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University of New South Wales Faculty of Law Research Series |
Last Updated: 10 October 2013
Financial Innovation in East Asia
Ross P. Buckley, University of New South Wales
Douglas W. Arner, University of Hong Kong
Michael Panton, University of Hong Kong
Citation
This paper is to be published in Seattle University Law Review, forthcoming. This paper may also be referenced as [2013] UNSWLRS 69.
Abstract
Finance is important for development. However,
the Asian financial crisis of 1997-1998 and the global financial crisis of 2008
highlighted
the serious risks associated with financial liberalisation and
excessive innovation. East Asia’s strong focus on economic growth
has
necessitated a careful balancing of the benefits of financial liberalisation and
innovation against the very real risks inherent
in financial sector development.
This paper examines this issue, focusing on the role of regulation and legal and
institutional infrastructure
in both supporting financial development and
limiting the risk of financial crises. The paper then addresses a series of
issues with
particular developmental significance in the region: trade finance,
mortgage markets, SME finance, non-bank finance, and mobile financial
services.
I. Introduction
Financial innovation has been defined as both the
“technological advances which facilitate access to information, trading
and
means of payment, and ... the emergence of new financial instruments and
services, new forms of organisation and more developed and
complete financial
markets.”[1] While financial
innovation has traditionally been associated with economic growth and
development, the financial crises of the past
decade have revealed the
significant risks posed by innovations in the absence of adequate regulation. It
is now clear that financial
regulation must balance risk with innovation in
order to maintain financial stability and support economic growth. This
pragmatic
approach to financial regulation was adopted in
East Asia following the Asian financial crisis, and is arguably one of the
greatest financial innovations
of the past decade. It is essential that such an
approach be maintained in East Asia and the West should be encouraged to look
to,
and learn from, the successes in East Asia as it attempts to recover from
the global and European financial crises.
In the two decades prior to
2007, financial innovation was viewed in most countries as a desirable objective
worthy of policy support.
Institutional development was particularly encouraged;
specifically law reform, deregulation, and financial liberalisation. During
this
period, finance in Asia was generally viewed as suffering from a lack of
financial innovation, with repressed markets and underdeveloped
institutional
infrastructure, particularly in the realm of law and regulation.
Since 2007
and the onset of the global and Eurozone financial crises, the general view of
financial innovation has become much more
nuanced. Financial innovation is no
longer seen as universally desirable, particularly as many innovations of the
preceding decades
played a central role in the global financial crisis.
Financial systems that had previously been characterised as suffering from
excessive regulation and insufficient innovation, such as those of Canada and
Australia, performed far better during the crisis than
the highly innovative
financial systems in the United Kingdom and United States. Likewise, while the
financial systems of East Asia
had been viewed as insufficiently innovative,
they suffered relatively minor financial crises by comparison to the United
States
and Western Europe. As a result, views of financial innovation have
changed significantly in a short period of time.
This paper considers the
role of financial innovation in the past, present and future development of East
Asia. It begins with the
question of whether, in fact, East Asia can be
characterised historically as suffering from a lack of financial innovation.
While
East Asia has certainly been the source of many significant financial
innovations historically, it is most commonly seen as having
generally lacked
innovation in the period since the Second World War. We argue that this
characterisation is not entirely accurate
and that, in fact, East Asia has
continued to innovate in finance during this period. At the same time, perhaps
one of its most important
innovations has been an approach to finance that is
both cautious and focused primarily on supporting real economic activity,
particularly
in the wake of the Asian financial crisis of 1997-1998. This
pragmatic approach to financial innovation is largely responsible for
the
region’s resilience during the global financial crises.
From this
background, we consider financial innovation in East Asia’s future
development. Given that finance in the individual
economies of the region tends
to be dominated by large domestic banks which often focus their lending on large
firms, there is a
clear need for alternative sources of funding. This is the
area where financial innovation matters most for East Asia going forward.
Specifically, we identify five areas where East Asia needs to focus on
supporting innovation in order to maintain financial stability
and also support
economic growth and development: mortgage markets, trade finance, SME finance,
non-bank finance, and mobile financial
services. In each of these areas,
innovation based on local circumstances and needs is vital to support financial
stability and growth
across the region.
II. Financial Innovation in East Asia’s Development
Financial market professionals, and various
scholars, have frequently characterized finance in East Asia as being
insufficiently
innovative.[2] Under
this characterisation, East Asia has been a “taker” of financial
innovations from the West, usually receiving new
financial strategies and
techniques third-hand after their development in the United States and
successful spread to Western Europe.
Only at that point have Western financial
institutions and professionals then exported successful techniques to East Asia
in search
of new opportunities for profit. That characterization, however, is
historically inaccurate.
A. Financial Innovation in Asia’s Early Development
The Asian economies, particularly prior to the
industrial revolution in Western Europe, were the source of some of the most
significant
historical financial innovations. Marine insurance and ship finance
came from the Phoenicians, as did, arguably, early forms of venture
capital and
corporations; agricultural futures and paper currency were derived from China;
group lending and insurance pools were
common across the region and likely
originated from China;[3] and bills of
exchange, hawala and covered bonds from the Islamic world and the Ottoman Empire
further exemplify financial innovation
originating from
Asia.[4] As such, it is clearly
incorrect to suggest that Asia, including East Asia, has always suffered from a
lack of financial innovation
and has always been a taker of financial
innovations from Western markets. In fact, many of these innovations, which
originated in
Asia, were central to the institutional framework that supported
and funded the industrial revolution in Western
Europe.[5]
Even in the second half
of the twentieth century, Asia has been the source of a number of significant
financial innovations. Three
examples warrant particular attention: the
developmental state, microfinance, and Islamic finance – all of which are
important
Asian financial innovations.
The model of the developmental state,
pioneered by Japan and exported across the region, comprises the repression of
finance to mobilise
financial resources to support export industries and thus
economic growth and development.[6]
There are very significant limitations to the model, particularly as economies
reach higher levels of development and fuller integration
with the global
economy and financial system. These limitations have been highlighted
dramatically by Japan’s two-decade financial
malaise and the Asian
financial crisis that commenced in 1997. Nevertheless, the model has been vital
to the region’s successful
development. Likewise, the centrality of
finance to the model is clearly an innovation and a very successful and
influential one,
albeit one with important limitations.
Microfinance emerged
from Bangladesh as an Asian innovation and has spread around the
world.[7] It is one of the most
influential developments in finance in the past thirty years. The focus
microfinance puts on lending small
amounts to the poor to support economic
activity and its use of a range of social techniques, such as group lending, to
ensure repayment
is an innovation clearly related to the actual conditions and
needs in the region. Likewise, the region, particularly Malaysia and
Pakistan,
has contributed greatly to innovations involving Islamic
finance[8], which have been exported
across Asia and also to Western
markets.[9]
In addition, other
areas of Asia-Pacific financial innovation include pensions, where Australia and
Singapore are world-leaders;[10]
stored value cards/e-money, where innovations in Hong Kong have spread around
the world;[11] and internet and
mobile banking and financial services, where developed East Asia leads the
world.[12]
While Asia has not
generated as much innovation in the past 70 years as North America and Western
Europe, the region has nonetheless
produced globally significant financial
innovations that have contributed to real economic growth and development. It
is thus clearly
incorrect to characterise finance in Asia as lacking in
innovation.
B. The Limits of Financial Innovation
In an era of globalisation and highly interdependent
markets, finance matters. From the most advanced leading economies to emerging
and developing nations, finance is viewed as a vehicle for development and
economic stability. Supported by a growing body of literature,
a consensus
exists that a well-functioning financial sector is a primary driver of growth.
At the same time, finance – as emphatically demonstrated by the Asian,
global and Eurozone financial crises – is not without
its risks. These
crises have raised important questions about the limits of financial innovation
and development for economic growth
and development. Economic researchers,
Jeanneney and Kpodar, argue that “financial development helps reduce
poverty indirectly
by stimulating growth and directly by facilitating
transactions and allowing the poor to benefit from financial services (primarily
savings products) that increase their income ... and enhance their ability to
undertake profitable ...
activities.”[13] They
conclude, however, that during some stages financial development may
“demonstrably undermine poverty reduction because
the poor are generally
more vulnerable than the rich to unstable and malfunctioning financial
institutions.”[14] Thus,
increases in financial development and activity, and moves to more open markets
may, in some countries, increase the disparity
between the rich and the poor and
positively harm the poor.[15]
While finance is important in the process of industrialisation, an
unbridled financial sector does not necessarily lead to continuing
economic
growth and prosperity. In Paul Volcker’s words, “I wish that
somebody would give me some shred of neutral evidence
about the relationship
between financial innovation recently and the growth of the economy, just one
shred of information.”[16]
While in our view this position is too extreme, at the same time, post-crisis
research does indicate that, in finance, more is not
necessarily better. In an
important recent study, Cecchetti and Kharroubi examined the impact of finance
on growth and development
at the aggregate level and found that mature
sophisticated economies get to a point where greater volumes and sophistication
in banking,
credit and other financial tools become associated with lower
economic growth.[17] Cecchetti and
Kharroubi found that because the finance sector competes with other sectors for
scarce resources, rapid growth of finance
can have an adverse impact on
aggregate real growth.[18]
Essentially, rapid growth of a financial sector can serve as a drag on an
economy and shift resource allocation and distribution
in sub-optimal
ways.[19]
Finance in the most
advanced nations today utilises increasingly sophisticated and complex financial
products, which are not always
transparent and are often difficult to source and
assess. Meanwhile, developing states continue their integration into the global
markets while being challenged by capacity and governance issues. This is the
context for our examination of the benefits of increased
financial activity and
its likely impact on long term economic development. This also highlights East
Asia’s most important
financial innovation since the Asian financial
crisis: a pragmatic and cautious approach to financial innovation and
development,
focusing not on encouraging innovation for innovation’s sake,
but rather seeking to support the needs of the real economy through
financial
stability and economic growth.
III. Financial Innovation in East Asia’s Future
Today’s financial innovations are largely a
by-product of financial liberalisation, which itself was a response to the
financial
repression of the 1970s and 1980s in many developing countries.
Financial repression included state ownership of financial institutions,
government control and distortion of interest rate pricing, and capital controls
to restrict asset transfers.[20]
Such measures came to be seen as questionable given their poor financial and
economic results, inefficient allocation of resources,
and high costs,
especially associated with the proliferation of non-performing loans (NPLs).
Globalisation thus supported the move
to financial
liberalisation.[21]
Liberalisation involves the broad deregulation of financial
markets.[22] This process is
typically accompanied by easier and faster capital flows, decreased regulatory
scrutiny and an increase in the types
of financial instruments used or traded.
Liberalisation tends to lead to increasingly creative and innovative financial
products
that feed investors’ demands for higher
yields.[23] In the wake of the
increasing frequency of cross-border financial crises over the past four
decades, questions have emerged concerning
the relationships between
liberalisation, economic development, and risk. In moving away from financial
repression, liberalisation
– and the rise of privatisation that is
associated with it – is often thought to be a significant driver of
economic
expansion and higher long-run
growth.[24]
While many assert
a positive correlation between financial liberalisation and growth, the
empirical literature is decidedly divided.
Critics have found that external
liberalisation is more prone to producing instability in developing countries,
and generates financial
fragility that can often have severe recessionary
consequences. [25] Further, economic
researchers Glick and Hutchinson found a tendency towards banking and currency
crises following financial
liberalisation.[26] Thus, while
financial liberalisation promotes growth more than does a repressed economy, it
also increases market uncertainty and
the chances of severely damaging
crises.
When a country uses financial liberalisation to promote economic
development, it must take measures to limit instability in markets
and the risk
of financial crises. In developing nations, premature liberalisation before a
strong prudential regulatory structure
is in place can lead to destabilised
markets and crises.[27] Without
adequate regulation and supervision, as economic researchers Arestis and Caner
have shown, financial institutions tend to
take excessive
risks.[28]
These are lessons
that East Asia learned very directly in the Asian financial crisis a decade
prior to the global and Eurozone financial
crises. In East Asia, the Asian
financial crisis triggered a rethinking of both the developmental state model
and the then-prevailing
model of financial liberalisation. The result was a
synthesis focusing on maintaining financial stability and supporting economic
growth. Since the Asian financial crisis, finance in the region has been treated
pragmatically rather than relying excessively upon
market-focused theoretical
approaches.[29] Arguably, this
approach to finance largely explains why the major financial centres in the
region (Hong Kong, Singapore, Tokyo) suffered
so much less from the global
financial crisis than their major Western competitors (London, New York,
Frankfurt, Zurich).
