FINANCIAL INTERMEDIATION AS DELEGATED MONITORING AND THOUGHTS

ON ITS PRACTICE: A REVIEW

The intermediation every country’s financial system provide thus enable fund owners extend
their resources to fund seekers in a contractual form and with guarantee of optimal returns on
same resources so extended (Haubrich, 1989; Diamond, 1996). Here, the financial institutions
(banks as well as non-banks) thereof play a role both as custodians of assets (or available
financial resources), enablers of fund transactions (or exchange) in the interest of fund owners /
financial resource owners as well as in their own interest since they exist also as entities with
profit objective – to be realized from services rendered or provided to their clients (i.e. same fund
owners / owners of financial resources) for a fee or commission (Diamond, 1996).

The foregoing therefore brings to bear the activities of delegation whereby owners of financial
resources in unique financial contracts devolve / bequeath the temporary use of their resources or
assets to a financial institution (Diamond, 1996), and also of monitoring whereby same financial
institution strive to ensure prudent extension and expert usage of all extended financial resources
to fund seekers with a contract as tool on behalf of their owners (Haubrich, 1989; Gryglewicz
and Mayer, 2018). Besides, the contract so established by financial institutions with borrowers or
fund seekers then help envisage an implied monitoring and to evoke compliance (Haubrich,
1989). Hence, underlying financial (resource) intermediation is the theory of delegated
monitoring (Diamond, 1984). Also, this intermediary role thus played by bank and non-bank
financial institutions rests on the authorization of a country’s monetary authority – the Central
Bank - to act in such manner / exhibit such behaviour, and the Central Bank in interest of the
larger society and being somewhat responsible to fund owners in the financial system in turn
ensures the continual on-site and off-site surveillance or monitoring of financial institutions in
whose custody are the so-monitored financial resources in order to avoid system panic or bank-
run (Diamond, 1996).

The theory of delegated monitoring however makes clear that financial (resource) intermediation
is not so carried out or undertaken as a one-time activity but such that unfolds in phases inclusive
of (i) mobilization of deposits (the search for loanable funds), (ii) reception of large-value assets
(or financial resources) from High Net Worth (HNW) individuals / corporate bodies to be
unbundled for possible extension to small-fund seekers, for example to small-scale firms /
entrepreneurs or as retail loans, in relatively less amount / quantity or the reverse case of
reception of several small-value assets (or financial resources) from Low Net Worth (LNW)
individuals / corporate bodies or as retail funds or as proceeds from retail banking to be
aggregated for possible extension to large-fund seekers, for example to governments, large-scale
firms or as wholesale / corporate loans – technically referred to as part of the asset
transformation function of financial institutions, (iii) examination and assessment of fund seekers
and their credit requests respectively – also technically referred to as in part of the asset
evaluation function of financial institutions, and (iv) expert-collection, expert-deployment as
well as expert-handling of financial, financial-related and non-financial information by financial
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institutions in relation to the funds / financial resources in their care or custody (Diamond, 1984;
1996; Haubrich, 1989).

In Nigeria, there are stream of activities that make evident the outplay of financial (resource)
intermediation, and these include as follows; at the capital market i.e. the Nigerian Stock
Exchange (NSE) or in equities trading or investment in securities / stocks / shares, fund owners
whom usually or often assumed to delegate the implementation of their interests for varied
reasons seek out financial institutions (as intermediaries) such as investment houses for example,
United Capital Plc, Cordros Capital, etc., professional brokers for example, Meristem Securities,
etc., fund custodians amidst others to help undertake the so-intended ‘purchase of equities / make
and or manage equity investment’ in choice companies / funds / investment instruments and ‘in a
prudent manner in the form of portfolio diversification so as to mitigate to some extent the
assets’ returns risk’ (Diamond, 1984; 1996); and also at the money market, potential fund
investors seek out fund custodians for example, Stanbic IBTC Asset Management Limited,
United Capital Plc, Asset and Resource Management Holding Company (ARM), etc. ‘to assist
them in or do the investment of their sum in relatively high-yielding fund or instruments’
(Diamond, 1996) like treasury bills, and so on; among other notable examples.

References

Diamond, D. W. (1984) Financial Intermediation and Delegated Monitoring, The Review of

Economic Studies 51(3): 393 - 414

Diamond, D. W. (1996) Financial Intermediation as Delegated Monitoring: A Simple Example,

Federal Reserve Bank of Richmond Economic Quarterly 82/3 Summer 1996

Gryglewicz, S. and Mayer, S. (2018) Delegated Monitoring and Contracting, Eramus University
Rotterdam

Haubrich, J. G. (1989) Financial Intermediation: Delegated Monitoring and Long-term

Relationships, Journal of Banking and Finance 13(1): 9 - 20