Comment on the following: Financial sector performs basic economic function of intermediation through transformation mechanisms.

The financial sector performs basic economic function of intermediation essentially through four transformation mechanisms: Liability - Asset transformation (i.e., accepting deposits as a liability and converting them into assets such as loans); Size - transformation (i.e., providing large loans generated from of numerous small deposits); Maturity transformation (i.e., offering savers alternate forms of deposits according to their liquidity preferences while providing borrowers with loans of desired maturities); and Risk transformation (i.e., distributing risks through diversification which substantially reduces risks for savers which would prevail in the absence of financial intermediation). The process of financial intermediation supports increasing capital accumulation through the institutionalization of savings and investments and as such, fosters economic growth. The gains to the real sector of the economy, therefore, depend on how efficiently the financial sector performs this basic function of financial intermediation.