East Asia’s approach was a major innovation in
financial regulation and is even more remarkable as it was dramatically contrary
to the prevailing wisdom. It is an innovation that regulators and policymakers
from around the world have increasingly looked towards
in the wake of the global
and Eurozone financial crises.[30]
This is arguably East Asia’s most important financial innovation in the
past 15 years and it should be accorded a high profile.
Given the significant
Asian membership of the G20 and Financial Stability Board and the region’s
relative success in the area
of financial regulation over the past 15 years,
there are important opportunities for the region to lead global approaches to
financial
regulation.
East Asia’s financial systems span a wide
range of development levels, from world-class international financial centres to
primitive
financial systems. It is thus difficult to address concerns
regionally. Nonetheless, looking forward, East Asia should continue to
adopt its
pragmatic approach to financial innovation, seeking to balance financial
stability and economic growth with market enhancing
policies and institutional
reforms.
Identifying financial limitations across the region will help to
identify areas in which innovation should be encouraged. We have
identified
five areas that should be of central concern for financial stability and
economic growth: trade finance, mortgage markets,
SME finance, non-bank finance,
and mobile financial services.
IV. Trade finance
International trade enhances efficiency and
competitiveness within economies and promotes their economic
development.[31] Trade finance is
essential to support trade, and the region that finances more trade than any
other is East Asia.[32] Some 80-90
percent of global trade transactions are supported by some form of credit
financing.[33] Finance for
international trade transactions is important for leading nations, and
particularly critical for developing and emerging
markets, where both exporters
and importers may be severely constrained by limited working capital.
A. The global financial crisis: Impact on trade finance
The global financial crisis sparked a substantial
worldwide shortfall in trade finance in a global market estimated at US$10-12
trillion
a year.[34] The effects of
this contraction were markedly different in different
regions.[35] South Asia, Korea and
China were particularly affected, with China experiencing a double-digit decline
in the availability of trade
finance during
2008.[36] The G20 responded with its
“trade finance package” in April 2009, which ensured the
availability of US$250 billion to
support trade finance over a two-year
period.[37] The package provided a
much-needed boost, and financiers worldwide responded to the package by making
substantially more finance
available for trade.
Export credit agencies
(ECAs) increased credit insurance and risk mitigation capacity by creating
programs for short-term lending
of working capital and credit guarantees aimed
primarily at small and medium sized enterprises
(SMEs).[38] Within the region, the
leaders of 11 Asian ECAs formed the Asian Regional Cooperation Group (RCG) of
the Berne Union and supported
more than US$268 billion worth of international
trade and investment in 2008.[39]
Regional development banks (RDBs) and the International Finance Corporation
(IFC) responded by significantly increasing the capacity
of trade facilitation
programs.[40] For example, the Asian
Development Bank (ADB) increased the capacity of their program to US$1 billion,
from US$400 million.[41] Central
banks in nations with substantial foreign exchange reserves responded by making
portions of those reserves available to finance
trade.[42] Within East Asia, Korea
pledged US$10 billion of its foreign exchange reserve to supply foreign currency
to local banks and importers
through repurchase
agreements.[43] Indonesia acted
similarly.[44]
The G20 package
ended in 2011. Trade finance market conditions improved continuously over the
two-year period up to this time, with
falling prices and increasing volumes of
transactions, albeit with some volatility around an upward
trend.[45] However, recovery has not
been even across all countries and gaps in trade finance persist.
B. Europe’s withdrawal of trade finance to Asia
Efforts to address the Asian trade finance gap have
been hampered by the ongoing economic crisis in Europe. European banks that
traditionally
provided trade finance facilities in East Asia have severely
limited their extensions of credit so as to improve their capital
ratios.[46] Since 2008, the
proportion of international credit provided by Eurozone and Swiss banks to
emerging Asia-Pacific economies has fallen
from 38 per cent to 19 per cent of
the region’s trade credit.[47]
This retreat has led to a dramatic increase in trade finance prices in Asian
markets.[48] According to Barclays,
“when European banks started to deleverage due to the Euro crisis [in
2011], trade finance pricing in
Asian countries including India and China moved
from 100 basis points to 200 basis points in three
weeks.”[49]
The reduction
in trade finance by European banks has left a funding gap at a time of
increasing demand for trade finance in
Asia.[50] In 2011, a US$1 billion
trade contract between the US and China could not proceed due to the lack of
trade finance.[51] In 2012, Chinese
exports grew by 25 per cent, imports climbed by 28.8 per
cent,[52] and the demand for
trade finance products increased
correspondingly.[53]
Fortunately, Japanese banks and some international banks such as HSBC and
Standard Chartered have stepped in to cover much of the
trade finance gap left
by the European banks. In the past two years, Japanese banks have dramatically
increased their share of large-ticket,
regional trade finance volumes, growing
from 6 per cent in 2010 to an extraordinary 54 per cent in the first quarter of
2012.[54] As a result, Japan became
the largest provider of trade finance globally in 2012, with reported trade
finance volumes of US$16.8
billion.[55]
Despite Japanese
and other nations’ banks stepping in, there is still a trade finance
shortfall in East Asia today, which is
serious given the critical role finance
plays in facilitating trade. The shortfall particularly affects the region
because a higher
proportion of trade is financed in East Asia than other
regions: more than 80 per cent of trade letters of credit are issued in
Asia.[56]
As well as a simple
shortfall of finance, Asian companies have complained that the cost of trade
finance is rising, probably due
to the growing pricing power exerted by the few
banks in the region willing to extend trade
credit.[57] While the top 40
institutions represented 95 per cent of the Asian trade finance market in 2011,
only 20 remained in the market for
Asian trade finance in
2012.[58]
C. Basel III and its Impact on Trade Finance
Apart from the retreat of European banks, the
largest challenge on the horizon lies in the implementation of Basel III –
the
third Accord agreed upon by the Basel Committee on Banking Supervision
(BCBS) -- which aims to improve risk management and governance
within the global
banking sector. While Basel III aims to establish a level playing field across
borders, the regulation is based
on Western experiences and its implementation
will not have the same impact
worldwide.[59] Basel III’s
requirement of larger capital holdings against trade transactions could slow
trade financing in emerging and developing
economies in the Asian region by
substantially raising transaction costs and discouraging trade financing,
thereby exacerbating the
trade finance shortage in the
region.[60]
Most experts
expected that Basel III would considerably increase trade finance pricing
worldwide if implemented in its original
form.[61] After two years of intense
pressure from the banking industry, the BCBS modified the liquidity coverage
ratio (LCR) for trade finance
products in January 2013 and delayed its full
implementation until 2019.[62] The
decision to relax the LCR has been regarded by the industry as positive, however
the longer-term impact of Basel III is still
likely to increase the cost of
financing trade.[63]
D. Potential responses
While the governments and regional institutions in
East Asia have largely succeeded in coming together to ensure availability of
trade
finance, there are still significant steps that can be taken to enhance
the provision of this critical type of finance for the region.
These include
further adjustments to the Basel III rules, deepening cross-border cooperation,
creating a ring-fenced liquidity pool
for trade finance, encouraging
public-private partnerships and co-financing, as well as the establishment of a
regional trade finance
database.
Further adjustments to the Basel III rules
Trade finance rates of default and loss have
historically been very low, even during
crises.[64] In 2009, the
International Chamber of Commerce (ICC) and ADB initiated a trade finance
default register to collect performance data
on trade finance
products.[65] The project’s
data supports the claim that trade finance is much less risky than other types
of credit.[66] Between 2008 and 2010
the ICC Trade Finance Register observed fewer than 3000 defaults in a full
dataset of 11.4 million
transactions.[67] The data collected
determined the probability of loss as just 0.02 per cent in a period of global
economic turmoil.[68]
The
proposed Basel III rules do not come close to reflecting this very low level of
risk involved in trade finance. At present, there
is no differentiation between
trade finance and other forms of financing in credit conversion factors (CCFs)
for calculating the
leverage
ratio.[69] The current rules require
banks to apply a CCF of 100 per cent for all off-balance sheet items when
calculating a leverage ratio.[70]
Under the first two Basel Accords, trade credit attracted a low risk weighting
of 20 per cent because of its low default rates and
because trade finance
facilities are typically secured against the goods or commodities being
financed.[71] The Basel
Committee’s introduction of a flat 100 per cent CCF to certain off-balance
sheet items in 2010 was an attempt to
reduce incentives for
“leveraging”.[72] This
included letters of credit and similar trade finance
facilities.[73] Subjecting trade
finance to a CCF of 100 per cent is excessive given that the objective of the
leverage ratio is to prevent the build-up
of excessive leverage in the banking
sector and yet, as trade finance is underpinned by the movement of goods and
services, it does
not lead to the sort of leveraging that may endanger real
economic activity[74] but actually
supports the real economy.
The leverage ratio in its current form does not
reflect market realities and will significantly limit banks’ ability to
provide
affordable financing to businesses in developing countries and SMEs in
developed countries.[75] In its
report Global Risks – Trade Finance 2011, the ICC identified
numerous ways the leverage ratio proposed by Basel III could adversely affect
global trade and growth.[76]
Examples include encouraging the use of high-risk financial products, increasing
the cost of trade and limiting banks’ ability
to provide affordable
financing to businesses in developing
countries.[77]
At present, Basel
III also uses a standard asset value correlation (AVC) for corporate banking,
imposing a treatment for trade finance
that does not reflect its short-term, low
risk nature.[78] The current rule
requires the AVC to be multiplied by 1.25 in respect of exposures to financial
institutions whose assets exceed
100 billion US dollars and to exposures to all
unregulated financial institutions, regardless of
size.[79] The increase in AVC
applies to all sources of credit risk
exposure.[80] The rule is based on
the assumption that such exposures present greater systemic risks or default
correlations than others.[81] This
assumption ignores the fact that trade finance rates of default are dramatically
lower than the rates of default in other banking
sectors.
While Basel III
subjects corporate banking to a blanket AVC, consumer banking is granted several
product specific default curves.[82]
Under Basel III, separate AVCs are applied to retail mortgages, credit cards and
other retail exposures.[83]
Corporate banking products should likewise be distinguished from one another to
accurately reflect their level of risk. Applying
a standard AVC is likely to
increase the cost of providing trade finance, and may prompt smaller banks to
pursue other, more profitable
areas of
banking.[84] This could particularly
affect emerging markets.
Recent changes to the LCR under Basel III came
about after sustained pressure from the trade finance
industry.[85] At present, making
further changes to the rules may be difficult for the Basel Committee given
public sentiment towards banks.[86]
Furthermore, the Basel Committee is faced with the challenge that concessions
for one type of financing may encourage others to make
such
claims.[87] Nevertheless,
statistical information demonstrates that trade finance is far less risky than
other forms of finance and provides
a strong case for the industry to continue
lobbying the Basel Committee to modify the Basel III
rules.[88] Without changes to the
leverage ratio and AVC, it is highly likely that the price of trade finance will
increase, with damaging consequences
for trade and growth globally, and
particularly in East Asia.
Deepening cross-border cooperation
Deepening regional cooperation on trade finance
would be beneficial to all
parties.[89] By pooling resources
and expertise, East Asia would be better equipped to tackle bottlenecks in trade
financing.[90] The cost of providing
trade finance would also likely
decrease.[91] Cooperation within the
region would reduce reliance on foreign finance, which tends to be heavily
procyclical and often
destabilising,[92] as is seen in the
current trade finance gap caused by the retreat of European banks from Asia.
In March 2012 the Export-Import banks of the BRICS (Brazil, Russia, India,
China and South Africa) agreed to extend credit facilities
to each other in
local currencies.[93] It is expected
this move will reduce the demand for fully convertible currencies for
transactions among the BRICS, which should help
to reduce transaction
costs.[94] The initiative will also
assist to shield the BRICS from the Eurozone crisis and boost trade despite the
slow growth of developed
country
markets.[95]
As the Eurozone
crisis continues, it is likely that European banks will continue to withdraw
credit from the region. Strengthening
the regional network of export-import
banks and development finance institutions within Asia, and entering into
agreements similar
to those of the BRICS to extend credit to each other in local
currencies, would greatly assist the region. Deepening cross-border
cooperation
within Asia will reduce the cost of trade finance within the region, tackle
current trade finance bottlenecks and help
to insulate Asian economies from the
crisis in Europe.
Despite the benefits that could be derived from regional
cooperation, previous initiatives to improve financial cooperation within
Asia
have not always succeeded. In 2010, Australia’s idea of establishing a
trade finance network within Asia was not supported
by other members of the East
Asia Summit.[96] Nonetheless, the
creation of a trade finance network within Asia is something that regional
countries should continue to pursue.
Its potential benefits to the region, given
the ongoing demand for trade credit in the region, would be substantial indeed.
