intermediation
Intermediation is what a bank does when it takes money from people who have some and lends it to people who need some, earning a spread in between.
In plain English
Remember the woman at the market who kept a small notebook, collecting ₦500 here and ₦1,000 there from traders every morning, then lending it back out to whoever needed capital to restock their stall by afternoon, and taking a little something for her trouble? That, in its rawest form, is intermediation. She never used her own money for long. She simply stood between people with cash lying idle and people who needed cash right now, and she made the connection work.
A bank does the same thing, just with more paperwork and a licence from the Central Bank of Nigeria. Someone deposits ₦2,000,000 into a savings account because they are not ready to spend it yet. The bank does not let that money nap in a vault. It lends a slice of it to a small business owner in Aba who needs working capital, or to a young man in Lagos financing a car, or to a family in Enugu building a house in stages. The depositor earns a little interest for lending the bank their patience. The borrower pays a higher rate for the convenience of getting money now instead of saving for years.
The gap between what the bank pays depositors and what it charges borrowers is called the spread, and it is how the bank survives and makes profit. This is why your savings account interest feels almost like a joke, while your loan interest feels like a slap. The bank is managing risk on both sides, and that management costs something.
A Nigerian in Manchester sending money home is not quite intermediation itself, but it rides on the same trust that makes intermediation possible. The receiving bank in Nigeria is trusted to hold and move funds because it has spent years proving it can gather deposits safely and lend responsibly.
Without intermediation, every saver would need to personally find a trustworthy borrower, negotiate terms, chase repayment, and hope for the best. Banks exist so that ordinary people never have to do that dance themselves.
A bank collects ₦50,000,000 in deposits across thousands of small savers, paying them 4% a year. It lends ₦40,000,000 of that to businesses and individuals at 18% a year, keeping some as reserve. The 14% gap, minus costs and bad debts, is roughly the bank's reward for standing in the middle.
Questions people ask
Is intermediation the same as just holding my money safe?
No. Safekeeping is one small part of it. Intermediation is the active work of moving that money to someone who needs it, while still promising to give yours back when you ask.
Why do banks pay such low interest on savings compared to loan rates?
Because the bank is taking on the risk of lending your money out and possibly not getting all of it back. The gap between the two rates covers that risk, the bank's running costs, and its profit.
Does intermediation only happen through banks?
Mostly, but not only. Microfinance banks, cooperative societies, and even organised savings groups like ajo or esusu perform a rougher version of the same job, gathering funds and channelling them to those who need them.
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