Financial Development in Target Markets - Essay Example

Planning For Expansion: Assessing Financial Development in Target Markets The World Bank ifies countries with GNP per capita income of $9,266 or more as high income countries. It is worth mentioning that in most instances the definition is derived from statistical standards that are developed by from statistical standards developed by different international organizations like the IMF, OECD, Eurostat and ILO. This study seeks to measure banking sector development by selecting at least one indicator from each of the various measures of depth, access, efficiency and stability. For purposes of the study, the high Income OECD country that we will study is Germany and the high non-OECD will be Qatar. Additionally, the country in Latin America and the Caribbean will be Mexico; a country in South Asia will be Pakistan; a country in Sub-Saharan Africa will be Nigeria; a country in Middle East and North Africa will be Libya; a country in East Asia and Pacific will be Malaysia and lastly a country Europe and Central Asia will be Ukraine. Some of the key indicators that we will give much focus during this study include GDP and GDP per capita for the sample countries. Our analysis will be a 5 years analysis between 2009 to 2013. Below is the GDP and the GDP per capita of for the sample countries for the last five years; Banking Sector Development Numerous studies have postulated about the existence of a strong relationship between the development of the financial sector of an economy and the overall development of an economy. To this regard, we must appreciate the fact that having a well-functioning financial systems provides good and easy accessibility to information which consequently results into lower transactional costs which consequently results into the improvement of resource allocation while also boosting the economic growth. Banking sector development relies mainly on banking systems and stock markets with the bottom line being poverty reduction. It is also important that before comparing the eight countries under study, it is important to understand that countries with open economies and sound macroeconomic policies in addition to shareholder protection and good legal systems not only help attract capital, but also result into larger financial markets. Consequently, the continued use of modern communication technology and increases financial integration has provided a platform for not only cross-border capital flows, but also a stronger presence of financial firms around the world consequently leading to the migration of stock exchange activities to international exchanges. Measuring banking sector development can be through the use of traditional measures of size and depth of banking systems limit assessment or through new measures of access to banking, efficiency and stability. We will measure banking sector development by selecting at least one indicator from each of the various measures of depth, access, efficiency and stability; Size and Depth The indicators that are used in assessing the size, depth and development of the banking sector of a country include the ratio of M2 to GDP and the ratio of private credit to GDP. These indicators mainly seek to show the causal effects of financial development. However, it is important to understand that the quality and availability of the indicators for determining financial stability is not only limited, but also there is lack of robustness in the documentation of institutional framework that supports banking. For purposes of this study, we will use the ratio of private credit to GDP as our indicator. Using the available data, it is evident that the difference between the high income and low income countries is comparatively less pronounced. As a matter of fact, the ratio of private credit to GDP varies from 15% in low income countries like Mexico and Pakistan to 95% in high income countries like Germany and Qatar which shows a significant difference. Access to Finance Access to finance is an important aspect of any economy as it not only expands opportunities for all with higher levels of access, but also enables the use of baking services that is associated with lower obstacles for both people and businesses. Consequently, we must appreciate the fact that the existence of a stable financial system not only promotes efficient savings, but also investment which is important for a thriving democracy and market economy. There are numerous indicators for measuring the level of access to finance. These include broad access that is measured by the branch and ATM density, average loan and deposit size, loan and deposit per capita; Household access that is measured through the percentage of people with bank accounts and the Firm access that is measured by the collateral needed for loan and the percentage of firms with financing constraints. For purposes of this study, we will use the house hold access as our indicator which basically aims at determining the use of banking service. High number of bank accounts implies greater use of services. From our analysis of the available data, it is evident that the access to finance varies widely across the countries both between the high and low income countries and within the low income economies. While the percentage of adults with accounts at a formal institution is 97.54% in Germany, it is 68.57% in Qatar, 27.43% in Mexico, 25.31% in Pakistan, 29.67% in Nigeria, 46.42% in Libya, 66.17% in Malaysia and 41.7% in Ukraine. A Previous studies on the subject postulates that the number of bank accounts per person in high income countries like Germany and Qatar is on average 2.2 while that of low income economies is 0.1. it is worth mentioning that measuring this indicator is mainly restricted by lack of information on bank accounts meaning that access to finance in low income countries is curtailed. Efficiency The indicators o efficiency mainly includes the number of days it takes to clear a check, a measure of the competition between the banks and the degree of state or the foreign ownership of banks. The indicators on efficiency can be categorized as Profitability which analyses returns on assets and net interest margin; Efficiency which analyses operating costs, lending spread and days to clear check; and lastly Competitiveness which analyses the concentration ratio and ownership. For purpose of this study, we will use operating costs as our indicator. There has been a widely accepted belief that having a more concentrated baking sector makes the sector less efficient. Previous studies on the subject have postulated that there exists no correlation between banks’ asset concentration and the operating costs which basically implies that when coming up with our decisions regarding the efficiency of the sector, focus should not be given to only concentration ratios. Other studies have also postulated that financial depth and efficiency have a strong correlation with the operating costs when compared to total assets. To this regard, we are justified to conclude that countries with weak banking systems have less efficient banks and poor efficiency within banking industry. Stability Stability in the banking sector is important for not only the banking system, but also the investors and the economy as it determines the rate of investment and consequently the growth of the economy. The indicators on the stability of the banking sector mainly includes of market based measures of the probability of default of the banks in a country and also data on the quality and performance of corporate sector and household borrowers hence also a measure of the user side of finance. Amongst other dimensions included in the measure of the stability of the development in banking sector include information on large loan exposures and concentration of lending activity. For purposes of this study, we will use non-performing loans as our indicator. It is important to appreciate the fact that the stability of the financial sector is not only measured with respect to both the balance sheets of the banks and also the balance sheets of the corporate borrowers. This especially important as the mixture provides a more elaborate and detailed picture of the heath of the banking sector. Previous studies on the subject postulate that there is a strong correlation between the shares of non-performing loans with the ratio of company’s financial leverage. To this regard, it is evident that the quality of the service of the banking sector is highly dependent on the vulnerability of the banking sector. Works Cited Barajas, Adolfo. Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe. Washington, D.C: International Monetary Fund, 2013. Computer file. Financial Sector Assessment: A Handbook. Washington, D.C: World Bank and International Monetary Fund, 2005. Print. Allen, Richard, Salvatore Schiavo-Campo, and Thomas C. Garrity. Assessing and Reforming Public Financial Management: A New Approach. Washington, DC: World Bank, 2004. Print. Gelbard, E, and Sérgio P. Leite. Measuring Financial Development in Sub-Saharan Africa. Washington, D.C.: International Monetary Fund, African Dept., 1999. Internet resource. Financial Sector Development in the Middle East and North Africa. Washington: International Monetary Fund, 2004. Internet resource. Kumar, Anjali. Assessing Financial Access in Brazil. Washington, D.C: World Bank, 2005. Internet resource. Caprio, Gerard. Handbook of Safeguarding Global Financial Stability: Political, Social, Cultural, and Economic Theories and Models. Burlington: Elsevier Science, 2012. Internet resource. Reda, Cherif, and Fuad, Hasanov. Oil Exporters Dilemma: How Much to Save and How Much to Invest. International Monetary Fund, 2012. Print Read More