Creating a ring-fenced liquidity pool for trade finance
Since the global financial crisis, banks have become
more risk averse and prefer to work with large, sound multinational
firms.[97] SMEs and new exporters
have been especially vulnerable to the tightening trade finance conditions as
they typically have a weaker
capital base and bargaining power in relation to
global buyers and banks.[98] Firms
in developing countries with underdeveloped financial systems and weak
contractual enforcement systems are particularly affected
by a lack of
affordable trade finance as they need it the
most.[99]
Establishing a small,
targeted liquidity pool run by international financial institutions would be
useful to assist smaller segments
of the market that are more vulnerable to the
contraction of trade credit.[100]
After the global financial crisis, much of the increased liquidity support
provided by central banks was used to ease money market
conditions and improve
liquidity ratios.[101] As a
result, trade transactions did not benefit greatly from the liquidity
support.[102] Creating a
ring-fenced liquidity pool for trade finance would ensure that adequate funds
remain available to assist trade by SMEs
and new exporters, even during times of
crises when banks may prefer to direct funds elsewhere.
For banks, the
downside to ring fencing is that liquidity is prevented from being used for
other purposes at times when the other
purposes might be more
pressing.[103] Large cross-border
banking groups benefit from the efficiency of holding liquidity centrally and
directing it to locations where
it is most
needed.[104] This process is more
cost-effective than ring fencing
liquidity.[105] Nonetheless, any
disadvantages of a ring-fenced liquidity pool for trade finance would be far
outweighed by the benefit of ensuring
that trade finance is still available for
SMEs and new exporters when economic crises occur and trade finance conditions
tighten.
The global financial architecture needs to reflect that the finance of
trade is probably the most important form of finance for the
real economy.
Encouraging co-finance between the various providers of trade finance, including public sector-backed institutions
The private sector provides the majority of trade
finance. In 2009, private banks accounted for about 80 per cent of all trade
finance.[106] Such reliance on
banks leaves trading firms vulnerable in times of crisis, as we have seen with
the recent drop in trade credit provided
to Asia by European
banks.[107] To reduce the impact
of crises on trade finance flows, public sector actors, such as ECAs and RDBs,
should share some of the private
sector
risk.[108] An example of a
successful private/public partnership was the introduction in 2009 of the Global
Trade Liquidity Program by the IFC,
which allowed for a 40-60 per cent
co-lending agreement between the IFC and commercial
banks.[109] The program allowed
banks to continue to support clients with trade finance, and gave the IFC the
ability to channel liquidity and
credit into markets to help revitalise trade
flows by leveraging the banks’ networks across emerging markets
globally.[110]
Mobilising
private and public-sector institutions to form a partnership during times of
crisis would ensure that institutions with
excess capacities had an opportunity
to meet the needs of those with insufficient
funds.[111] However, co-financing
between the two sectors need not only be limited in times of crisis. Longer-term
cooperation would help to
close the structural market gaps in our region and
reduce the impact of any future financial crises on the availability of trade
finance.[112]
Establishing a regional trade finance database to facilitate the collection and exchange of information
Filling information gaps between public and private
institutions is of great importance, particularly during times of economic
crisis.
While responding to the financial crisis that commenced in 2008, members
of the Bankers’ Association for Finance and Trade
complained that a series
of measures announced by ECAs and RDBs were hard to
track.[113] They also lacked
access to critical information, such as who was providing what finance, and
under what criteria.[114] Such
information gaps affect the ability of both the public and private sectors to
respond to trade finance challenges, particularly
in developing
countries.[115] It is thus crucial
that information is collected and shared among trade finance stakeholders within
the region.
The ICC Trade Register established by the ICC and ADB in 2009
was a significant step towards increasing trade finance information.
So far the
database has recorded over 15 million transactions worldwide, reflecting 70 per
cent of global transactions.[116]
It is currently the most comprehensive data available on trade and export
finance.[117] Nevertheless, the
register only records data provided from participating
banks.[118] While this includes
twenty-one of the most active banks in worldwide trade
finance,[119] gaps in data remain.
Within the region, much more information is needed as to how SMEs, in
particular, finance their trade and the
challenges they face.
While the
information provided by the ICC Trade Register is crucial for the development of
trade finance policy, the Register does
not provide stakeholders with up-to-date
information about the type and amount of trade finance being provided at the
present time.
In times of crisis, such information is needed to allow trade
finance institutions to respond rapidly.
In order to address gaps in trade
finance information, a regional database should be created that disseminates
relevant information
to both public and private institutions, such as the
development of programs by ECAs. Such a database should include all trade
finance
stakeholders within the Asian region, not just commercial banks. It is
important that the information gap between the public and
private sectors is
filled so that both sectors can respond quickly when shortfalls in trade finance
arise.
V. Mortgage Markets
Strong housing markets are often equated with strong
economic growth and development. Given the growing population and trend toward
urbanization in East Asia, a strong mortgage market is a critical underpinning
for local housing markets. Mortgage market development
varies greatly across the
Asian region. Figure 9 shows the extent of mortgage market development in
selected Asian economies in 2006
(before the
crisis).[120] At this point in
time, Hong Kong’s mortgage markets (unsurprisingly in light of recent
events) had already developed the most
– standing at about 50 per cent of
GDP and 25 per cent of overall lending. At the other end of the spectrum,
mortgage markets
in Indonesia represented only about three per cent of GDP.
In virtually every developed economy, mortgage financing
supports housing markets. However, its effect varies in different domestic
financial sectors. China’s mortgage finance market, for example, eclipses
mortgage markets in the rest of
Asia.[121] Yet the Chinese
mortgage market remains but a fraction of the size of the US
market.[122] China’s housing
loans to GDP ratio stands at about 16 per cent, while US ratios peaked at about
80 per cent.[123] Government
supply of housing, and purchasing using pooled family resources, explains
China’s housing loans to GDP
ratio.[124]
In most developed
economies, strong housing markets underpin and correlate with robust economic
growth.[125] A strong housing
market also creates jobs.[126] In
Hong Kong, rapid housing sector development has not correlated with vigorous
growth in gross metropolitan
product.[127] In Singapore, on the
other hand, highly developed banking and equity markets, along with associated
legal and regulatory infrastructures,
have helped support sustained growth in
housing finance markets.[128]
Nevertheless, Singapore’s active mortgage market makes the city-state more
vulnerable to an overheated and overpriced market.
Japan possesses Asia’s
second largest mortgage market, and the most sophisticated mortgage financing
market.[129] With mortgage-to-GDP
ratios of approximately 40 per cent, the reliance of Japan’s financial
markets on mortgage-generated returns
cannot be
underestimated.[130] Such
dependence on mortgage-backed finance has led the Japanese economy to heights
and depths that are all too familiar.
In developing economies, the
relationship between mortgage finance and economic growth is murkier. Housing
prices in China continue
to rise at an alarming rate, in spite of the relatively
small size of the residential finance
market.[131] The Chinese
government and many investment analysts fear that the Chinese housing market may
resemble that in Japan in the
1970s.[132] However, Koyo Ozeki
points out that while Japan’s economy had matured by the 1980s,
China’s economy still possesses enormous
upside growth
potential.[133] China’s
young demographic profile will continue to drive the demand for new housing for
the foreseeable future.[134]
In Southeast Asia, the link between mortgage markets and economic growth
also remains relatively unclear. In India, the mortgage
finance market
represents about 8 per cent of GDP at US$104
billion.[135] India’s
mortgage industry remains at a nascent stage, and mortgage markets should grow
by 15 per cent annually, to achieve
a mortgage to GDP level of 13 per cent
within the next five years.[136]
The migration of professionals to major cities such as Mumbai and Bangalore
continues to support such growth. In a population averse
to debt, the average
mortgage loan repayment duration stands at about 13
years.[137] In Thailand, the
housing market is supported by a strong land registry system in place for more
than a century. The registration
system has evolved to being able to facilitate
land title transfers extremely quickly and efficiently (often in less than a
day),
and can easily be navigated without the need of a lawyer or a real estate
agent.[138] The home financing
market is very competitive, and there has been a recent lowering of interest
rates to help stimulate home ownership
for first time
buyers.[139]
Mortgage markets
in developing parts of Southeast Asia remain very small. In Indonesia, few
homebuyers take out mortgages, as purchasers
traditionally pay cash for their
residences.[140] Housing markets
appear to have flourished nevertheless, although lack of credit finance has
tended to keep home prices low. In Vietnam
and Cambodia, mortgage markets do not
yet play a significant role in supporting the housing
markets.[141] That is expected to
change, particularly in Vietnam as its economy continues to
evolve.[142]
Urban
migration has supported the need for, and development of, housing markets across
Asia. By 2030, 50-55 per cent of Asian people
are expected to reside in urban
regions.[143] Urbanisation will
continue to underpin the importance of the housing market and housing finance
for low and middle-income families.
As such, stable housing markets and mortgage
markets that finance home purchases remain vitally important.
A. The mixed reform of housing-related lending in Asia
The FSB Guidelines on mortgage underwriting serve
as a useful starting point in deciding whether various Asian countries have the
regulatory institutions in place to provide for pro-development outcomes and
manage the risks to the financial sector concomitant
with mortgage
finance.[144] These principles
include effective verification of income and other financial information,
reasonable debt service coverage, appropriate
loan-to-value ratios, effective
collateral management, prudent use of mortgage insurance, and effective
supervisory powers and tools.
Differences in regulations designed to
maintain appropriate loan-to-value ratios represent an important illustration of
the way that
financial regulation can balance development needs and financial
risks. Korea represents a positive example. The Financial Supervisory
Service
(FSS) targeted loan-to-value requirements for certain zoning areas in
particular, and applied different maximum levels to
various
zones.[145] Korean regulators then
changed these requirements counter-cyclically in response to changes in the
economy.[146] Korea’s
financial regulators co-ordinated with other government departments to ensure
that loan-to-value requirements served
the broader interests of regional
development and other policy objectives. As a result of such targeted policies,
housing price-to-income
ratios rose by only 7 per cent in Korea between 2000 and
2007.[147] In contrast, these
ratios rose more than 30 per cent in a range of OECD
countries.[148] Such an example
shows how dynamic mortgage regulations can strike a balance between development
and risk-management needs better
than a fixed policy-rule.
The Hong
Kong case shows how regulators may need to constantly adjust their mortgage
underwriting rules. In Hong Kong, housing prices
have risen 73 per cent over the
last three years,[149] yet the
city’s GDP grew only 1.8 per cent in
2012.[150] This has caused the
authorities to question the sustainability of current high property prices. In
response, the Hong Kong Monetary
Authority (HKMA) instituted its fifth round of
property market measures – including tightening the maximum debt servicing
limit
and capping home loan amounts in an effort to cool the overpriced
residential property market.[151]
Economists expect these measures to cut Hong Kong mortgage lending by 25 per
cent to HK$171.3 billion ($22.1 billion), which would
return the market to
levels approaching those in
2007.[152] Nonetheless, the market
remains
overpriced.[153]
Indian
policymaking shows the opposite extreme – how slow-moving and
contradictory regulation can limit development and increase
systemic
risk.[154] Urban housing has
failed to keep up with rapidly expanding demand for residential housing due to
failures in land and housing laws
and mortgage finance
laws.[155] Inappropriate formal
institutions governing the supply of land and real estate have resulted in high
transactions costs, fragmented
markets, tenuous approval processes for building,
and low mortgage
rates.[156]
Prudential
regulation in India has adjusted slowly to the rapidly evolving demand for
housing. First, changes to formal institutions
have allowed for broader changes
in the risks and returns to mortgage
finance.[157] Easier recovery
reduced risks for financial institutions and transferred some of those risks to
borrowers. Instead of the previous
quantitative restrictions placed on lending,
Indian mortgage finance institutions allowed lenders and borrowers to take
greater risks
– but price those risks
themselves.[158] Second, changes
in formal institutions have led to changes in informal institutions. The
“rules of the game” of mortgage
lending have clearly changed –
as informal norms have encouraged a large increase in mortgage lending. Mortgage
lending as
a percentage of GDP has increased four-fold from 2008 to
2012.[159] Third, Indian
institutions – despite their adaptation – have remained
“sticky.” In contrast to India’s
waves of mortgage-related
reform, regulators in jurisdictions like Hong Kong and Singapore reform their
regulations often, responding
to housing market needs and macroeconomic
developments.[160] Such Indian
stickiness (in academic terms, institutional rigidity) has kept mortgage finance
at too low a level to supply enough
housing to meet existing needs.
B. Financial crises and mortgage financing
Given the role of asset securitisation in the US
subprime crisis, a key area for housing finance reforms has been to ensure the
retention
of a degree of originator interest in securitised loans.
