The Performance of Financial Institutions in Emerging Economies
Financial institutions play a crucial role in providing accessible and cost-friendly monetary funding to leverage individual and community financial needs. Such institutions as credit firms, banks, and the financial regulatory authorities should work together to provide financial access that benefits the needs of their customers. These institutions should focus on incorporating suitable financial services that enhance the public’s access to credit funds. As such, identifying better management programs that financial institutions may adopt in their service delivery is crucial in consolidating the performance of banking and credit institutions in emerging economies for standardized service delivery.
Question 1.a
Necessary Preconditions for Consolidating the Performance of Domestic Financial Institutions in Emerging Economies
The domestic financial markets of emerging economies constantly struggle with several management issues. As such, implementing better technologies will address major operational issues undermining their ability to incorporate better integrated financial management systems. Such technologies would help improve the institutions’ financial accountability needs (Bogaert et al., 2019). The players in the financial markets of developing economies should, therefore, embrace structural changes in their operational procedures by incorporating tech-savvy technologies to enhance their service delivery and operational functions. These initiatives should target information processing functions to eliminate financial mismanagement, fraud detections and ensure transparency and accountability in the monetary markets. The choice for the growing economies to adopt better digital systems in managing credit services will also help the domestic financial firms link their services worldwide (Bogaert et al., 2019). As such, these institutions will effectively trade in the international stock markets and face minimal financial risks associated with global operations. As a result, the international financial markets will support credit firms in emerging economies to effectively manage their financial decisions for improved service delivery.
Deregulating middle economies’ financial services is also a suitable alternative of ensuring effective consolidation of the upcoming economies’ banking services. For instance, enforcing unnecessary regulatory rules on the operations of the banking industry is commonly known to encourage an institution’s overreliance on conservative financial procedures undermining the success of credit firms (Rodriguez et al., 2019). For several years, the monetary services of the upcoming economies have been exposed to stringent rules regulating their lending and depositing activities and even restricting their access to global financial markets (Aras & Ozturk, 2018). These rules limit the expansionary goals of credit firms and instead deregulating the banking sector would enhance their competiveness within the national and international levels. For instance, it would be necessary for the government authorities of the emerging economies to engage central banks in removing ceilings and restrictions on current account interest rate payments. Such actions will aim to provide multiple cheap sources of financial funding that credit firms may use to expand their operations across the global market (Aras & Ozturk, 2018). The unregulated monetary markets will create financial links between the financial and non-financial economic players creating a collective market participation aimed at reducing the volatility of business profitability. This is likely to help credit firms manage constant cases of interest rate fluctuations.
Financial firms trading within the emerging economies may also consider opening their financial markets to the global monetary associations. Middle economies’ access to foreign markets, for instance, will also play a key role in enhancing the competitiveness of their domestic credit firms. These firms will be exposed to global pressures encouraging them to align their service delivery to match the standards of the international banking industry. As a result, domestic institutions in emerging financial markets will find an opportunity to reorganize their capital structures, operational procedures, and service delivery processes to meet their desired profitability goals. Finally, to consolidate the domestic credit and equity firms’ operations in emerging markets, the banking sector should advocate for a change in the corporate behavior of financial institutions by putting more emphasis on shareholder value. With a focus on stakeholder interests, domestic credit firms will trap the investor switches associated with unattractive bank services (Teixeira et al., 2018). Therefore, adopting these approaches will help protect the interest of financial firms, statutory powers, and shareholders supporting the growth of financial industry.
Question 1.b
Strengths and Weaknesses of Sample Financial Systems
To assess the strengths and weaknesses of emerging financial systems, I consider evaluating the strengths and weaknesses of Real-time gross settlements (RTGS) and the online banking and telebanking systems which have been massively adopted across the international financial markets. A real-time gross settlement system is a modern integration of banking procedures enabling an instant and complete settlement of funds from any location and from one bank to another based on an individual’s order (Aras & Ozturk, 2018). Such transactions are promptly processed at the request of customers, thereby minimizing delays. RTGS presents several benefits for managing the services of financial institutions. For instance, the service is readily available for financial institutions’ clients, ranging from business entities and individualized persons. These persons can efficiently perform real-time transactions instead of relying on fixed bank timings to transfer funds. The system is also paperless, and an automatic process key is saving the fund transfer’s time of transactions.
