Trends towards Globalization of the Banking System - Literature review Example

Trends towards Globalization of the Banking System Name Course Professor City and State Date Introduction Globalization has been in existence since World War II, but has accelerated in 1980s and 90s. Globalization, especially in the banking sector has been greatly contributed by two factors; technological advancement and trade liberalization. There are various trends emerging with globalization in the banking system. Among these trends is increased liberalization of financial services. Because of the globalization of the banking system, there is high integration in the global financial system, enormous economic growth of some countries, such as India and China among others. Empirical studies show that globalization in the banking industry has various benefits, such as access to global markets, technological advancement, especially for the developing countries, division of labour and new employment opportunities among others. However, globalization of the banking sector comes along with various risks such as increased competition, over reliance on cheap products from the developed nations, just to mention but a few, which pose various challenges for the developing countries. Literature Appraisal Emerging Trends with Global Banking Globalization in the banking industry is a controversial topic that has been widely researched on. According to Charles (2003, p.57), globalization can be referred to as the tendency of countries to depend on each other because of rising trends, such as integration of finances, people, and trade liberalization among others. Globalization has existed for a long time, but it is argued that it became intense from 1980 to 1990s. Recent research shows that there are several emerging trends with globalization of the banking system. The common trend is liberalization of trade. Trade liberalization in a nation results when its policies do not restrict or do not apply any rules and regulations on imports and exports by applying such things, such as tariffs and subsidies. According to Keegan (2002, p.89), international institutions, such as “World Bank, International Monetary Fund (IMF), and World Trade Organization (WTO),” have contributed greatly to trade liberalization. With trade liberalization, the trading partners get mutual gains from the trade. Trade liberalization can also be referred to as free trade. Prices under this kind of trade are determined by supply and demand, which on the other hand determines a nation’s resource allocation. According to Ward (2009, p.19), many countries have been compelled to some extent to adopt free trade since they are members of WTO, which limits some tariffs and other barriers on imports and exports. According to Pugel (2007, p.53), the nations practicing free trade rip many benefits from it. The main feature with trade liberalization is intense competition. Global markets are full of competition between countries producing the same goods and services. Therefore, with trade liberalization in the banking system, a country has a chance of facing stiff competition from the more developed nations hence able to learn better methods to improve its banking system. The local, domestic banks in a nation learn to produce more efficiently to keep up with the pressure experienced in the global markets. Through free trade, a nation accesses larger, international markets for its exports, establishes new links with potential importers for its exports and hence get free international market for its supplies and the vice versa. Another advantage of free trade is labour division. Labour division means that a nation’s citizens are going to specialize in various jobs involved in free trade, such as production of the goods and services for the global market. Global banking trade also opens new employment opportunities for a nation. Through establishment of trading partners, a country can create an avenue for its citizens to get employment especially in the more developed nations. In addition, a nation may benefit from trade liberalization by getting more personnel that are qualified from her trading partner who can help improve the performance of its banking system. Through trade liberalization, a country also benefits from foreign investors. International bankers may realize the potential of a nation’s banking industry and decide to invest in it. Through this, a country’ banking industry expands and hence leads to increased economic growth for the nation. However, free trade has various risks, especially for the developing nations. As Keegan (2002, p. 95) explains, because of increased competition, many of the industries, especially the small banks in the developing nations are forced to quit. This is because the emerging industries lack enough resources in both material and human form, which can help them, put up with the pressure in the global market. Research shows that some established and well performing nations in developing countries that play major roles in a nation’s security are opposed to their government’s overreliance on foreign supplies. Therefore, by restricting a country to import foreign supplies, these industries impede trade liberalization. There are arguments that free trade does not benefit developing nations, but instead makes them poorer through labour exploitation. Various researchers point that foreign suppliers take advantage of trade liberalization by exploiting free, domestic labour available in the developing countries that they supply their goods and services. Another factor of trade liberalization affecting the economies of the developing countries is decrease in prices of primary goods such as oil, cocoa, tea, and coffee, which form the largest share of the goods produced by the developing nations. As a result, many developing nations have been forced to chunk out of international trade. Other nations, especially the transitional nations have managed to adapt to the evolving global market by increasing their shares in manufactured goods in their exports. However, the manufactured goods they specialize in require locally available materials and local expertise, such as clothe manufacturing, art and design among others. According to Schulp (2006, p. 167), another emerging trend with globalization of banking system is liberalization of financial services. Globalization of the banking system has broken the geographical barriers that existed between various nations. Today, a person can access financial services from any nation because banks can establish branches in various countries. This has made financial services become accessible in terms of distance, time, and expense. Through financial services liberalization, nations are also benefiting from increased foreign exchange. All these benefits resulting from liberalization of financial services enhance economic