Securitisation enabled loan originators to quickly move loans from their
balance
sheets.[161] This created the
moral hazard of originators having no stake in the quality of the loans being
written.[162] Mandating the
retention of a permanent stake in a portion of the credit risk is likely to
improve the quality of loans
originated.[163]
An
important way forward for East Asia is the enhancement of institutional and
legal frameworks that will support the development
of a robust mortgage finance
market.[164] These institutional
frameworks include property rights, effective enforcement mechanisms, and
regulatory regimes.[165]
C. Moving forward
Policymakers in many Asian countries have adopted
policies that encourage mortgage finance of residential housing and other real
estate. Such credit creation deepens domestic financial markets, encourages
access to residential housing, and has multiplier effects
in the construction,
consumer goods and other industries. The potential of such reforms to underpin
further economic growth is large
in many of Asia’s middle-income
economies. However, as the US and EU experiences show, linkages between mortgage
finance and
derivative assets, like mortgage-based securities, can create
substantial systemic risk.
Most countries are pursuing mortgage finance
reform as part of a larger effort to strengthen their financial
markets.[166] In developing Asia,
market reforms have mostly been orientated toward strengthening core areas,
meeting international standards,
and increasing prudential regulatory capacity,
with less focus on reforming domestic mortgage finance markets. With housing
clearly
being a primary factor in domestic economic development, greater efforts
must be undertaken regionally to initiate reforms that protect
lenders and
borrowers and facilitate flows to finance transactions. Regulatory reform
efforts in the housing finance sector must
strike a balance between advancing
homeownership, which supports the domestic economy, and preventing an inflated
real estate bubble,
which harms consumers and remains a real risk in a number of
Asian countries.
Asian countries would do well to concentrate on following
the advice in the FSB Guidelines. At one extreme, the overzealous establishment
of income ceilings and checks on that income can restrict the flow of funds into
residential housing. At the other extreme, lax regulations
can encourage banks
to over-lend to classes of borrowers who cannot repay. East Asian nations are
generally seeking to strengthen
their legal, institutional and policy
foundations and this may well be the most useful contribution that can be made
to mortgage
finance reform. Perhaps the primary focus to promote mortgage
markets in our region should be upon the strength of their foundations,
much as
it is when one is building a home.
VI. SME Finance
Small and medium sized enterprises (SMEs) are
key drivers of economic growth. Access to capital, however, poses challenges for
SMEs.
SMEs often need capital to get off the ground, and to achieve scale, and
thereby support the economy. Thus, it is important that
governments and
financial institutions find ways to increase access to financial capital for
SMEs.
Most of the region’s financial systems are characterised by a
small number of large domestic
banks.[167] These banks are often
quite effective at funding governments and large
corporations.[168] However, they
tend to be less effective in funding other forms of economic activity. At the
same time, while equity markets across
the region are likewise at varying levels
of development, as a general matter, equity markets are effective across the
more developed
economies in the region in supporting large
enterprises.[169] Finally, while
bond markets were underdeveloped at the time of the Asian financial crisis, now
bond markets are generally functional
across the more developed economies in the
region.[170] Bond markets
likewise, though, tend to be most effective in funding government and large
enterprises.[171] Thus, there is a
particular need in the region to focus on innovation in supporting provision of
finance other than to governments
and large firms, and particularly to
SMEs.
A. The challenge of SME finance
In many ways, SME finance is one of the more
significant aspects of financial development for supporting the real economy and
growth.[172] It has also been
among the more difficult to achieve. The important role SMEs play at the
domestic and international levels is well
documented.[173] At the same time,
SMEs face a variety of financial challenges in Asian
economies.[174] While factors such
as inflation and exchange rate fluctuations affect SMEs to a far greater extent
than their larger corporate counterparts,
the largest single challenge for an
SME in a developing economy is securing a bank as a funding source. In 2008 the
World Bank released
a report that showed few SMEs had a formal bank loan (only
about 20 per cent in China, 30 per cent in Russia and 55 per cent in
India).[175] The number of SMEs
within those countries that had not applied for loans at all was very high. For
instance, of SMEs without a bank
loan in China, 85 per cent had never applied
for one.[176] Likewise in India,
96 per cent of SMEs without a loan had never sought
one.[177] Accessing finance is
disproportionately more difficult for SMEs in developing countries. The IFC
found in 2011 that some 41 per cent
of SMEs in LDCs cited a lack of finance as a
major constraint on their growth and development, compared with 30 per cent in
middle-income
countries, and 15 per cent in the most advanced high-income
countries.[178]
The early
stages of SME growth and evolution are particularly critical. Businesses are the
most vulnerable financially during their
launch and early growth stages. During
the early stages of development, SMEs do not typically have formal funding
options and instead
rely heavily on self-funded, internal
sources.[179] This most often
includes savings of principals or less commonly, funding through the sale or
pledging of privately owned assets –
a concept that is rare in developing
economies. When self-funding has been exhausted, the availability of external
sources of funding
often becomes the factor limiting the firms’ growth and
productivity.[180]
The lack
of SME financing may stem from a number of factors, such as a lack of
legislation supporting credit and allowing security
interests to be created in
the types of collateral that SMEs typically have. Underdeveloped or
unenforceable property rights, or
weak banking and institutional structures, may
also further inhibit funding options.
SMEs in developing and emerging
economies face biases within the formal banking sector, where banks prefer to
limit their exposure
to risk by lending to large corporations and governments
rather than to small business entities, effectively squeezing SMEs out of
the
loan market.[181] When SMEs are
able to secure formal funding through a bank, they are often subjected to
inordinately high interest rates or overly
burdensome
terms.[182] Nevertheless, a recent
report by the IFC and McKinsey found that traditional banks are still the most
important source of formal
external financing for
SMEs.[183] This, in large part, is
because capital market access is very difficult for SMEs. This is the case even
in developed nations and
is even more so in developing ones where capital
markets are usually unsophisticated and
underdeveloped.[184]
The
financial climate became considerably more challenging for SMEs during the
recent global financial crisis, when SMEs had fewer
options than their larger,
more internationally integrated
counterparts.[185] Higher interest
rates and increased collateral requirements were but some of the tightened
credit conditions SMEs faced. The subsequent
recovery has been globally uneven
and sector sensitive in much of the world. For example, the requirements of
Basel III are likely
to impact SMEs more than some other
borrowers.[186] The extent of the
impact will depend on how a country and its institutions implement the Basel
reforms and international standards
pertaining to banking supervision and
capital requirements.[187] Various
Basel requirements could discourage formal banks from lending to the SME sector,
exacerbating the already precarious position
of SMEs in accessing formal bank
finance.[188] This will
significantly impact how SMEs perform and evolve.
B. Recommendations for increasing SME finance
The primary need of SMEs is for improved access to
finance from the bank and non-bank sectors. Commentators often focus on the need
to develop local capital markets, but the highly developed institutional
infrastructure needed for capital markets to function makes
their development a
major challenge. Furthermore, the high transaction costs associated with equity
and bond issuances means that
capital markets are not well adapted to meet the
financing needs of SMEs. Governments should thus focus on expanding access to
bank
and non-bank credit.
C. Developing Policies to Encourage SME Lending
Access to finance can be facilitated by expanding
bank services in rural areas, where a large number of SMEs are located. For
instance,
India initiated a program between 1977 and 1990 that mandated that
when a commercial bank wanted to open a branch in a primary location
where it
already had branches, it was required to open four branches in locations where
it had no branches.[189] This
program was based on the premise that commercial financial service providers
needed incentives to move into underserved areas.
A later evaluation found that
the “1:4 rule” was largely beneficial in providing increased banking
presence in rural
areas, and led to an increase in rural
credit.[190] While there were
problems related to subsidised interest rates and larger than normal loan
losses, the program was perceived as successful
in expanding access to finance
for SMEs and lowering the rate of poverty in the areas under
study.[191] Expanding the physical
presence of formal banks has generally been found to increase the use of banking
services by the formerly
unbanked.[192]
Improving
the secured transaction regime can significantly enhance SME finance options by
reducing the risk for
lenders.[193] SMEs typically do
not have the types of assets that most readily serve as adequate collateral
– immovable assets. To help facilitate
SME growth, a secured transaction
regime that can accommodate a broader range of assets is
required.[194] Expanding the range
of acceptable collateral has been correlated with enhanced economic growth and
stability.[195]
SMEs’
access to finance can also be greatly increased through the expansion and
utilisation of leasing and factoring (the discount
purchasing of account
receivables).[196] Factoring
depends on the financial condition of the obligor, not the SME. It generates
credit from the SME’s normal business
operations rather than from the
credit worthiness of the SME. Reverse factoring is particularly well suited
where contract law is
weak and credit information is unavailable or
inaccurate.[197] Leasing is also
highly advantageous to SMEs in that it secures credit by giving the financier
ownership of the leased equipment.
While various types of leasing and factoring
strategies are employed in advanced nations, they are still greatly
underutilised in
developing
economies.[198] This is due
primarily to weaker legal and regulatory regimes in developing
countries.[199] SMEs in the
developing world will thus benefit greatly from programs that strengthen their
nation’s legal and regulatory regimes,
and introduce effective secured
transaction regimes.
Finally, there is a bias within the traditional
banking sector that makes it more difficult for SMEs to secure
loans.[200] The banking industry
often perceives SMEs to be unstable, particularly in developing
economies.[201] This perception
can be exacerbated by a lack of sound financial information about the loan
applicant and by the fact that small transactions
are generally more expensive
to service for banking
institutions.[202] For SMEs to
flourish, a change in how they are perceived by the banking industry is
required. The state may need to incentivise lenders
(as the Indian government
did in the above example) to encourage them to offer their financial services to
a wider market. SMEs can,
with assistance, become valuable bank customers.
D. Allowing SMEs Access to Public Trading Markets
Another way to increase SME access to finance is by
giving them access to capital markets. An important first step towards improving
SMEs’ access to capital markets would be decreasing the fees associated
with going public. Simplified listing and disclosure
requirements for SMEs would
also allow for increased participation.
To expand access to finance for
SMEs, some jurisdictions have created SME stock exchanges or separate trading
platforms that cater
to the specific needs of
SMEs.[203] These dedicated stock
exchanges, or “junior markets,” have significantly less stringent
eligibility requirements and
considerably lower costs during the IPO
underwriting process.[204] The
success of these initiatives overall has been mixed. The performance of these
markets in developing economies, for example, has
not been strong, with many
offerings in lower-income countries being unable to attract financial
support.[205] In many of these
economies the general population does not have the capital to support IPOs.
Institutional buyers within these same
environments are unlikely to be
participants, as very few SMEs will meet their investment grade criteria. Thus,
few SMEs succeed
in capital market
raisings.[206]
The results of
such initiatives in middle-income and high-income countries have been better.
MESDAQ in Malaysia, London’s Alternative
Investment Market (AIM), and the
MOTHERS market in Japan, have been consistently successful in bringing small cap
SMEs to market.[207] Such SME
exchanges tend to succeed if (1) there is a sufficiently sophisticated primary
market from which the SME market may draw
expertise, and (2) the general market
has a track record of supporting IPOs, thus suggesting investors who are
qualified and economically
able to support SME
fundraising.[208] These factors
remain a major challenge in developing economies.
Access to finance is
perhaps the largest single barrier to SME
growth.[209] While there are many
other hurdles SMEs face, most challenges revolve around, and come back to,
resolving the dilemma of financing.
Government intervention, regulatory policy,
and improvements in the legal and financial infrastructure are all needed to
foster an
environment that promotes financing options for SMEs.
VII. Non-bank finance
As noted in the previous section, non-bank
finance provides a very important alternative to bank financing in supporting
East Asia’s
future development, particularly in the context of the
limitations of existing banking systems. At the same time, the supply of credit
by non-bank financial institutions is an area where Asian financial regulators
will need to exercise vigilance. They will need to
ensure that the positive
impacts of their regulation exceed the risks of weakening the domestic financial
sector.
A. Growth and Development of Non-Bank Finance in East Asia
Global non-bank finance, often referred to as shadow
banking, grew rapidly before the latest financial
crisis.[210] Rising from US$26
trillion in 2002 to US$62 trillion in 2007, the value of transactions conducted
in the shadow banking sector represented
about 90 per cent of global GDP by
2007.[211] The global value of
transactions conducted by non-bank financial institutions (NBFIs) declined
slightly with the onset of the global
financial crisis in 2008 but increased
subsequently to reach US$67 trillion in 2011 (or about 110 per cent of GDP in
the countries
monitored by the
FSB).[212] Shadow banking
transactions represent about half of the value of assets in the banking sectors
of the countries providing information
to the FSB
exercise.[213]
The amount of
finance NBFIs provide differs markedly across Asian countries. Figure 8 shows
NBFI assets as a share of total financial
assets in six Asian
countries.[214] In Hong Kong,
Singapore and Korea, NBFIs play an important role in intermediating the flow of
investment and savings. NBFIs in Indonesia
and China play a small role, with
their share of total assets remaining below 10 per cent. Indian NBFIs have
increased the proportion
of assets they manage from about 7 per cent in 2002 to
a high of about 15 per cent in
2008.[215]
Non-bank finance appears to have played an important role in promoting
growth in high growth jurisdictions such as Hong Kong, Singapore
and
Korea.[216] Other Asian
countries’ NBFI assets represent a relatively negligible share of GDP.
