Role of International Credit in Contemporary Economy - Essay Example

TABLE OF CONTENTS Introduction 2. Credit History and Regulation 3. Types of Credit 4. Requirements of International Credit 5. Rise of International Credit 6. Function of International Market 7. Credit: Distribution of Wealth to Debtors, Investors and Policy Makers 8. Iranian Economy: Credit Crunch 9. Conclusion Introduction Consolidation of the foreign market is important for the international market. In todays market, the role of international credit manager has become more decentralised, and these people based abroad are reporting back to their chief credit manager. It is essential to realise that the risk management has integrated with todays credit market, and the role of risk manager has amplified, inclusive of insurance and cash management. International credit is possible through international skills i.e. diplomatic association. International credit plays pivotal role in the development and expansion of the international business, and further provides support, tools and opportunities for progressive growth (Vidal, 2002). The challenges faced by international credit are set of political instability within specific regions associated with the international credit. Considering example of Central Asian countries, before Sept 2001, different countries agreed to provide financial credit to these nations to develop infrastructure, however soon after US-led invasion of Afghanistan, the economic conditions of Central Asian countries took u-turn. The wave of terror affected the society and economy of these countries severely, to an extent the all the international credit facility was either halted or roll-back. This reference makes it explicitly clear that international credit is not just economic driven; rather it is complicated exercise and assistance (Kaihara, 2003). The financial credit facility is offered to the countries to increase their foreign revenue which shall strengthen the purchasing powers of the country, and is able to support the ailing economy through infrastructure development and resource management. As per general rule, the international credit facility is offered to countries having reserves less than estimated amount of three-four months of import bills. However the institutes have explored that "availability of capital flows to offset current account shocks should, on the face of it, reduce the amount of reserves a country needs, but access to private capital is often uncertain, and inflows are subject to rapid reversal" (Jan, 2002). There have been occurrences where the developed and economically capable countries have stumbled, "it is therefore no surprise that the traditional current account approach has been viewed more sceptically in recent years", and there is a growing conviction that emerging market countries with liberal capital accounts require more reserves rather than less, and that we should look to the capital account in determining a countrys need for reserves. Credit History and Regulation The credit regulations have been responsible for active engagements of the financial and non-financial institutions in the markets. The credit regulations have deeply influenced the international standards, and core functions of mortgage lenders. The financial institutions have designed product rules, capital rules and investment towards subordinated bonds. The credit regulations have developed disclosure and registration requirements, many investment plans towards mortgage related securities have been determined through credit regulations. The credit regulation has been responsible for the creation of constructive savings and investment cycles, which prevents "regulatory arbitrage in lending securitization" (Klose, 2005). The credit regulations have been responsible for the development of level playing fields through "capital requirements, true sale definition, tax rules, disclosure requirements". The history of credit is old, but it also started from USA in 1970s, when credit was issued to the American government towards exploration of natural resources in the country. The credit facility was initiated based upon "demographic trends, household income growth, interests rates, availability of financing, foreign direct investment, lack of investment alternatives". The credit regulations were developed during this period to ensure that strict measures are taken to avoid default i.e. through restriction of LTV, loan designs, monitoring of market trends, monitoring of liquidity position, and maintenance of quality of origination process and restructuring act (Klose, 2005). Types of Credit Different types of credits include consumer credit, equity loans etc. The credit is offered in specific forms i.e. either in loan agreements which specify the equal monthly or annual payments or in some cases a large single payment inclusive of payment and interest. The requirements for credit varies, in some cases borrower pledge "certain assets as collateral to guarantee repayment of the loan", however in other cases the borrower has to only make legal commitment to return the money. Consumer credit has been further classified into instalment credit and non-instalment credit. Closed-end credit or instalment credit is credit that requires the "borrower to repay the principal amount in equal periodic payments, usually monthly"; such fixed-payment loans typically provide little repayment flexibility to the borrower. Non-instalment credit includes all other forms other than fixed-payment loans. The borrower is either bind to repay in single payment, or has the provision to make irregular payment. In such case, the borrower has the permission "to borrow additional funds without submitting a new credit application"; such practice is regarded as open-end credit. According to definition, the single-payment loans "require the repayment on a