growth in a nation. Another trend evolving with globalization of banking system is financial deepening. According to Khanal (2007, p. 243), financial deepening has resulted in increased provision of financial services whereby people have many choices to make. More money is supplied to gross domestic product (GDP), which results to economic growth of a country. Financial deepening can be equated to liquid money in a nation. According to Khanal (2007), the presence of liquid money in a nation means more chances for its economic growth. The main positive impact of financial deepening is poverty reduction. Financial deepening presents more opportunities for disadvantaged groups, such as the poor, to access essential services such as education, health among others. Good examples of nations that have benefited from globalization of the banking system are China and India. According to Goldberg (2008, p.17), the two countries have withstood the pressure coming along with global markets, such as increased competition. Other countries have also benefited from globalization of baking services. Empirical studies show that globalization in the banking sector has greatly influenced the economies of many East-Asian countries, such as Singapore, and Korea among others. Through globalization of their banking systems, these nations have emerged among the richest in the world through accelerated economic growth. The main characteristic of any kind of globalization is technological advancement. According to Tjallinks (2005, p. 145), for any globalization to take place, technological advancement should exist both in communication and computerization. Through technological advancement, banks are establishing branches in various nations hence making financial services more easily accessible. Recent research show that developing nations benefits much from globalization through technological spill over from their developed foreign suppliers. In the banking world, globalization requires new, improved knowledge, and equipment for providing financial services. Therefore, developing nations directly benefit from this knowledge, which is embedded in the production equipments. Technological advancement has resulted in decreased communication and transport costs. Decrease in transportation cost has made the banking system more cost effective. The small, emerging banks in the developing nations have greatly benefited from this. Cost effective communication has made it possible for developing countries to access information on the new techniques of financial banking in the developed nations, hence they are using it to improve their effectiveness and efficiency. Improvement in transport and communication, especially in the developing nations has enhanced access to necessities, such as education and health. Another impact of technological advancement is increased exchange of goods and services between and among countries. According to Tjallinks (2005, p. 153), with advancement in communication, even countries with trade barriers can easily exchange goods and services. The other aspect of improved communication and transportation is outsourcing. Nations are now obtaining better and quality products. Technological advancement has boosted innovation in such a way that there are better banking services and good production methods for goods and services in other sectors. Through technological advancement, countries can create job opportunities for their citizens. Employment boosts people’s economic status, which at the long run results in economic improvement of the nation as a whole. Challenges posed by the Evolving Global market in the Developing Countries Increased Competition Globalization is characterized by intense competition among nations in the global market. According to Charles (2003, p. 63), some developing countries supply goods and services in the global markets supplied by more improved nations. Because their trade competitors in the global market are more developed in terms of technology and production methods, they outdo the developing nations. With increased competition therefore, some banking industries in the developing nations, which cannot adapt to the global market pressure are forced to pull out. This means that these industries end up closing, leading to economic loss of the industry and that of the nation as a whole. Research shows that some nations practice protectionism for their important sectors up to date. Many of the developing nations argue that their emerging industries that are not fully established need to be protected from unhealthy competition, which results from globalization, until they become established. As a result, they put tariffs on exports to increase the benefits these industries get by selling their goods and services to the global market. On the other hand, they reduce or completely remove tariffs and introduce subsidies on the imports to assist these industries access the foreign supplies easily and cheaply. Supporters of globalization argue that if these industries are protected from global competition, they continue performing poorly, which leads to economic stagnation or regression in the developing nations. Increased Inequality According to Penar (1999, p80), globalization does not cater for the needs of the developing nations. With global banking, there is enough evidence that shows developing nations are left out, especially in decision-making and only the powerful, developed nations make decisions on their behalf. This magnifies the level of inequality among nations. Because of the power the developed nations have in influencing the global economy, they end up influencing the formulation and implementation of both economic and social policies in the developing nations. Globalization has made it easy for multinational corporations to take advantage of the cheap labour available in the developing nations. These corporations offer jobs to developing nations’ citizens and provide them with poor salaries and other working conditions in such as a way that the corporations boost their productivity at the expense of their employees. Recent studies show that these trends have led to increased economic gap between the developed and the developing nations. Increased Control by Developed Nations With increased globalization, the level at which developed nations are controlling the developing nations is increasing. According to Ward (2009, p. 22), political leaders in many developing nations are under the control of their developed trading partners. Developed countries influence the formulation of political and social policies in the developing countries in such a way they address some certain needs of the former at the expense of the latter. For many developing nations, it is not a choice for them not to conform or not. They are forced to submit to these demands because failure to do that can lead to