B. Opportunities and Risks Posed by Shadow Banking
The growth of NBFI transactions provides
opportunities for Asian countries’ economic development. Shadow
banking has often provided finance that traditional banking institutions are
unable or unwilling to provide.
Many new business ventures have high levels of
risk which banks in many Asian countries have often not felt comfortable
servicing.[217] Shadow banking may
fill this need,[218] and may free
up resources – by providing credit extended on a wider range of
collateral.
On the other hand, the risks posed by shadow banking
arrangements are plentiful.[219]
There are many risks related to the supply of funds to NBFIs. First,
depositors may suddenly withdraw their funds. Second, margins may be lower
because NBFIs will need to pay higher
interest to compensate savers for the
risks of placing funds with these under-regulated financial intermediaries.
Third, they may
face certain types of counterparty and other risks on assets
placed with regulated financial institutions, as they may not have the
resources
to recover funds on demand. As such, NBFIs may be the first to liquidate assets
at a discount during periods of economic
shocks – further depressing asset
prices. Fourth, regulatory changes may affect the supply of funds from
traditional banks
to NBFIs. Regulators across Asia will apply their own
interpretation of the rules promulgated by institutions like the FSB about
shadow banking in upcoming years. Many of their responses may tend to restrict
bank lending to NBFIs (and lending by NBFIs themselves).
Such regulatory risk
can cause a sudden decrease in liquidity in the shadow banking sector.
Lending by NBFIs may also increase systemic risk in several ways. First, it
may push up asset prices throughout the economy –
such as in real estate,
where prices often depend on the supply of available funds. Second, NBFI lending
may lead to widespread maturity
duration and other mismatches, as NBFI managers
may not have the expertise to match the duration of funds received and funds
lent.
This is especially likely in developing parts of Southeast Asia. Third,
macroeconomic changes may cause large classes of NBFI borrowers
to disappear.
Tightening credit causes interest rates to rise across all types of lending.
NBFIs charge higher interest rates, partly
to cover their own cost of capital
and partly to price in the extra risks of their borrowers. Higher interest rates
often correspond
to highly elastic demand for funds.
C. Developing Innovative Policy and Regulation Around Shadow Banking
Regulators need to develop regulations that
anticipate the aforementioned risks and help mitigate their economic effects.
However,
regulators in many under-developed Asian financial markets have not
done so appropriately. India, Indonesia and Japan provide examples
of
regulations that have sought to respond (with greater or lesser success) to
these benefits and risks.
In India, regulators have started to amend
highly restrictive regulations with a view toward developing a range of credit
markets,
both formal and
shadow.[220] However, many of the
recent amendments do not demonstrate a clear consideration of the risks seeking
to be mitigated. In Indonesia,
piecemeal law-making has scattered laws
regulating NBFIs across a range of legislative and regulatory instruments. Lack
of a clear
focus on the potential risks and benefits has resulted in an abstract
Action Plan aimed at consolidating policy across the NBFI
sector.[221] As a counter-example,
Japanese regulation of NBFIs focuses on explicit outcomes rather than specific
measures. This focus has led
to the development of a vibrant NBFI sector. Such
an approach also reflects the principles the FSB has recently promulgated in
relation
to regulating shadow banking
markets.[222]
Japan’s
regulatory treatment of the capitalisation of these NBFIs shows how Indian
regulators could focus more sharply on the
gains and losses they seek to manage.
Indian regulators have sought to increase capitalisation requirements of NBFIs
for several
years. Currently Indian legislation requires NBFIs to have a
capitalisation of at least 2.5 million
rupees.[223] Recent
recommendations aim (under Section 45NC) to exempt all non-deposit taking NBFIs
from registration requirements if their individual
asset sizes fall below 500
million rupees.[224] Such a focus
on line-in-the-sand capitalisation floors ignores the risk Indian regulators
should target: the risk of default. As
such risk depends on the type of lending,
a more flexible approach should be adopted.
Recent proposals in India aim
at taking a regulatory approach focused on balancing risks and returns. Previous
regulation focused
on minimum capitalisation in order to obtain a registration
certificate. Section 45-IA(4)(d) of the Reserve Bank of India Act (1934)
requires the Indian central bank (the RBI) to review an applicant’s
capital structure before granting
registration.[225] The RBI may
impose certain discretionary requirements with regard to capitalisation and
assets under management before registering
an applicant (or providing an
exemption to registration under section 45NC of the Act). Demonstrating a firm
grip on the underlying
rationale for such discretionary power, a recent RBI
working group on reforming NBFI regulations notes, “the spirit behind
such
exemptions is not to create entry barriers for small innovative players from
entering the NBFC sector especially for lending
to small businesses, but to
refocus regulatory resources to where the risks may
lie.”[226] Nevertheless,
India’s relatively underdeveloped shadow banking sector shows that either
not enough entrants have come into
the market, or they cannot attract enough
capital.
Indonesia’s regulation also tends to overemphasise risk
management at the possible expense of national economic development.
While
several laws substantially strengthen the regulatory framework governing
NBFIs,[227] legislation aimed at
regulating Indonesian shadow banking is scattered across a range of different
acts and regulations. Many of
these laws do not directly regulate the
credit-creating capacity of NBFIs. In response, the government has created
The Capital Market and Non Bank Financial Industry Master Plan 2010 –
2014, which contains a 63-point Action Plan designed to harmonise these
laws.[228]
The Action Plan
aims to encourage the expansion of finance and guarantee institution networks
and the development of finance and
guarantee products so as to increase public
accessibility.[229] The Plan also
seeks to increase the distribution and quality of information in the NBFI
sector.[230] However, the Plan is
short on concrete details as to how the government intends to achieve these
aims. It does not address the underlying
risks in the Indonesian economy or the
scattering of provisions across different legislative instruments. Indeed, it
fails to address
any of the fundamental risks facing NBFIs that we discussed at
the beginning of this section. There remains a strong need for a coherent
institutional framework in Indonesia.
By contrast, Japan has focused on
outcomes rather than details. Enshrined in three major pieces of legislation
covering usury, the
Japanese legislative framework has sought to focus on
usurious practices – particularly in the NBFI sector. The Interest Rate
Restriction Act (1954) subjected non-bank financial entities – which
had hitherto done business virtually without restriction – to regulatory
control.[231] The Act capped
interest rates at 15-20 per cent, depending on the loan
amount.[232] Other laws targeted
potential risks coming from the NBFI sector by capping interest rates at 20 per
cent.[233] By capping interest
rates, the law addressed the risks of default coming from the non-payment of
excessively high interest. It also
moved the focus of regulation from the bank
to the borrower and set new net asset requirements to ensure the viability of
the lender.
Such requirements basically made risk management self-enforcing.
Instead of requiring banks to engage in complex risk management
practices, these
legal requirements provided strong economic incentives for banks and borrowers
to engage in sustainable lending
and borrowing practices.
Regulators in
Asia still rely excessively on minimising risks rather than capturing the
development potential of shadow banking.
This is particularly so in countries
with rapidly developing NBFI sectors, such as China, India and Indonesia. Recent
FSB guidelines,
however, encourage regulators to focus on broad principles
– mostly aimed at promoting the development of all kinds of finance
(including non-bank finance). In their view, regulators should focus on five
aspects in rulemaking: focus (target only externalities
and risks while avoiding
unintentional market deterioration); proportionality (introduce the lightest
possible measures and not more);
forward-looking and adaptable (predicting
market reactions to things like Basel III); effectiveness (taking into
particular account
possible cross-border regulatory arbitrage); and assessment
and review.[234] Such a
results-oriented focus on rulemaking would likely increase the viability of
NBFIs in these developing markets.
The issue of shadow banking illustrates
our thesis that regulation should strike a balance between the need for
flexibility (so as
to provide capital for development) and the need to respond
rigorously when risks threaten financial sector development. As we explained,
jurisdictions with larger shadow banking sectors have generally developed
quickly (such as Hong Kong, Singapore, and South Korea).
Many of the countries
with underdeveloped financial markets have tried to tackle the regulation of
shadow banking using an administrative
approach. We find that financial
regulation in much of developing Asia needs to do a better job of balancing
developmental needs
and macroeconomic risks, such as those inherent in rapidly
expanding NBFI sectors. Such risks pose a significant threat to the entire
domestic financial sector of these economies. In developing markets like China,
Malaysia, India and others, regulations on NBFIs
likely impede the growth of
this pro-development financial sector. Regulators may want to promote the NBFI
sector in these countries
through further (though not unmitigated) financial
liberalisation. Lastly, the case study of Japan demonstrates how to focus on the
objectives of NBFI regulation rather than micro-regulating. Asian countries
looking to expand their shadow banking sectors will do
well to balance flexible
regulations (which allow for such expansion) and rigorous regulation (which
prevents systemic and other
risks building).
VIII. Mobile Financial Services
Mobile financial services are provided through
mobile phones. A typical transaction involves a customer going to an agent, such
as
a local shopkeeper, to convert some cash into e-money on their phone. The
customer does this by paying cash to the agent and seeing
a credit appear on
their phone, which is achieved by the agent using their own phone for this
purpose. With this e-money, the customer
can then pay bills or remit funds to
others.
About 1.7 billion people have a mobile phone but no bank account.
Mobile phones therefore provide a direct conduit to almost one-half
of the
world’s unbanked population. The potential of mobile financial services to
assist in the alleviation of poverty and
to increase efficiency across an
economy has captured the attention of many international financial institutions,
including the Asian
Development Bank and the Consultative Group to Assist the
Poor (CGAP), a World Bank affiliate.
The ground-breaking success story in
mobile financial services occurred in Kenya with the launch of M-PESA in 2007.
Within three years,
nearly 40 per cent of Kenya’s adult population used
M-PESA.[235] A study of the
community impact of M-PESA found that it allowed clients to remit money to
family in times of financial
distress.[236] It made the conduct
of business easier and safer, and it reduced transaction costs for business
people.[237] M-PESA’s
success has prompted policy makers in a range of nations to seek to emulate
it.[238] Mobile financial services
are now broadly seen as a way to promote financial inclusion and reduce
disadvantage.
The G20 has made financial inclusion a development priority
and has established the Global Partnership for Financial Inclusion to
implement
the G20’s multi-year financial inclusion action
plan.[239] This is strong evidence
of how financial inclusion is gathering broad acceptance as a fundamental
development principle.
In East Asia, mobile money is perhaps most advanced
in the Philippines. Only two out of ten Filipino households have access to a
basic savings account, but 80 per cent of people have access to a mobile
phone.[240] The potential of
mobile banking to reach a significant portion of the unbanked population in the
Philippines is great. The Philippines’
experience has been that enhancing
financial inclusion through the provision of mobile money services can support
political and financial
stability and economic growth. Even the very poor still
need to make payments to pay utilities and other bills and to remit money
to
families. Financial exclusion means that these payments have to be made in cash
either by the payees traveling long distances
themselves, or entrusting their
cash to someone else with all the problems that entails. Either method is
tremendously inefficient
and time consuming – time that could be used by
the poor in earning an income or in other ways improving their
lives.
Regulatory reform in the Philippines has opened up the opportunity
for telecommunication companies (telcos) to compete with banks
to deliver mobile
money services. This has been a major factor in reducing the prices of
remittances, which is very important given
that remittances are a substantial
part of the country’s
economy.[241]
The Philippines
has enacted major regulatory changes to promote financial
inclusion.[242] The nation does
not have a national ID card, so the regulations have liberalised ID requirements
to the point of certification of
identity from a local chieftain being
acceptable in some
circumstances.[243] The
Philippines has in place a targeted human development program as a core
component of its poverty alleviation
strategy.[244] It helps the
nation’s poorest families through cash assistance, provided they meet
certain conditions such as keeping children
in school, attending regular health
check-ups and vaccinating their
children.[245] Grants were
delivered through the banking system as over-the-counter payments and, in some
cases, the government had to hire helicopters
to physically bring the cash to
beneficiaries in remote
areas.[246] Effective mobile money
programs permit a far more efficient and effective way to distribute these
relatively small payments and to
accurately track their distribution.