specified date of the entire amount that was borrowed", however the term-loans is based upon practice of periodic interest payments. The open-end credit permits the borrower to withdraw additional funds, as per requirement, however this is permitted as long as the "total outstanding loan balance doesn’t exceed a predetermined limit, known as the credit limit or line of credit". The borrower has the option to reduce the debt by making payments, and has the option of increasing borrowing, without repayment of previous credit amount. Such practice is essentially practiced in the case of developing world economy, where the repayment position of the country changes with the global, regional and internal situation. As per basic credit principles, "a personal line of credit allows the borrower to draw out funds as needed, generally by the use of special checks/relaxation supplied by the lender. The checks can be used to pay for goods and services or deposited into the borrower’s checking account. The line of credit permits the borrower to obtain and repay funds at her convenience, subject to the line’s maximum amount. Interest charges are based on the amount of the outstanding balance and the length of time the funds remain unpaid". The IMF and World Bank have developed their policy based upon this principle, where the lender has the right to adjust and revive the repayment period and interest rate. Requirements of International Credit The international credit is offered against variety of new products, which shall be essential for the global clients. In many cases, different economic agencies have offered assistance of developing countries for the establishment of industrial infrastructure, therefore the nature of international credit is client driven, and it can be hard-cash, bonds, mutual funds or material. The facility of international credit is offered to nations and groups which are familiar with specific business, for which the lending is requested. As per economists, it is important that the international customer shall realise the significance and repercussions of the business and environment, for which international credit is being provided. In different instances, it has been observed that international financial institutes including World Bank, International Monetary Fund, Asian Development Bank, Islamic Development Bank, Beretz and Paris Club etc. are the prominent credit providing facility. Such institutes have previously offered trillions of dollars to different parts of the world i.e. from South Asia to Africa, from Central Asian countries to South East Asian countries (Levis, 2004). The world economy has experienced extreme shortage of credit. The episode started in the 2007 and has now turned into mammoth. The economy condition was declared worrisome when most of the American based banks were declared bankrupt. The money which was lent to others for investment was invested in areas having low return, investment worth billions, turned into profits worth millions. The credit crisis reached its extreme, when the European economy including Iceland and Hungary declared them bankrupt, the UK economy was on the brink of bankruptcy. Rise of International Credit Such agencies have provided "excellent vehicle to recognize and reemphasize that international credit management is a very specialized area of knowledge critical to business; adding professionals credibility within the company and the industry, it is respected in other cultures as well". The intent of international credit is to "improve cash flow for global manufacturing, distribution and service companies". The international credit facility is available based upon the capability and potential of the client. International credit is always available after "initiation of tactical and strategic processes, guided management to evaluate the market place and competition, established personnel performance measures, utilized budgeting and forecasting tools" (Harrison, 2001). International credit agencies have developed "best practices strategies, reorganized departments, and re-defined and authored desk procedures for worldwide operations". International credit facility is involved in "provided guidance to several multi-billion dollar companies in the recognition of economic, country, and cultural issues fundamental to selling products and services internationally" (Brown, 1995). Function of International Market In international financial market, the foreign reserve of the specific country or company is critical as it exposes the countrys ability to overcome economic and financial downfall. Such downfall and crisis situation have been studied by the money lending agencies. In this regard, the international credit lending agencies have focused upon "the strengthening of surveillance and improvements in armoury of lending instruments" (Dejan, 2003). The international lending agencies have focused upon "policy areas that can leave a country vulnerable to crises", inclusive of management of reserves, macroeconomic policies, exchange rate regimes, financial sector soundness, and debt management (Shah, 2002). International credit facility is provided on conditional grounds, such conditions emphasises over the need for "greater transparency, including the publication of many IMF staff reports on national policies and prospects, and proliferation of international standards and codes of conduct in different policy areas, monitored in their respective areas of expertise by the institute and other relevant bodies"(Harald, 2000). It is hoped that the simulation of effective economic policies along with the reduction in the uncertainties within the market shall support countries to controlled access to the capital required, at lower cost. The intent of the credit agencies is to predict crises, and this requires development of the warning system, based upon substantial