Role of IMF in Money and Banking - Essay Example

Role of IMF in Money and Banking Money and Banking (ECO3MB) Date: 17/05/2014 Tran Phi Long – 17258010 Nguyen Duy Hieu - 15909354 BANKING This paper outlines an overview of IMF roles in money and banking in developing countries. The paper explains obstacles to banking in developing nations. It also explains how mobile banking has transformed the banking sector in developing countries. The paper describes and discusses some of its key dilemma that has faced IMF. For instance, research on IMF supported programs generate results that are varying depending on the time period that it was covered as well as the methodology that was used for estimation. IMF has faced criticism because of its involvement in developing countries. Some of the programs have also been criticized as being unsustainable and encourage global warming. IMF programs in countries such as Korea have led to loss of jobs among its citizens. Just like a double-edged sword, IMF programs have alternately led to increased development as well decline in productivity of some countries. Issues associated with banking In developed countries, both the poor and the rich have bank accounts; this is not the case in developing nations, according to a study conducted by Gallup/World Bank. Richest adults in least developed nation are more than twice poorest adults with accounts in the bank – 62% vs. 24% respectively. % banked Poorest 24 Second income quintile 34 Third income quintile 42 Fourth income quintile 50 Richest 62 In developing countries, the problem of not having bank accounts is aggravated by limited access to formal financial institution this implies that adults cannot save and borrow regularly so that they can have investments in their business or education. Globally about 2.5 billion people do not have bank accounts and most of these people without bank accounts are located in developing nations. Differences in account penetration across different income quintiles, most individuals in developing countries consider lack of money to be the main reason for them not having bank account. Even the richest individuals in developing nations feel that they lack sufficient money that will justify having an account in the bank. Developing nations have high banking costs, this involves high cost charged when opening an account and the account maintenance fee and this makes owning an account to be considered something luxurious. poorest Second income quintile Third income quintile Fourth income quintile richest Not enough money 75% 70% 63% 58% 51% Too expensive 28% 26% 24% 23% 17% Family member already has an account 13% 21% 23% 31% 39% Too far away 23% 22% 21% 18% 14% Lack of documentation 17% 17% 20% 17% 17% You don’t trust 10% 13% 14% 14% 13% Religious reasons 4% 4% 5% 6% 4% The reasons are less dominant when income increases. Individuals with high income may not have a bank account since other family members already have bank accounts. Among the lower income individuals, not being near financial institutional is considered the main reason for not having a bank account this comes after financial reasons. Low-income individuals are likely to be residents of rural areas, and these regions have poor bank penetration since most residents in such regions are poor and cannot guarantee survival of a financial institution. Even if these poor rural residents may have adequate money to sustain an account, travelling to urban areas with banks to withdraw or deposit money is not something that is practical since it too costly. About one in every five adult’s documentation is a barrier to having a bank account regardless of the income levels. Most banks in developing nations require individuals to have proper documentation, personal identification number and wage slips and in countries where most of the populations do not take part in formal economy, having such documentation is something that is hard to have (Klapper, Randall & Marlar, 2012). Mobile banking Most nations in Africa are least developed and mobile banking is revolutionalizing the landscape of business and personal banking in this region. Mobile banking does not prompt anyone to have a chequebook or bank account or one is not supposed to visit a bank so that he deposit, transfer or withdraw money. One is supposed to have a mobile phone and a SIM card. Mobile money and mobile banking entail use of mobile phones to ensure delivery of financial services to customers. Mobile financial services have resulted in most mobile operators as well as banks to take advantage of exponential growth in the mobile handset ownership dominant in Africa. Most sub-Saharan countries have huge and vibrant informal economy system. Most of the population in Africa consists of many unbanked traders, small-scale farmers, craftsmen and women. Most of these individuals yearn to have bank account. Nonetheless, individual bank qualifying method disqualifies most of them. However, most of unbanked individuals have mobiles phones, which have enhanced mobile banking. Mobile banking has developed opportunities for poor individuals to have access to wider financial services sectors in developing nation in most parts of the world and mostly in Africa. This is a key element in helping the poor from overcome poverty. MONEY International Monetary Fund involvement in developing countries According to Rhodes and Mansbach (2008, p. 189), the International Monetary Fund (IMF) plays a number of key roles in the global economy. IMF was established as a financial cooperative through the Bretton Woods agreement in July 1944. After three years, it was made a specialized UN agency. The IMF was established in response to the irresponsible monetary practices, which led to the Great Depression. It was aimed at promoting economic stability through regulation of monetary policy along with currency exchange rates (Aswathappa, 2010, p.548). IMF is an intergovernmental