The global financial and economic meltdown has created a new world with its own array of threats, opportunities and sustainability factors which call for fresh thinking to capitalize new horizons, damage control and preempt fallouts.
Perhaps, it calls for revisiting of the banking and finance institutional aims, objectives, organizational functional and operational and governance architecture.
It is a general perception that Asia’s banking and financial industry was adequately insulated from the Western financial system. Asian countries banking and finance sector has effectively avoided the subprime mortgage crisis as against the Western countries.
Contrarily many Asian countries have witnessed rapid growth during the period that resulted in enormous investments in Western countries and reciprocally Asian countries have received enhanced foreign investment from the West.
However, the global financial and economic crisis has shown that in an inter-connected globe, the financial and economic turmoil has a grounded transmission mechanism that transmits the effects.
The above scenario calls for reviewing Asian banking industry strategies for medium to long-term sustainability and expansion imperatives. Therefore, it would be wise on the part of the Asian banking industry to look into following areas and review strategies as need be:
Asian banking industry is oligopolistic rather than competitive; the industry has converged to products that offer highest returns. The existent major barriers to entry need to be eased out by the respective central banks so as to bring diversity in the industry’s players; this will trigger needed innovation in terms of products and services and cost effectiveness.
A belief in irrelevance of nationality of ownership associated with financial institutions needs serious review and calls for limiting profits repatriation to parent institutions.
The efficient free market hypothesis is now a proven fallacy, the herding behavior in banking industry needs to be curbed. Individual banks alongside central banks will do well if they persistently carry out operational research to ascertain market trends and changing economic dynamics of their respective countries and adjust their strategies and monetary policy interventions accordingly.
Climate change is the next global phenomenon, which in macroeconomic terms has entered as a factor in addition to capital and labor. The cost impacts from extreme weather events and greenhouse gas emissions have emerged as risk factors in pricing securities, credit and asset valuation. Some of the leading Western banks have started to factor a market price for carbon dioxide in their lending and investment decisions. Asian banking and finance industry needs to incorporate this new factor in their investment decisions and embed this factor in the costing of financial products and services.
The global trade is in for a bumpy ride and may eventually stabilize at a level that may not prove a perpetual source of respective emerging economies vigor, this situation directs inward looking domestic market strategies and regional economic consolidation. Financial institutions enhanced penetration in the real sector is no more an option.
Research has revealed that provision of better access to financial services to the poor provide fillip to economic growth and increased savings and investment in poor households as well as in small and medium enterprise. Considering the global economic and financial scenario, Asian banking industry should vigorously pursue a financial inclusion objective in order to maintain their domestic economy’s resilience. In the context of financial inclusion, microfinance model has to undergo a radical change and switch from debt based mode to investment mode (partnership with the poor) that will effectively take care of flip side of the microfinance model.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Azam Ali is Ex.Senior Economist at State Bank of Pakistan. He is an Economist, Management, Organizational Capacity Building & Training and Organizational