This system is also effective in ensuring the safety of interbank fund transfers by removing delays that may be associated with such fund transfers likely to attract fraudulent acts. However, the system is restricted to a range of fund transfers. For instance, it is preferred to disburse large amounts of money between parties or corporate entities. As such, it does not support the transfer of money below the minimum or above maximum required limits. The services of RTGS are also provided at heavy fees and charged in a progressive manner. Therefore, the system can be expensive to investors and bars one from accessing its usage based on the minimum and maximum set transaction requirement limits. However, the system of online banking and telebanking involves the adoption of internet platforms to connect to banking sites to process bank transactions (Aras & Ozturk, 2018).The system has played a role in addressing the risks of handling cash, including the danger of misplacing money and the risk of hijacking in pursuit of stealing money. The system also provides a quick form of fund transfer and guarantees financial accountability with online short codes supporting any online transaction. On the contrary, the system exposes banks and their clients to cases of online financial fraud, undermining its effectiveness as a safe and secure form of the banking system.
Question 2
Explaining the Low Sovereign Debt Ratings of Brazil and Turkey in Comparison to China, India, and Mexico’s Sovereign Debt Ratings
Several factors are attributable to Brazil and Turkey’s reduced sovereign debt ratings in comparison to Mexico, India, and China’s high debt ratings. The government’s income and the per capita income of the economies of Brazil and Turkey are largely dependent on the gross domestic product due to their low engagement with international trade compared to countries such as China, Mexico, and India. As a result, Brazil and Turkey manifest high domestic expenditures with few cases of foreign-dominated debts (Teixeira et al., 2018). These nations present high solvency to short-term debt obligations. In contrast, large economies dominated by foreign debts possess high insolvency in responding to their short-term obligations. They, therefore, consider deferred debt payment as an alternative to paying to honor their sovereign debt obligations. Therefore, these nations are more common with high sovereign debt ratings compared to emerging economies such as Turkey and Brazil, which possess the ability to meet their short-term debt obligations.
China, Mexico, and India’s overreliance on international trade as a source of their vast revenues positions them to have stronger bargaining power on their debt payments. As such, these countries are more likely to default or defer their debt payment obligations with little or no financial repercussions. On the contrary, such countries as Turkey and Brazil that have little bargaining power on the global market funding are more responsible in paying their sovereign debts. For instance, these countries’ failure to honor their loan obligations may force their foreign creditors to consider seizing their assets in other foreign countries. These nations may also be barred from accessing foreign loans in the future. Finally, their reputation in the international trade environment may be undermined, leading to their little access to cross-border trade (Bogaert et al., 2019). To mitigate such harsh consequences, the less dominant nations within the global trade arena, such as Brazil and Turkey, will be forced to repay their loans to maintain their relational trade ties. The differences in the inflation rates between Brazil and Turkey compared to those of Mexico, India, and China are also crucial explained by the variations in the sovereign debt ratings between these countries. The high inflationary rates manifested in emerging economies such as Brazil and Turkey demonstrate their high involvement in the payment of foreign debts. Debt payment-related cases of inflation, such as high interest rates are common economic variables that undermine the performance of upcoming economies. These nations further commit their tax collection income towards meeting their public debt obligations. As a result, tax and interest rate expenses are major inflationary factors attributable to emerging economies’ attempts to maintain their sovereign debts at low levels.