Beneficiaries in the past used to spend as much as 30 per cent of their grants
on the cost of
traveling to collect them and this does not include the time
engaged in travel and queuing to collect the actual
grant.[247]
A. Regulatory Challenges of Mobile Banking
Mobile money poses many regulatory challenges. The
fact that it is often provided by telcos through a wide array of agents does not
sit particularly comfortably with most prudential regulatory agencies. Has a
customer who has deposited into their phone more than
the amount needed to make
an initial payment, actually made a deposit with the telco of funds such that
the telco needs to be licensed
as a bank? What protects the customer against the
risk of fraud on the part of the agent, or the risk of insolvency on the part of
the telco? What “know your customer” rules should apply to telcos
operating in remote areas where customers have no formal
identification papers?
Should these regulatory risks be ameliorated by limiting the provision of
e-money services to banks that are
appropriately regulated?
What are the
roles for banks in e-money services? Should telcos be required to place their
net balance on deposit in a trust account
with a bank each day, so that the
funds on trust would survive the insolvency of the telco and be available for
distribution to customers?
Can the regulator be confident in the event of the
insolvency of the telco that the company’s records would be in a
sufficiently
good state to permit return of these funds to their rightful
owners?
There are a host of unresolved regulatory issues that different
nations are grappling with in different ways. The only clear consensus
seems to
be that financial inclusion really matters. The provision of very basic payments
and other financial services to the poor
offers them far more than was widely
realised only a few years ago. Such financial services save time and save money,
and allow the
poor to spend their days working to better their situation, not
merely effecting transactions that take people with access to a bank
account
just a few minutes.
India is likewise keen to promote the adoption of mobile
financial services because some 40 per cent of its people do not have bank
accounts.[248] In addition, the
Indian government, like the Filipino government, is implementing targeted human
development programs under which
specified payments are made to mothers when
their children attain certain milestones, such as regularly attending school or
health
clinics. The biggest challenge India faces today in implementing such a
program is the accurate and efficient transfer of funds to
the poor. Without
bank accounts, or some form of mobile e-money, a large proportion of such
payments are lost to corruption or inefficiency.
It is therefore ironic that the
RBI has done a poor job of promoting mobile financial services. Since 2005, the
RBI has recommended
that banks increase access for the unbanked population using
mobile payment systems.[249]
Nonetheless, regulations in India only permit mobile payments when they are
linked to a registered bank account through which such
transactions must take
place.[250]
Accordingly, in
one stroke, the RBI has ensured that mobile money does not help the unbanked in
their country. The intention of this
regulation is to protect customers by
subjecting mobile payments to the full panoply of prudential
regulation.[251] This is an
understandable and worthy regulatory goal but the price India is paying for it
today is far too high. There is a clear
need to rethink the regulation of mobile
financial services to provide sufficient protection of customers while allowing
this new
technology to assist all Indians who already have access to a mobile
phone but not a bank account.
B. Recommendations Moving Forward
Within the region, the approach of the Philippines
should be preferred to that of India. The Philippines has encouraged financial
inclusion for its poor and has been very effective in achieving it. India has
prioritised the effective regulation of its system
and has maintained regulation
accordingly, but at a high human cost. In some nations in East Asia, e-money is
not a pressing need.
These include the more developed countries such as Japan,
Korea, Hong Kong and Singapore. But in their less-developed neighbours,
e-money
offers a great deal to the large, presently unbanked proportions of their
population and it is recommended that the promotion
of financial inclusion be a
priority for ASEAN and other regional organisations. Many of the regulatory
challenges identified above
could most usefully be addressed by a regulatory
handbook that identifies the various regulatory challenges and analyses a range
of potential responses to each
challenge.[252] This is an area in
which national regulators need assistance now and which the ADB and other like
organisations are ideally placed
to deliver in a highly efficient way.
IX. Conclusion
Financial liberalisation has long been
associated with economic growth and development. In the past decade, however,
financial crises
have demonstrated the significant risks posed by financial
innovations in the absence of adequate regulation. Such sizable risks
mean
financial regulation needs to balance risk with innovation in order to maintain
financial stability and support economic growth.
This was the approach largely
adopted in East Asia following the Asian financial crisis, which explains why
the major financial centres
in the region were much less affected by the global
financial crisis than their Western competitors. East Asia’s pragmatic,
grounded approach to financial regulation is arguably one of the greatest
financial innovations of the past decade. It must be maintained
in East Asia and
other regions should be encouraged to look to, and learn from, the successes of
many Asian economies in this regard.
We have identified five central areas
in which this approach is particularly needed to ensure ongoing financial
stability and economic
growth in East Asia. These include trade finance,
mortgage markets, non-bank finance, SME finance, and mobile financial services.
While the region faces a number of challenges in these areas, such challenges
can be overcome through carefully regulated financial
innovation.
Trade
finance in the region is currently suffering from a retreat by European banks
and the implementation of the Basel reforms. We
have outlined a number of
possible solutions that involve collaborative innovations by both the public and
private sector. In the
area of mortgage markets, an important way forward for
East Asia is the enhancement of institutional and legal frameworks that will
support the development of a robust mortgage finance market. Regulatory reform
must aim to strike a balance between promoting home
ownership and preventing
inflated real estate bubbles. SMEs and NBFIs play an important role in financial
development yet both face
numerous challenges. Regulators need to focus on
enhancing the access of SMEs to finance, and developing a stable non-bank
financial
sector, so as to assist development and preserve financial sector
stability. Finally, mobile financial services provide the opportunity
to assist
in the alleviation of poverty and to increase efficiency across many developing
economies in Asia. While some challenges
exist, with careful regulation mobile
financial services can enhance the lives and productivity of the presently
unbanked in the
region.
East Asia’s balanced approach to financial
innovation and regulation needs to be nurtured and applied across the region in
all areas of finance, particularly those outlined above. In the wake of the
global and Eurozone crises, it should also serve as an
important example for
other parts of the world. Financial regulation, after all, exists to ensure
financial sectors serve the needs
of the real economy, not the needs or desires
of bankers.
[1] Eugenio Domingo Solans,
‘Structural Change and Growth Prospects in Asia - Challenges to Central
Banking’ (Speech delivered
at the 38th SEACEN Governors Conference and
22nd Meeting of the SEACEN Board of Governors, Manila, 13 February 2003), http://www.ecb.europa.eu/press/key/date/2003/html/sp030213.en.html.
See also Stephen A. Lumpkin, ‘Regulatory Issues Related To Financial
Innovation’ 2009(2) OECD Journal: Financial Market Trends (2009);
World Economic Forum, Rethinking Financial Innovation: Reducing Negative
Outcomes While Retaining The Benefits (2012)
<http://www3.weforum.org/docs/WEF_FS_RethinkingFinancialInnovation_Report_2012.pdf>
and Financial Innovation, Financial Times Lexicon,
<http://lexicon.ft.com/Term?term=financial-innovation>
.
[2]
For detailed discussion and analysis, see especially Q. Liu, P. Lejot & D.
Arner, Finance in Asia: Institutions, Regulation and Policy (Routledge
2013), ch 7.
[3] The History of
Insurance, Quadris Insurance Brokers, http://www.quadrisinsurance.co.uk/insurance_history.html
[4] Matthias Schramm and Markus
Taube, ‘Evolution and institutional foundation of the hawala financial
system’ (2003) 12(4)
International Review of Financial Analysis
405.
[5] See P. Parthasarathi,
Why Europe Grew Rich and Asia Did Not: Global Economic Divergence,
1600-1850 (Cambridge University Press
2011).
[6] Q. Liu, P. Lejot &
D. Arner, above n 2, especially chs
1-2.
[7] Beatriz Armendáriz
de Aghion and Jonathan Morduch, The Economics of Microfinance
(Massachusetts Institute of Technology Press, 2005) and Kevin Davis,
Financing Development: Microfinance – Background, Institute for
International Law and Justice
<http://www.iilj.org/courses/FDMicrofinanceBackground.asp>
.
[8]
Islamic finance is a financial system that operates according to sharia law.
While Islamic law allows for a free-market economy,
Islamic finance prohibits
certain activities such as gambling, charging interest, investing in prohibited
industries and dealing
in uncertainty-based
transactions.
[9] National Bureau
of Asian Research, Islamic Finance in Southeast Asia – Local Practice,
Global Impact (March 2008)
<http://www.nbr.org/publications/specialreport/pdf/Preview/PR08_IF_preview.pdf>
Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, ‘Regulatory
and governance for Islamic finance’ (Speech
presented at the Brunei
Darussalem Islamic Investment Summit, Bandar Seri Begawan, 19 June 2013); Mercy
A. Kuo, ‘Islamic Finance
in Southeast Asia: Strategic Context and
Trends’ (2009) 5(3) Journal of Islamic Economics, Banking and
Finance.
[10] Yuwei Hu,
‘Growth of Asian Pension Assets: Implications for Financial and Capital
Markets’ (Working Paper No. 360, Asian
Development Bank Institute, May
2012), 3.
[11] Winnie Nip,
‘E-Money in Hong Kong’, The Analyst, September 2006,
<http://www.hcs.harvard.edu/analyst/content/issues/analystSample2005.pdf>
.
[12]
Alfred Romann, ‘Banking on the digital age’, China Daily
(online), 2 August 2013,
<http://www.chinadailyasia.com/business/2013-08/02/content_15081264.html>
.
[13]
Sylviane Gullaumont Jeanneney and Kangni Kpodar, ‘Financial development
and Poverty Reduction: Can there be a Benefit without
a Cost’ (Working
paper WP/08/62, International Monetary Fund, 2008),
3.
[14]
Ibid.
[15] Philip Arestis and
Asena Caner, ‘Financial Liberalization and Poverty: Channels of
Influence’ (Working Paper No. 411,
The Levy Economic Institute, July
2004); and R. Buckley & D. Arner, From Crisis to Crisis: The Global
Financial System and Regulatory Failure (Kluwer
2011).
[16] ‘Paul Volcker:
Think More Boldly’ Wall Street Journal (online), 14 December 2009
<http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html>
.
In the same piece Volcker wrote the words one so often hears quoted: “the
most important financial innovation that I
have seen the past 20 years is the
automatic teller
machine.”
[17] Stephen G
Cecchetti and Enisse Kharroubi, ‘Reassessing the Impact of Finance on
Growth’ (Working paper No 381, Bank for
International Settlement, July
2012).
[18] Ibid,
1.
[19] Ibid,
13.
[20] For a detailed analysis
of the term “financial repression” and its impact on growth, see
Edward S. Shaw, Financial Deepening In Economic Development, (Oxford
University Press, 1973). In contrast, Reinhart and Sbrancia argue that the
aftermath of the global financial crisis created
optimal conditions where
financial repression would be effective in reducing debt. See Carmen M. Reinhart
and M Belen Sbrancia, ‘The
Liquidation of Government Debt’ (Working
Paper 16893, National Bureau of Economic Research, March 2011).
[21] The World Bank, Economic
Growth in the 1990s: Learning from a Decade of Reform (World Bank, 2005),
203-238.
[22] Graciela Laura
Kaminsky and Sergio L. Schmukler, ‘Short-Run Pain, Long-Run Gain: The
Effects of Financial Liberalization’
(Working Paper WP/03/34,
International Monetary Fund, February
2003).
[23] Financial Crisis
Inquiry Commission Report on the Causes of the Financial Crisis, January 27,
2011, available at:
http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.
[24] Bekaert, Harvey and
Lundblad, in their quantitative analysis, found liberalisation of the equity
market to have a statistically significant
influence on per-capita GDP growth:
Geert Bekaert, Campbell R. Harvey and Christian Lundblad, ‘Does financial
liberalization
spur growth?’ (2001) 77(1) The Journal Of Financial
Economics, 3-55. Abiad and Mody established a positive connection between
financial liberalisation and a state’s openness to trade: Abdul
Abiad and
Ashoka Mody, ‘Financial Reform: What shakes it? What Shapes it?’
(Working Paper 03/70, International Monetary
Fund,
2003).
[25] Charles Wyplosz,
‘How Risky is Financial Liberalization in the Developing
Countries’ (Discussion Paper No 2724, Centre for Economic Policy
Research, 2002) and Romain Ranciere, Aaron Tornell and Frank Westermann,
‘Decomposing
the effects of Financial Liberalization: Crises vs.
Growth’, (2006) 30(12) Journal Of Banking & Finance,
3331-3348.
[26] Reuven Glick and
Michael Hutchison, ‘Banking Crisis And Currency Crisis: How Common Are The
Twins’, in Glick, Moreno
And Spiegel (eds), Financial Crises In
Emerging Markets (Cambridge University Press, 2001).
