC of China, China Construction Bank, Agricultural Bank of China, JP Morgan Chase of US, Wells Fargo of US, HSBC Holdings of UK, Citigroup of US, and Banko Santander of Spain.

There is no any African Bank on the list. In order to understand the present and prediction of the future, it is advisable to study the past. Going back to history, the invention of banking preceded that of coinage.

Banking originated in Ancient Mesopotamia (Iraq, Kuwait, Syria) where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities.

Receipts came to be used for transfers not only to the original depositors but also to third parties.

In Egypt, too the centralization of harvests in state warehouses also led to the development of a system of banking.

Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, soon became used as a more general method of payment of debts to other persons, including tax gatherers, priests and traders.

Even after the introduction of coinage, these Egyptian grain banks served to reduce the need for precious metals, which tended to be reserved for foreign purchases, particularly in connection with military activities (Davies, 2002).

These coins, however, needed to be kept in a safe place. Ancient homes didn't have the benefit of a steel safe, therefore, most wealthy people held accounts at their temples.

Numerous people, like priests or temple workers whom one hoped were both devout and honest, always occupied the temples, adding a sense of security.

According to Davies (2002),the great variety of coinages originally in use in the ancient Greek world meant that money changing was the earliest and most common form of Greek banking.

Usually the money changers would carry out their business in or around temples and other public buildings, setting up their tables (which usually carried a series of lines and squares for assisting calculations), from which the Greek bankers, derived their name, much as our name for bank comes from the Italian banca for bench or counter.

In last two decade we evidenced a lot of researches concerning the diminishingrole of the banking (See Boyd and Gertler, 1994). It happened when the bankingindustry faced sharp decline of share in financial system.

The mutual funds,pension funds, and finance companies drove away part of shares of the bankingdue to its strict regulation and inability to challenge financial innovations.

These financial innovations however, have increased costs of borrowing notably among working classes between 15 per cent to 23 per cent of interest rate, let alone the 2007-2008 financial crises.

For instance, in Tanzania, a loan of 70m/-, costs a consumer nearly 10m/- a year as interest charges. The implication of high cost of borrowing is the widening gap between rich and poor, or making those who are considered as middle class to be trapped into debt.

The author is a Tanzanian economic analyst living in the UK.