several, severe consequences, such as withdrawal of financial assistance and trade restrictions among others. Even when developing nations receive financial aid from the developing nations, they are not at liberty to spend the donations on the projects that are of interest to them. Instead, the donor countries dictate to them the projects that the donations should be used for, which are meant to serve their specific interests. Increased Dependence on the Developed Countries Globalization comes along with removal of trade barriers, which results to increased supply of cheap products from developed to the developing nations. Because of technological advancement and economies of high scales, the developed nations are in a better position to produce cheap products compared to developing nations. The influx of cheaper goods and services leads to increased competition among industries producing the same goods and services in the developing nations, which might put them at the risk of getting out of business. The result of this is that the developing countries are left to depend on the supply of these goods from the developed nations. Ways of Addressing the Challenges Recent research shows that developed nations can effectively address the negative impacts of globalization and greatly benefit from it. To show clearly how these challenges can be addressed, this paper will explore globalization of the financial banking system of Egypt as a case study. Case study: Globalization of Banking System in Egypt According to Molouk (2009, p. 56), Egypt has for some time focused on reforming its banking industry to ensure it overcomes the challenges posed by financial globalization. One of the strategies Egypt has been using to reform its banking sector is application of mergers. The Egyptian government has formulated and implemented policies that promote merging of small banks to form big banks that can adapt to the intense competition in the global market. The government has also allocated many resources in expanding the capital base of its banking sector and restructuring it to ensure that it can keep up with the pace of the development of other international banking sectors. However, research indicates that despite the reformations that have been done on the Egyptian banking sector, its contribution to the nations’ economic growth is still low. According to Molouk (2009), before merging, nations have to consider various factors that will enable the banking sector realize huge profits for sustaining it in the global market. One of the factors to be considered is the financing of the merging through purchase of assets and shares. Molouk (2009, p.60) argues that this will ensure that the mergers result to economic boosts that increases the savings of the banks and reduces its costs. A country should also assess and identify the attitude of its workforce towards merging. The workers need to be enlightened on the importance of merging to release their full potentials in ensuring that the banks achieve maximum production. The other way of overcoming the challenges is through formulation and implementation of effective banking policies. For any effective banking to occur in the developing nations, their governments should ensure proper policies that enhance macro economic growth. In addition, governments should form and implement laws that ensure securitization and protection of the banking industries, especially the emerging ones together with their consumers. These laws should impose tariffs on cheap goods being supplied by the developed nations to ensure that they become expense and hence reduce the risk of overdependence on them. Developing nations must ensure that their retail banks have the right technology in delivering retail-banking services to detect any kind of fraud that can result into losses. The country should also invest in training their human resources to ensure effective and efficient retail banking services. Above all, they should invest in foreign investors who are interested in investing in the banking industry. Creating conducive working environments can do this for them by reducing the costs and increasing their earnings. Nations should allocate financial resources to support the emerging small banks, to minimize the risks of closure because of increased competition in the global market. Conclusion As explained earlier, financial globalization has become a common phenomenon both in the developed and developing nations. Globalization of the banking system has resulted in various trends, such as increased competition, technological advancement, trade liberalization, and financial services integration, and liberalization, emergences of powerful corporations such as WTO and IMF among others. Research indicates that financial globalization has benefited the developed nations, which have enough capital and adequate technology that can outdo trading rivals in the global market. However, the developing nations are still facing many challenges because of financial globalization. To rip any benefits from it, they first have to address these challenges. These challenges include, increased competition, overdependence on the developed nations, and control by the developed nations among others. Strategies of addressing these issues include financing the small banks to ensure they are not kicked out of business due to competition, enhancing technological advancement for efficient and effective banking, training of human resource required for effective banking, encouraging foreign investment in the banking sector among others. Reference List Charles, W. L 2003, International Business – Competing in the Global Marketplace, 4th Edition, New York, Mc Graw – Hill. Khanal, D. R 2007, Banking and insurance services liberalization and development in Bangladesh, Nepal and Malaysia: A comparative analysis. Asia-Pacific Research and Training Network on Trade Working Paper Series, no. 41, July (rev. Oct. 07) Molouk, E. K 2009, Globalization and its Effects on the Banking System performance in Egypt. Ozean Journal of Applied Sciences, vol. 2, no. 1, pp. 55-71. Keegan, W. J 2002, Global Marketing Management 7th Edition / International Edition New Jersey, Prentice Hall International. Goldberg, L.S 2008, Understanding Banking Sector Globalization. Penar, K 1999, Is the Nation State Obsolete in a Global Economy? in Business Week, 17 July 1995, p80. Pugel, T 2007, International Economics, 13th edition. New York, McGraw-Hill Irwin. Schulp, J. A 2006, “Service & Experience in the Global Village,” Service Society Module Reader, The Netherlands, CHN University Press. Tjallinks, E.K 2005, “Beyond Service Society – Service Industries in a Globalizing World”, Service Society Module Reader, The Netherlands, CHN University Press Ward, J 2009, The new Basel Accord and Developing Countries: problems and alternatives. Working paper no. 04 Read More