[27] Philip Arestis and Murray
Glickman, ‘Financial Crisis in Southeast Asia: Dispelling Illusion the
Minskyan Way’ (2002) 26(2) Cambridge Journal Of Economics, 237-260;
and RP Buckley, ‘A Tale of Two Crises: The Search for the Enduring Lessons
of International Financial Reform’ (2001) 6 UCLA Journal of
International Law and Foreign Affairs
1-43.
[28] Arestis and Caner,
above n 15.
[29] Andrew Sheng
(CEO of Fung Institute) has repeatedly advocated a pragmatic approach to finance
in Asia. See for example: Andrew Sheng,
‘The Regulatory Reform of Global
Financial Markets: An Asian Regulator’s Perspective’ (2010) 1(2)
Global Policy 191.
[30]
Michael Schuman, ‘Can Asian-Style Capitalism Save the West?’,
Time, 25 March 2012.
[31]
Trade, Development and Poverty Reduction, AusAID, September 2007
<http://www.ausaid.gov.au/Publications/Documents/trade_devel_poverty.pdf>
[32]
Thierry Senechal (ed), Rethinking Trade & Finance 2013 (International
Chamber of Commerce, June 2013),
13.
[33] Marc Auboin,
Restoring Trade Finance During a Period if Financial Crisis: Stock-taking of
Recent Initiative, (Working paper ERSD-2009-16, World Trade Organisation,
December 2009), 1.
[34] Marc
Auboin, ‘Boosting the availability of trade finance in the current crisis:
Background analysis for a substantial G20 package’,
Centre for Economic
Policy Research, Policy Insight No. 35, June 2009, 3 and Marc Auboin and
Martina Engemann, ‘Trade finance in periods of crisis: what have we
learned in recent years?’ (Staff Working Paper ERSD-2013-01, World Trade
Organization Economic Research and Statistics Division,
January 2013),
14.
[35] Elizabeth Ho, The
International Effects of the Credit Crisis, 28 RBNKFL 102 (Fall, 2008).
[36] Wei Liu and Yann Duval,
‘Trade finance in times of crisis and beyond’ (April 2009) 3
Asia-Pacific Research and Training Network Alerts
1.
[37] The G20 London Summit
Leaders’ Statement, 2 April 2009, paragraph
22.
[38] Marc Auboin and Martina
Engemann, above n 34, 17.
[39]
Ibid.
[40] Marc Auboin and
Martina Engemann, above n 34,
17.
[41] World Trade
Organization, The challenges of trade financing (May 2012), available at:
http://www.wto.org/english/thewto_e/coher_e/challenges_e.htm
and UNCTAD, ‘Trade financing and regional financial institutions from a
South-South perspective’, 15 August 2012, available
at: http://unctad.org/meetings/en/SessionalDocuments/ciimem2d11_en.pdf
[42]
Marc Auboin and Martina Engemann, above n 34,
17.
[43] World Trade
Organization, above n 41 and Marc Auboin, above n 34,
5-6.
[44]
Ibid.
[45] Marc Auboin and
Martina Engemann, above n 34,
17.
[46] Aki Ito & Shamim
Adam, ‘European Retreat Squeezes Asia Trade Finance as ADB Sees Loan
Demand Climb’, Bloomberg (online), 6 December 2011, available at:
http://www.bloomberg.com/news/2011-12-05/credit-squeeze-hits-asia-trade-finance-as-adb-loan-demand-soars.html
[47]
Bank for International Settlements, ‘Highlights of the BIS international
statistics’, BIS Quarterly Review, December 2012,
17-18.
[48]
Michael Bainbridge, ‘Basel III threat to Asian trade
finance’, Financial News (online), 29 October 2012,
available at: http://www.efinancialnews.com/story/2012-10-29/basel3-threat-to-asian-trade-finance
[49]
Ibid, citing Kay Chye Tan of
Barclays.
[50] Aki Ito and Shamim
Adam, ‘European retreat squeezes Asia trade finance as ADB sees loan
demand climb’, Bloomberg (online),
6 December 2011
<http://www.bloomberg.com/news/2011-12-05/credit-squeeze-hits-asia-trade-finance-as-adb-loan-demand-soars.html>
.
[51]
UNCTAD, ‘Trade financing and regional financial institutions from a
South-South perspective’, 15 August 2012, available
at: http://unctad.org/meetings/en/SessionalDocuments/ciimem2d11_en.pdf
[52]
Sarah Turner and V. Phani Kumar, ‘China data helps lift most Asia stocks;
Japan down’, MarketWatch, Wall Street Journal (online), 8
February 2013, available at: http://articles.marketwatch.com/2013-02-08/markets/36970890_1_quarterly-net-loss-sony-corp-china-data
[53]
World Trade Organisation, WTO Report on G-20 Trade Measures: Mid-May to
Mid-October 2012 (31 October 2012), available at: http://www.wto.org/english/news_e/news12_e/igo_31oct12_e.htm
[54] Morgan Stanley Research,
EU bank deleveraging and Asian trade finance (1 May 2012)
<http://pg.jrj.com.cn/acc/Res/CN_RES/INVEST/2012/6/1/8fa9fcad-09b7-4dc6-a05a-dcb2d692b442.pdf>
..
[55]
‘Japan tops trade finance charts’, Global Trade Review
(online), 25 January 2013, available at: http://www.gtreview.com/trade-finance/global-trade-review-news/2013/January/Japan-tops-trade-finance-charts_10637.shtml
[56]
Michael Bainbridge, above n 48.
[57]
Francesco Guerrera, ‘French Banks Say Adieu to Financing Asian
Trade’, Wall Street Journal (online), 3 September 2012,
<http://online.wsj.com/article/SB10000872396390443571904577629250952177234.html>
..
[58]
Morgan Stanley Research, above n
54.
[59] Takehiko Nakao, Vice
Minister of Finance for International Affairs, Japan, ‘International
Regulatory Reform and New Financial
Infrastructure in Asia’ (Speech
delivered at the Asian Financial Forum, Hong Kong, 14 January 2013)
<http://www.mof.go.jp/english/international_policy/others/20130114.htm>
.
[60]
Elliot calls it a ‘dangerous misconception’ that raising capital
requirements will ensure a safer banking requirement
and believes considerably
more debate is needed. See Douglas J. Elliot, Higher Bank Capital
Requirements Would come at a Price, The Brooking Institute, February 20,
2013, available at:
http://www.brookings.edu/research/papers/2013/02/20-bank-capital-requirements-elliott;
Shawn Baldwin, Basel Barriers: How capital requirements would impede progress
in the sovereign debt crisis, Forbes (online), 15 October 2012, available
at: http://www.forbes.com/sites/shawnbaldwin/2012/10/15/basel-barriers/.
[61] Viren Vaghela, ‘Basel
III threatens to throttle trade finance’, Asia Risk (online), 9
July 2012, available at: http://www.risk.net/asia-risk/feature/2190078/basel-iii-threatens-throttle-trade-finance and Michael Bainbridge, above n 48.
[62]
David Enrich, Geoffrey T. Smith and Andrew Morse, ‘Rules for lenders
relaxed’, Wall Street Journal (online), 7 January 2013, available
at: http://www.efinancialnews.com/story/2013-01-07/rules-for-lenders-relaxed
[63] Thierry Senechal (ed),
Global Risks – Trade Finance 2013 (International Chamber of
Commerce, 24 June 2013), 59.
[64]
Ibid,15.
[65] Thierry Senechal
(ed), Global Risks – Trade Finance 2011 (International Chamber of
Commerce, 26 October 2011), 16.
[66]
Ibid.
[67]
Ibid.
[68] Viren Vaghela,
‘Basel III threatens to throttle trade finance’, Asia Risk
(online), 9 July 2012, available at: http://www.risk.net/asia-risk/feature/2190078/basel-iii-threatens-throttle-trade-finance
[69] Garima Chitkara and Aaron
Woolner, ‘Revised LCR falls short on ending Basel III concerns over trade
finance’, Asia Risk (online), 6 February 2013, available at: http://www.risk.net/asia-risk/news/2242693/revised-lcr-falls-short-on-ending-basel-iii-concerns-over-trade-finance
[70] Laurence Neville,
‘Euromoney Trade Finance survey 2012: Trade not getting the credit’,
Euromoney (online), January 2012, available at: http://www.euromoney.com/Article/2959489/Euromoney-Trade-Finance-survey-2012-Trade-not-getting-the-credit.html?Type=Article&ArticleID=2959489
[71] Basel Committee on Banking
Supervision, Treatment of trade finance under the Basel capital framework
(Bank for International Settlements, October 2011)
<http://www.bis.org/publ/bcbs205.pdf>
.
[72]
Laurence Neville, above n
70.
[73]
Ibid.
[74] BAFT-IFSA,
‘Trade finance – key concerns and recommendations for the Basel
framework’, 1 December 2011, available
at: http://www.esf.be/new/wp-content/uploads/2011/12/BAFT-IFSA-Basel-Talking-Points-2011-12-01-Final.pdf
[75] Thierry Senechal (ed),
above n 65, 4.
[76] Thierry
Senechal (ed), above n 65,
7-8.
[77]
Ibid.
[78] Ibid and BAFT-IFSA,
above n 74.
[79] Citibank,
‘Basel III – Sailing the trade winds of change’, October 2012,
available at: http://www.transactionservices.citigroup.com/transactionservices/home/sa/b1/sibos_2012/docs/1015942_Impact_of_Basel_III.pdf
and Australian Prudential Regulation Authority (APRA), ‘Implementing Basel
III capital reforms in Australia – counterparty
credit risk and other
measures’, Discussion Paper, August 2012, available at: http://www.apra.gov.au/adi/PrudentialFramework/Documents/APRA_Discussionpaper_BASEL3_CCR_FINAL_2.pdf
[80] Australian Prudential
Regulation Authority (APRA), above n
79.
[81] Garima Chitkara and
Aaron Woolner, above n 69.
[82]
Ibid.
[83] BAFT-IFSA, ‘Key
concerns regarding trade finance and transaction banking’, 2012, available
at: https://www.baft-ifsa.com/eWeb/docs/Misc%20Documents/JointIndustryLetterTalkingPoints.pdf
[84]
Citibank, above n 60.
[85] David
Enrich, Geoffrey T. Smith and Andrew Morse, above n
62.
[86] Laurence Neville, above
n 70.
[87] Garima Chitkara and
Aaron Woolner, above n 69.
[88]
Thierry Senechal (ed), above n
59.
[89] Wei Liu and Yann Duval,
above n 36, 3.
[90]
Ibid.
[91] UNCTAD, ‘Trade
financing and regional financial institutions from a South-South
perspective’, 15 August 2012, available
at: http://unctad.org/meetings/en/SessionalDocuments/ciimem2d11_en.pdf
[92]
Ibid.
[93]
Ibid.
[94]
Ibid.
[95]
Ibid.
[96] Eko NM Saputro,
‘The East Asia Summit and regional financial cooperation’, East
Asia Forum (online), 18 August 2011, available at: http://www.eastasiaforum.org/2011/08/18/the-east-asia-summit-and-regional-financial-cooperation/
[97] Jean-Pierre Chauffour and
Mariem Malouche, ‘Trade finance during the 2008-9 trade collapse: key
takeaways’ (September
2011) 66 World Bank Economic Premise
5.
[98]
Ibid.
[99] Jean-Pierre Chauffour
and Mariem Malouche, above n
97.
[100] Marc Auboin, above n
34, 5.
[101] Marc Auboin and
Martina Engemann, above n 34,
19.
[102]
Ibid.
[103] Viren Vaghela,
‘Asian regulators get tough on liquidity ring-fencing’, Asia
Risk (online), 1 April 2011, available at: http://www.risk.net/asia-risk/feature/2041993/asian-regulators-tough-liquidity-ring-fencing
[104]
Ibid.
[105]
Ibid.
[106] Pascal Lamy,
‘Trade finance: rebooting the engine’ (2009) 1 International
Trade Forum 4.
[107]
Francesco Guerrera, above n
57.
[108] Marc Auboin, above n
34, 5.
[109] Marc Auboin and
Martina Engemann, above n 34,
18.
[110] International Finance
Corporation, Global Trade Liquidity Program
<http://www1.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Financial+Markets/Trade+and+Supply+Chain/GTLP/>
..
[111]
Marc Auboin and Martina Engemann, above n 34,
14.
[112] Marc Auboin and
Martina Engemann, above n 34,
3.
[113] Pascal Lamy, above n
106, 5.
[114]
Ibid.
[115]
Ibid.
[116] International
Chamber of Commerce, The ICC Trade Register (2012), available at: http://www.iccwbo.org/uploadedFiles/Services/Trade_Facilitation/ICC%20Trade%20Register%20Brochure.pdf
[117]
Ibid.