On the contrary, the developed countries like China often impose restrictions on foreign currency debt payments. These nations often prefer to pay their borrowings from their debt reserves, contrary to the emerging economies that rely on tax remittance as a funding source to repay their debts. Chinas routineness to pay its debts from the debt reserves is realized fairly. Such cases are similar with other advanced nations. Therefore, these nations fail to honor their public debt obligations rendering their sovereign debt ratings to be high compared to the developed nations. The default history between emerging and developed nations could also help explain the differences in their sovereign debt ratings. The sovereign debt ratings, at times, are more subjective than being objective. As a result, an economy’s rating by the public debt authorities may be attributed to a nation’s defaulting history other than its realistic financial debt position. For instance, such advanced economies as China, India, and Mexico may presumably assume high debt ratings due to their previous high international trade involvement forcing their public debt obligations to remain high (Aras & Ozturk, 2018). However, developing economies such as Turkey and Brazil, with a record of high commitments to debt payment, may have low sovereign debt ratings in line with their historical records. Such differences are evidenced in constantly reported variations in nations’ rating levels presented by several sovereign debt authorities. In most cases, these economies present sovereign debt levels lower than the actual values. Such variations may also emanate from the variation in the scaling systems adopted to measure sovereign ratings. The results of these measures may put the repayment levels of an economy in a better position than the other.
Compared to those of China, India, and Mexico, the corruption rates between Turkey and Brazil further depict the differences in these countries’ sovereign debt ratings. Brazil and Turkey’s low level of corruption cases positions the two nations to embrace a culture of the debt payment. Such proactive efforts to pay the state’s borrowings enable them to keep external debts at low level. These nations, therefore, can support their economic development with little financial constraints, which further attracts their low-interest payments on sovereign borrowings. On the other hand, Mexico, China, and India are governed by a corporate culture more conducive to corrupt deals. These nations are slow at responding to their public debt payments. With constant debt defaults, deferred payment plans, and engaging in financial schemes of delaying debt payments, the economies of these nations are more exposed to colossal interest rate expenses and debt fines, undermining their economic development. As a result, their debt burden is increasingly rising. The high corruption index is depicting their low rate of development, which undermines the quality of life of the citizens and the impossibility for future generations to honor the state’s sovereign debts.
Question 3
Fintech’s Contributions to the Availability and the Lowered Credit Costs for Family and Business Persons
In my opinion, Fintech can improve availability and lower credit costs for people and corporate entities in emerging economies. It may enhance access to credit funds to the minority segments of the population. For instance, Fintech has enhanced individual access to numerous financial services by focusing on the factors of financial inclusion, such as credit penetration and access to financial deposits. Such platforms aim to access a particular group of customers, such as small business enterprises and individuals with low incomes (Yalta & Yalta, 2018). The initiative also focuses on establishing better financial policies to evaluate the effectiveness of the financial inclusivity of less empowered persons (Hemmen, 2019). These frameworks have ensured that Fintech improves the effectiveness of financial intermediation by providing innovative banking services that support the financial needs of both small and medium enterprises and individuals persons. These solutions are digitized and address the negative implications of the conservative nature of most financial institutions. Fintech, for instance, advocates for the provision of full-time digital banking to ensure its services are constantly available to the public.
The technology also provides easily accessible depositing and withdrawal points to ensure customer access to its services (Varsaba & Zaslavska, 2020). To ensure affordable banking services, Fintech solutions increased its credit services alongside providing a diverse range of banking products such as investment options, insurance services, and risk mitigation services. These services are unique and target individuals from different social rankings to encourage financial inclusivity. The foundation further aims to provide formal training to help small and medium enterprise owners acquire professional skills to help them manage their businesses. The initiative also championed for the registration of the rural populations to electronic bank accounts with the aim of engaging the account holders to use the bank accounts for receiving payments and managing their business deposits (Thermaenius & ostling, 2018). These initiatives aimed to improve the economic status of the impoverished among the community by helping them acquire better social services like the rest of the other high social class persons.