methodology. The International Monetary Fund has developed an International Capital Markets Department, the intent of this department is to gather and analyze information (Guinet, 2001). This forum includes presentation from private sector financial institutions through consultants. According to research, different credit lending agencies have introduced "greater financial incentive to adopt crisis-resistant policies by offering those that do Contingent Credit Lines to protect them from contagion effects"; such developments are being regarded as important innovations introduced by the agencies (Klose, 2005). Credit: Distribution of Wealth to Debtors, Investors and Policy Makers The agencies are involved in different schemes including stress tests to verify the adequacy of reserves. Such a scheme is supportive for the estimation of "potential variations in line items within the balance of payments in different scenarios". The stress test is applicable where the foreign reserves are equal to short-term debt such that "when the current account is in balance and there is no capital flight by residents, this is the level of reserves that would allow a country to hold out for a year in honouring all its debt obligations, if there are no new capital inflows and if creditors refuse to roll over maturing debts"(Vidal, 1997). Iranian Economy: Credit Crunch According to reports, Iranian economy is in acute shortage of credit. The country has been experiencing issues for the credit arrangement towards its expenses. The countrys consistent policy towards establishment of nuclear program has placed the countrys credit standing at stake. The country has been experiencing difficulty in the issuance of letter of credit from important financial institutions of Asian and global market. The Iranian government has always been referring to World Bank and IMF for credit funding, however after developing severe relationship with American government, the country has been ignored by the American influenced - credit lending agencies i.e. World Bank and IMF. The country has switched to EU for economic assistance, "Iranian companies had been trading in Euros, or currencies preferred by customers including the Japanese yen or United Arab Emirate dirham, though most payments were made in Euros, securing euro-denominated LCs for Iranian receiving banks was getting increasingly difficult". Major European banks including Deutsche Bank Group are reluctant to join hands with Iran, and have refused to offer credit to the country for any purpose. According to reports, "major banks in Singapore, Hong Kong and China have declined to stand guarantee due to the uncertainties in Iran’s political and economic climate". The acute shortage of credit and global economic recession has influenced the oil prices, and this has been another setback for the oil-rich country, less revenue generation and more import bills. According to different sources, "the issue of securing credit has become one of the most de-motivating factors to work with Iranian companies". Conclusion The financial corporate has also revised some schemes and incentives which are particularly aimed at the promoting health services to the poverty stricken regions, the World Bank has developed a forum in collaboration with different governments and the pharmaceutical companies, and the purpose of the exercise was to resolve the health concerns of the region. The most important aspect of the project is that the program does not request special funding from the government, except for the certain approvals from the government, the entire project is funded by the financial corporate and industries, whereas after the plant and industrial units are operational it is excepted that the companies will be able to secure economic gains and profits that is expected to be achieved through the available purchasing power of the poor population (Emilio, 2005). The purchasing power of the local population is available, and is not at all supported by the government; therefore the World Bank has relied on the worst possibility and has assured the success to different companies and industrial units (Nell, 2004). It is also expected that the investment made through the platform of the financial corporate will cause employment opportunities, and will account for the further reduction of poverty in the region. The World Bank is renowned and well sponsored financial corporate has been previously involved in different exercises in which it has offered low interest loans to the third world countries (Robert, 2002). The World Bank has emerged as a financial corporate based on versatile services, it has been successful. The World Bank was the first financial corporate which was able to gather and transmit enough information about the markets, having enough potential and opportunities, left for exploration. The World Bank does not only carry information about these markets but also carries enough experience with viable business strategies (WRI, 2006). The essence of the project has been derived through continuous market based approaches that have been applied on the project towards the welfare of the poor population, the strategy has warranted far more attention in the development community (WRI, 2006), the initiative is responsible for the active involvement of the basis of the economic pyramid into the formal economy, and is further responsible for the improvement of the essential services to this large population segment (WRI, 2006). References 1. World Resources Institute. International Finance Corporation. The Next 4 Billion. Market Size and Business Strategy at the Base of the Pyramid. Executive Summary. World Bank Publication. 2006. pp. 79 2. Nell Minow, Robert A.G. Corporate Governance. Blackwell Publishing. 2004. pp. 207 3. Sunil Mani, Anthony Bartzokas. 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