Securitization is defined as a controlled finance process that allocates risks by cumulating several assets in a pool and then issue new securities which are normally backed by assets and their cash flows. Securitization offers an excellent source of funding for the lending institutions and this enables them to recover from the downgrading of credit rating they face as a result of increasing financial pressure and leveraged buyout. Trade receivables securitization therefore gives the lending institution an attractive cost of funds and relatively reduced interest costs.
When a lending institution engages in securitization transaction, it is able to diversify its funding sources and achieve soft amortization profile (Madura, 2008). Securitization also lowers the working capital investment requirement by offering return on equity benefits from lower funding costs. Most of banks and financial institution devote their assets to investment securities in order to achieve economic and financial objectives.
This includes accumulation and management of a reserve assets, stabilization of macroeconomic effects as a result of sudden increase in export earnings. Investment in security assets will help in management of pension assets and the transfer of national wealth across inventions. For any given financial firm, the primary source of liquidity demand is the investment
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Other additional principle sources of liquidity demand include the selling of loans, borrowing from the Central banks or other banks and raising of additional capital. Nevertheless, liquidity demand radiates from the nature of the banking business and macro factors that are exogenous to the financial firm as well as from the financing and operational policies that are mostly internal to the financial firm. References Madura J. (2006). Financial markets and Institutions. Winfield, Kansas: South-Western College Publishers