organisation that is managed by a board of directors. The managing director handles its day-to-day work. The European Union nominates the managing director (Mansbach, 2008, p.520). Stable exchange rates are pertinent since both trade and investment involve payment in terms of money. Countries have different currencies therefore currency of one country cannot be used to purchase goods in another country. As a result, importers have to convert the money into the desired one so that they can buy their goods easily. If many individuals want dollars, its value will rise resulting in a “strong dollar”. Conversely, if there is less demand for dollar it will result in a “weak dollar”. If a currency value is high, it means that the country’s exports are high for foreigners, therefore exports will decline. It is understood that countries that would like to increase their exports will undervalue their currency in relation to other countries (Mansbach, 2008, p.520). The mainstay objective of IMF was to restore the monetary system based on convertible currencies as well as fixed exchanges rates. It was also aimed at preventing competitive devaluations. It was geared at stabilizing the exchange rate the through provision of short-term loans to help countries manage temporary balance-of-payments deficits. According to Buckley (2009, p.69), in Korea, the severity of the policies that were imposed as IMF conditions led to resentment. There were high interest rates as well as decreased government spending. This had several implications, for instance, economic slowdown that was 1accompanied by higher prices of goods as well as wide spread unemployment. The Korean employees were infuriated after the end of a system that would ensure they would have lifetime employment which was in return for their loyalty to their employer IMF (2009, p. 20). The Korean national boundaries could not cushion them against economic storms from overseas. The IMF reforms have led to both political and social unrest in Korea. As stated earlier, government spending has declined considerably, cost of goods has increased and there is a decline in public services that are offered. These might lead to a powerful backlash against IMF as well as the government. In most scenarios, states are limited in their choices but to accept IMF conditions. IMF promotes good governance among member states in two spheres. Firstly, it helps in improving management of public resources by implementing reforms in public institutions, for instance, central bank, treasury, civil service, as well as the official statistics function. Secondly, it supports development as well as maintenance of a clear and stable environment to efficient private sector activities (Honda, 2008, p. 21). This measures help in the improvement of government functioning since a government will have improved services. The IMF was established to facilitate international exchange among developed countries. It is still not understood why IMF is helping developing countries, yet they were not in their scope when it was created. IMF had two main tasks first was to monitor the economy of its member states. Secondly, it was to act as an international lender. Apparently, this is what IMF was doing and it is still doing in the developing countries. The loans that IMF was giving, were in tandem with its mandate of 2providing balance of payment assistance, however instead of intervening in exchange rates of developed nations it offered assistance to developing nations from the 1950s (Vreeland, 2006 p.9). IMF programs have far-reaching implications on the environment. The Fund policies discourage environmental conservation since the program encourages export oriented development (Ramlogan, 2006, p.26). The Fund also encourages economic contractions which result in extensive migration into marginal lands since most land that is fertile is taken so that they can initiate their projects. This implies that the occupants of the land have to occupy another piece of land and in most cases, they occupy marginal land. This further aggravates the problem of global warming since arable land is converted into unsustainable economic use (Pigman, 2010 p.146). In a nutshell, not everything that sparkles is gold. This can be compared to the IMF programs since some of its programs have led to increased development and on the other hand, it has resulted in decline in productivity in some countries, for instance Korea. The IMF was established in response to the irresponsible monetary practices, which had led to the Great Depression. It was aimed at promoting economic stability through regulation of monetary policy along with currency exchange rates. A study on IMF programs reveals that it has mixed results therefore it has led to different results globally. sReferences Aswathappa, 2010. International Business 4E. New Delhi: Tata McGraw-Hill Education. Buckley, R., 2009. International Financial System: Policy and Regulation. Alphen aan den Rijn: Kluwer Law International. Honda, J., 2008. Do IMF programs improve economic governance? (Epub). Washington, DC: IMF. IMF, 2003. Evaluation of Prolonged use of IMF Resources (EPub) Washington, DC: IMF. IMF, External Relations Dept 2009. Finance & Development, December 2009, Washington, DC: IMF. Klapper, L., Randall, D & Marlar, J. (2012). Income biggest barrier to banking in developing countries, retrieved from http://www.gallup.com/poll/159380/income-biggest-barrier-banking-developing-countries.aspx. Mansbach, R., 2008. Introduction to Global Politics. New York, NY: Routledge. Pigman, G., 2010. Contemporary Diplomacy. Malden: Polity. Ramlogan, R., 2010. Sustainable Development: Towards a Judicial Interpretation. Danvers: Martinus Nijhoff. Rhodes, E and Mansbach, R., 2008. Global Politics in a Changing World. Boston: Cengage Learning. Vreeland, 2006. The International Monetary Fund: Politics of Conditional Lending. Taylor & Francis. Read More