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CHAPTER 6 : ISSUES IN INTERNATIONAL BANKING (SUBPRIME CRISIS (HISTORICALLY…
CHAPTER 6 : ISSUES IN INTERNATIONAL BANKING
🎞 INTERNATIONAL BANKING EVOLVEMENT
: :pencil2: The banking industry has been undergoing major consolidation in recent years, with a number of global players emerging through successive M&A
:pen:For instance, another form of international banking is the agency. The agency constitutes an intermediate form of extension, between representative office and branch.
:fountain_pen: Another form of presence is the indirect installation i.e. natural presence in the foreign country by collaborating with local institutions.
: :star: The form that this collaboration could take care:
:check: Connected bank
:check:Off Shore Banking
:check: Consortium bank
:check: Cross-Border Banking
: :checkered_flag: As at all private firms, a bank's main objective is to maximize shareholder value, often replaced by return on equity
SUBPRIME CRISIS
ROOTS OF THE SUBPRIME CRISIS :explode:
:warning: Number of theories as to what led to the mortgage crisis
:warning: Many experts & economists believe it came about the combination of number of factors in which subprime lending played a major part.
HOUSING BUBBLE :explode:
:star: Is an economic bubble that occurs in local or global real estate markets.
:star: By rapid increases in the valuations of real property until unsustainable levels are reached in relation to incomes & other indicators of affordability.
HISTORICALLY LOW INTEREST RATES :explode:
:warning: Many economists believe that the US housing bubble was caused in part by historically low interest rates.
:warning: Housing bubble was fundamentally caused by the decline in real long-term interest rates.
:warning: Mortgage rate typically are set in relation to 10-year treasury bond yields which are affected by federal funds rates
:warning: The higher home values bring to the overall economy
HOUSING MARKET CORRECTION :explode:
:star: There would be a housing market correction because of the over-valuation of homes during the bubble period.
:star: Estimates ranged from a correction of a few points to 50% or more from peak values.
THE RISE OF SUBPRIME LENDING :explode:
:star: Subprime borrowing was a major factor in the increase in home ownership rates & the demand for housing during the bubble years.
:star: The borrowers behind these mortgages typically will have clean credit histories but the mortgage itself generally will have some issues that increase its risk profile.
:star: The number of subprime loans rose as rising real estate values led to lenders taking more risks
:star: These issues include higher loan-to-value & debt-to-income ratios / inadequate documentation of the borrower's income
DECLINING RISK PREMIUMS :explode:
:warning: This means that the risk premium required by lenders to offer a subprime loan declined.
:warning: The decline of the risk premium led to lenders considering higher-risk borrowers for loans.
Asian Financial Crisis
Introduction: two assumptions that could explain the causes of the Asian economies, currency and financial crises of 1997-1998
Sudden shift in market expectations and confidence were the key sources of the initial financial turmoil, its propagation over time and regional contagion.
Fundamental imbalances caused the currency and financial crisis in 1997. Once the crisis started, market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions.
The Root of the Asian Crisis
Corporate level: political forces to maintain high rates of economic growth had led to a long tradition of public guarantees to private projects
Structural distortions in the pre-crisis Asian financial and banking sectors including:
a. Lax supervision and weak regulation
b. Low capital adequacy ratios
c. Lack of incentive-compatible deposit insurance schemes
d. Insufficient expertise in the regulatory institutions
e. Distorted incentives for project selection and monitoring
f. Outright corrupt lending practices
g. Non-market criteria allocation
h. Semi-monopolistic relations between banks and firms had restrained price signals
regulatory inadequacies and close relations between public and private banking and financial institutions.
with fin and industrial policy trapped within widespread business sector netwrok of personal and political favouritism and governments that are appeared willing to intervene in favour of trouble MNCs
such forces and beliefs represented the foundations of a sustained process
In 1997, 7 of 30 largest conglomerates considered bankrupt because of investment rates and capital inflows in Asia remained high even after the negative signals sent by the indicators of profitability
this is happen due to interest rate fall in industrial countries such as Korea and Japan which it lowered the cost of capital for MNCs and motivate large financial flows in to Asian countries
All of these factors contributed to build up of severe weaknesses in the undercapitalized financial system
ISLAMIC BANKING ISSUE
PRICING FORMULAS FOR ISLAMIC FINANCIAL PRODUCTS
include shariah concept
addressed mainly trough pricing
financing operation involve accommodation
MODUS OPERANDI OF FINANCIAL INSTRUMENTS AND DOCUMENTATION
difficult standardized format on documentation
daily practices from institution to institution
there has to be some measure of standardization
VOCABULARY OF ISLAMIC BANKING
hinder popularization of islamic banking
no standardized terminology
selective interpretation Arabic term
different international banks use different term
STANDARDIZATION
term used
islamic documentation
pricing formulas for islamic financial problem
ISLAMIC BANKING ISSUE
:bird:
:panda_face: Public Awareness
:pencil2: the pace of development of Islamic banking can be expedited through the following:
:bulb: public education and awareness campaigns
:bulb: inclusion of Islamic banking concepts in school curriculum
:bulb: making Islamic financing course a part of business administration program
:bulb: offering full-fledged undergraduate programs in Islamic financing
:pencil2: the Islamic product concept is feasible
:panda_face: Training of Banking Professionals
:<3: lack of qualified manpower is one of the biggest hurdles in the advancement of Islamic banking
:<3: pioneers in Islamic banking developed their financial instruments and thoroughly trained their staff
:<3: in Islamic banking industry, the nature of financial instruments will affect banking in two ways:
:check: Islamic bankers will be forced to adopt an outreach approach in pursuit of economic applications of funds in the marketplace.
:check: follow-up of financing, such as delivery matters in trade-based financing or monitoring Musharakah financing
:check: the need for aggressive marketing of Islamic financial products and the follow-up considerations will add a new dimension to training programs for Islamic bankers
:panda_face: Shariah Audit instead of Reliance on Shariah Supervision
:rose: the Islamic banking model emerged as 'banking under Shariah supervision'
:rose: this was done through the delegating authority for the Shariah matters to the respective Shariah Boards, absolving Islamic bankers of their responsibility in Shariah violations
:panda_face: Finance Gap between Islamic Banks and Small Medium Enterprise (SMEs)
:star: a finance gap can be detected when one take a careful look at the existing relationship between SMEs and Islamic banks
:star: throughout a study conducted by Mohammed several factors were identified as contributing to the phenomena of 'finance gap' or also known as the grey zone within the SME sector
:tada:
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