In financial systems lenders play a very important part in the flow of funds. Lenders or savers as they are commonly called, can lend their funds in the form of direct finance or indirect finance. Their funds are transported to the borrowers. To properly understand this we must look at diagram A, a diagram of the circular flow of funds in a financial system, on the diagram page.
According to the circular flow diagram, the main savers and source of savings in the economy are households. Households may spend less than what they earn and will save some of what they earn for future compensation. Other major lenders are business enterprises which make profits and governments that achieve "surplus budget outcomes".
The supply of savings for borrowers can also be supplemented by borrowing from overseas financial systems, these include New York, Tokyo, London, Zurich, Singapore and Hong Kong.
Banks and financial intermediaries from overseas lend funds to Australian Borrowers.
Households, businesses, governments and international can lend money to financial intermediaries as an "indirect finance" in the form of savings. To attract funds intermediaries offer the lenders interest, this way they charge a high rate to the borrowers.
Financial intermediaries include banks and NBFI's or non-banking financial institutions. The biggest bank is the reserve bank, NBFI's include things such as credit unions. The reserve bank will lend money to banks and authorised money dealers.
The rate of interest earned is very important to lenders, it is necessary to distinguish between the nominal interest rate and the real interest rate. The nominal rate of interest is the rate advertised by the intermediary to attract borrowers and lenders.
Eg. Nominal Interest Rate = dollars of interest paid/original deposit x 100/1.
For example, a lender deposits $400 with...