Fintech innovation also focuses on identifying other banking-based challenges that the larger community could be facing. Once such issues are discovered, the initiative identifies necessary technological solutions that can help address those needs. For instance, launching a mobile banking service for the public’s use is a typical consideration adopted after assessing the accessibility of mobile devices among disabled members of society. The invention of the Fintech banking system also enhanced consumer and investor protection by setting a regulatory commission that would foster training among individual and businesspersons. This body would ensure that all the interests of bank holders and small business owners are protected for creating a financially inclusive community. The innovated solutions provided by Fintech are, therefore, aimed at increasing the access of credit services to all persons of social ranking thereby encouraging financial inclusivity.
Therefore, identifying better management programs that financial institutions may adopt in their service delivery plays a crucial role in consolidating the performance of banks and credit institutions in emerging economies for standardized service delivery. These firms should adopt better strategies to consolidate their engagement in quality service delivery to improve the preexisting trade challenges. Such improvement actions would include embracing structural changes in credit firms’ procedures by incorporating tech-savvy technologies, including Real-time gross settlements and online banking and telebanking systems for enhancing efficient operations. It would also be necessary to deregulate middle economies’ financial service providers and advocate for a change in the corporate behavior of these institutions to focus on improving shareholder value. The proposed strategies will help these economies boost their sovereign credit ratings, which can be evidenced in the income and per capita income, inflationary level, and the economies’ rate of defaulting to pay public debts rates. To further assess the effectiveness of the credit firms’ choice to adopt better management and operational strategies, Fintech’s digital banking solution can be adopted as a benchmark for evaluating the outcomes of a financial firm’s service delivery. This innovation is preferred for its contributions in availing and lowering credit costs for family and business persons. The initiative is also effective in enhancing the public’s access to credit funds and establishing better financial policies to protect the interests of customers. Finally, the innovation of Fintech is crucial in encouraging full-time banking services while mitigating customer investment risks.
References
Aras, O. N., & Öztürk, M. (2018). The Effect of the Macroeconomic Determinants on Sovereign Credit Rating of Turkey. MPRA Paper. https://ideas.repec.org/p/pra/mprapa/86642.html
Bogaert, M., Lootens, J., Van den Poel, D., & Ballings, M. (2019). Evaluating multi-label classifiers and recommender systems in the financial service sector. European Journal of Operational Research, 279(2), 620-634. https://ideas.repec.org/a/eee/ejores/v279y2019i2p620-634.html
Hemmen, N. (2019). Fintech & Financial Inclusion. [Master’s Thesis, Copenhagen Business School]. https://research-api.cbs.dk/ws/portalfiles/portal/59796342/638270_Master_Thesis.pdf
Rodríguez, I. M., Dandapani, K., & Lawrence, E. R. (2019). Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings? Financial Management, 48(1), 229-256. https://doi.org/10.1111/fima.12223
Teixeira, J. C., Silva, F. J., Ferreira, M. B., & Vieira, J. A. (2018). Sovereign credit rating determinants under financial crises. Global Finance Journal, 36, 1-13. https://econpapers.repec.org/article/eeeglofin/v_3a36_3ay_3a2018_3ai_3ac_3ap_3a1-13.htm
Thermaenius, V., & Östling, L. (2018). Financial Inclusion in the Age of FinTech: A multiple case study of FinTech companies’ role for financial inclusion in India. [Master Degree Project, University of Gothenburg]. https://gupea.ub.gu.se/bitstream/2077/57254/1/gupea_2077_57254_1.pdf
Vartsaba, V., & Zaslavska, O. (2020). Fintech Industry in Ukraine: Problems and Prospects for the Implementation of Innovative Solutions. Baltic Journal of Economic Studies, 6(4), 46-55. https://doi.org/10.30525/2256-0742/2020-6-4-46-55
Yalta, A. T., & Yalta, A. Y. (2018). Are credit rating agencies regionally biased? Economic Systems, 42(4), 682-694. https://ideas.repec.org/a/eee/ecosys/v42y2018i4p682-694.html
