The process of indirect finance using financial intermediaries is called indirect finance. This process involves financial intermediaries, such as banks, insurance companies, mutual funds, and pension funds, that act as middlemen between lenders and borrowers. These intermediaries collect funds from lenders, such as savers and investors, and then use the funds to provide loans or other investments to borrowers. This process of indirect finance allows lenders to benefit from higher returns on their investments, while borrowers can access funds at a lower cost than if they attempted to raise funds directly from lenders.

Indirect finance

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(November 2021)

The flow of funds from the lender to the borrower

indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. This is different from direct funding, where there is a direct connection to the financial markets as directed by the borrower issuing bonds directly in the market. Common methods of direct funding include a auction (where the security price is bid) or a initial public offering (where the safety is sold for a set starting price).

Indirect financing (government)

This is where the government grants privileges, in the form of a reduction in the tax burden, as a means of supporting a particular interest, rather than collecting and redistributing tax revenue (which would be considered a method of direct government funding). For example, a reduction in the tax burden on lenders provides targeted monetary benefits and helps to effectively reduce bond prices (provided that the tax savings have a tangible effect on bond prices and that the aforementioned passes through these tax savings to their respective clientele). This can be applied to a variety of applications, from infrastructure investments to education or military spending.

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Source: Indirect finance
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