[118] International
Chamber of Commerce, ICC Trade Register, available at: http://www.icctraderegister.com
[119]
Ibid.
[120] We show pre-crisis
levels on the supposition that markets will recover toward their long-term
equilibrium levels of mortgage finance
after adjusting to the temporary impact
of the global financial crisis. See Loïc Chiquier, ‘Housing Finance
in East Asia’
(Working Paper 39393, World Bank,
2006).
[121] Economy Watch,
Mortgage Market in Asia, Economy Watch, 27 October 2010
<http://www.economywatch.com/mortgage/asia.html>
.
[122]
Ibid.
[123] Hans Wagner,
Will China Housing Market Follow the U.S. in a Mortgage Bust, The Market
Oracle (online), June 17, 2010, available at:
http://www.marketoracle.co.uk/Article20386.html.
[124]
Ibid.
[125] Leah Schnurr,
Housing rebound fails to recharge economy, MSNBC, November 5, 2012,
available at: http://www.nbcnews.com/business/economywatch/housing-market-rebound-fails-recharge-economy-1C6859650
and Jonathan Spicer and Leah Schnurr, ‘Housing Still impediment to U.S
growth: Fed officials’, Reuters (online), 5 October
2012,
<http://www.reuters.com/article/2012/10/05/us-usa-fed-idUSBRE89419L20121005>
.
[126]
Ibid.
[127] Haibin Zhu, The
Structure of Housing finance markets and house prices in Asia, BIS Quarterly
Review, December 2006, available at:
http://www.bis.org/publ/qtrpdf/r_qt0612g.pdf
[128]
Ibid.
[129] Economy Watch,
above n 121.
[130]
Ibid.
[131] Xiaoyi Shao and
Natalie Thomas, China home prices rise further in August, testing
government, Reuters (online), 18 September 2013,
<http://www.reuters.com/article/2013/09/18/us-china-property-prices-idUSBRE98H02120130918>
.
[132]
Andrew Hessian, China Seeks to Tame Boom, stirs Growth Fears, The Wall
St. Journal (online), 19 January 2012,
<http://online.wsj.com/article/SB10001424052748703405704575014703152997616.html>
.
[133]
Koyo Ozeki, The Chinese Real Estate Market: A Comparison with Japan’s
Bubble, PIMCO, December 2009,
<http://www.pimco.com.sg/EN/Insights/Pages/Asian%20Perspectives%20The%20Chinese%20Real%20Estate%20Market%20by%20Koyo%20Ozeki.aspx>
.
[134]
Ibid.
[135] Pooja Thakur and
Anto Anthony, ‘India 15% Loan Growth Led by Cautious Buyers:
Mortgages’, Bloomberg (online), 9 November
2012,
<http://www.bloomberg.com/news/2012-11-08/india-15-loan-growth-led-by-cautious-buyers-mortgages.html>
.
[136]
Ibid.
[137]
‘India-Housing Finance: Undeterred by Rough Seas – an Industry
Report’, Emkay Global Financial Services, January
2012, available at:
http://emkayglobal.com/downloads/researchreports/India%20-%20Housing%20Finance_Sector%20Report.pdf
[138] Presentation by Khan
Prachuabmoh, President of Government Housing Bank, Thailand, at the
25th Anniversary Celebration of the International Housing Financing
Program, The Wharton School, University of Pennsylvania, 18 June 2010,
available
at:
http://ihfp.wharton.upenn.edu/25th%20Anniversary%20Presentations%5CKhan.pdf
[139]
‘Mortgage market to be heated’, ASEAN Free Trade Area Sources, 10
August 2012, available at:
http://www.aftasources.com/news/show-1635.html
[140]
See Sonia Kolesnikov-jessop, ‘Bali’s cash property market keeps
prices up’, The New York Times (online), 9 February
2009,
<http://www.nytimes.com/2009/01/29/realestate/29iht-rebali.1.19777791.html?_r=0>
.
[141]
Ron Florance, Frontier Markets: Vietnam and Cambodia (13 July 2012) Wells Fargo
Wealth Management Insights Center, <https://www.wealthmanagementinsights.com>.
[142]
Ibid.
[143] United Nations
Population Division, World Urbanisation Prospects: The 2001 Revision,
available at:
http://www.un.org/esa/population/publications/wup2001/WUP2001_CH3.pdf.
[144]
FSB, FSB Principles for Sound Residential Mortgage Underwriting
Practices, April 2012, available at:
http://www.financialstabilityboard.org/publications/r_120418.pdf.
[145]
OH Hwa Se, ‘Loan-to-Value as Macro-Prudential Policy Tool: Experiences and
Lessons of Asian Emerging Countries’ (Policy
Paper Series No. 33, DSF,
January 2013).
[146] Soon-taek
Chang, ‘Mortgage Lending in Korea: An example of a Countercyclical
Macroprudential Approach’ (Policy Research
Working Paper 5505, The World
Bank Financial and Private Sector Development Financial Systems-Prudential
Oversight Department, December
2010).
[147] OH Hwa Se, above n
145, 7.
[148] Ibid at 7. For
more on the response of Korean real estate prices to changes in loan-to-value
and other requirements, see Deniz Igan
and Heedon Kang, ‘Do Loan-to-Value
and Debt-to-Income Limits Work?’ (Working Paper WP/11/297, International
Monetary
Fund 2011).
[149]
Rating and valuation Department, Hong Kong Property Review, February 2013,
available at: http://www.rvd.gov.hk/doc/en/statistics/full.pdf
[150] International Monetary
Fund, World Economic Outlook: Coping with high debt and Sluggish Growth,
October 2012, available at:
http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
[151] Oswald Chen,
‘Mortgage landing value may fall’, China Daily (online), 19
September 2012
<http://www.chinadaily.com.cn/hkedition/2012-09/19/content_15766724.htm>
.
[152]
Ibid.
[153] Chester Yung, IMF:
‘Hong Kong Property Sector Poses Severe Risk’, The Wall Street
Journal (online), 12 December 2012,
<http://online.wsj.com/article/SB10001424127887324024004578174441917470354.html>
.
[154]
John Y. Campbell, Tarun Ramadorai and Vimal Balasubramaniam, Prudential
Regulation of Housing Finance in India: 1995 – 2011, 2012, available
at:
http://intranet.sbs.ox.ac.uk/tarun_ramadorai/TarunPapers/PrudentialRegulationAppendix.pdf.
[155]
KPMG, Bridging the Urban Housing Shortage in India, available at:
http://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Urban-housing-shortage-in-India.pdf.
[156]
United Nations Human Settlements Programme, Housing Finance Mechanisms in
India (UN-HABITAT, 2008)
8-10.
[157]
Ibid.
[158]
Ibid.
[159] In 2008, UN-Habitat
bemoaned low mortgage lending to GDP ratios of percent. By 2012, Thakur and Anto
had observed this ratio increase
to about 8 percent: Pooja Thakur and Anto
Antony, ‘India 15% Loan Growth Led by Cautious Buyers: Mortgages’,
Bloomberg
(online), 9 November 2012
<http://www.bloomberg.com/news/2012-11-08/india-15-loan-growth-led-by-cautious-buyers-mortgages.html>
.
[160] See for example recent
measures introduced in Singapore: Sharon Chen, ‘Singapore Tightens Rules
for Home Loans in Latest Curbs’,
Bloomberg (online), 29 June 2013
<http://www.bloomberg.com/news/2013-06-28/singapore-tightens-rules-for-home-loans-in-latest-curbs.html>
.
[161]
Sara Malekan and Georges Dionne, Securitization and Optimal Retention Under
Moral Hazard (9 May 2012) SSRN,
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2038831>
.
[162]
Jack Selody and Elizabeth Woodman, ‘Reform of
Securitization’, (2009) Financial System Review,
47-52.
[163] Section 941 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) requires
securitizers to retain a minimum 5 percent
interest in mortgages they securitize
to better align their incentives: Ryan Bubb and Alex Kaufman,
‘Securitization and Moral
Hazard: Evidence from Credit Score Cutoff
Rules’ (Public Policy Discussion Paper No 11-6, Federal Reserve Bank of
Boston, 30
August 2011), 1. See also Selody and Woodman, above n 162,
50.
[164] Arner, et al,
‘Property Rights, Collateral, Creditors Rights, and Insolvency in East
Asia’, (2007) 42 Texas Internatiional Law Journal,
515.
[165] Johan Torstensson,
‘Property Rights and Economic Growth: An Empirical Study’, (1994)
47(2) Kyklos , 213-247.
[166] For example, the United
States: Jeff Mason, ‘Obama touts mortgage finance plan, highlights private
sector role’, Reuters
(online), 6 August 2013
<http://www.reuters.com/article/2013/08/06/us-obama-housing-idUSBRE97516Q20130806>
.
[167]
See Weber, Arner et al. in this
volume.
[168]
Ibid.
[169] Catriona Purfield,
Hiroko Oura, Charles Kramer and Andreas Jobst, ‘Asian Equity Markets:
Growth, Opportunities, and Challenges’
(Working Paper WP/06/266,
International Monetary Fund,
2006).
[170] Bank for
International Settlements, ‘Weathering financial crises: bond markets in
Asia and the Pacific’ (BIS Papers No
63, BIS Monetary and Economic
Department, January 2012),
<http://www.bis.org/publ/bppdf/bispap63.pdf>
.
[171]
International Capital Market Association, Economic Importance of the
Corporate Bond Markets (March 2013)
<http://www.icmagroup.org>
13.
[172] Edinburgh Group,
Growing the global economy through SMEs (2012),
<http://www.edinburgh-group.org/media/2776/edinburgh_group_research_-_growing_the_global_economy_through_smes.pdf>
.
[173]
Ibid.
[174] Mirijam Schiffer
and Beatrice Weder, ‘Firm Size and the Business Environment: Worldwide
Survey Results’ (Discussion Paper
43, International Finance Corporation,
2001), 15.
[175] The World
Bank, Finance for All; Policies and Pitfalls in Expanding Access (2008),
available at:
http://siteresources.worldbank.org/INTFINFORALL/Resources/4099583-1194373512632/FFA_book.pdf
[176]
Ibid.
[177]
Ibid.
[178] International
Finance Corporation (IFC), SME Finance Policy Guide, October 2011,
available at:
http://www.gpfi.org/sites/default/files/documents/SME%20Finance%20Policy%20Guide.pdf.
[179]
International Finance Corporation (IFC), SME Finance Policy Guide,
October 2011, available at:
http://www.gpfi.org/sites/default/files/documents/SME%20Finance%20Policy%20Guide.pdf.
[180]
Thorton Beck, Asli Demirguc-Kunt and Ross Levine, ‘SMEs, Growth and
Poverty’ (Working Paper 11224, NBER, March
2005).
[181] Jean-Pierre
Chauffour and Mariem Malouche, ‘Trade finance during the 2008-9 trade
collapse: key takeaways’ (September
2011) 66 World Bank Economic
Premise 5.
[182] European
Commission, Improving access to finance for SMEs: key to economic
recovery (2 May 2013),
<http://europa.eu/rapid/press-release_MEMO-13-393_en.htm>
.
[183]
Stein, Goland, and Schiff, Two Trillion and Counting: Assessing the Credit
Gap for Micro, Small, and Medium Enterprises in the Developing World
(International Finance Corporation,
2010).
[184] Jean-Pierre
Chauffour and Mariem Malouche, above n
182.
[185] Edinburgh Group,
above n 172.
[186] Association
of Chartered Certified Accountants, Framing the debate: Basel III and
SMEs (July 2011),
<http://www.accaglobal.org.uk/content/dam/acca/global/PDF-technical/small-business/pol-af-ftd.pdf>
.
[187]
See generally, Ricardo Gottschalk, Basel II implementation in developing
countries and effects on SME development, 2007, available at:
http://www.ids.ac.uk/files/gottschalk_ICRIER_paper07.pdf.
[188]
Association of Chartered Certified Accountants, above n
187.
[189] The World Bank,
above n 176, 108.
[190] Ibid,
164.
[191] Ibid..
[192]
Ibid.
[193] UNCITRAL (United
Nations Commission on International Trade Law), Legislative Guide on Secured
Transaction (2007), 1.
[194] Alvarez de la Campa,
Increasing Access to Credit through Reforming Secured Transaction in the MENA
Region (World Bank,
2010).
[195] Simeon Djankov,
Caralee Mcliesh and Andrei Shleifer, ‘Private Credit in 129
Countries’ (Working Paper, NBER,
2005).
[196] Leora Klapper,
‘The Role of Reverse Factoring in Supplier Financing of Small and Medium
Sized Enterprises’ (2006) 30(11)
Journal Of Banking And
Finance.
[197]
Ibid.
[198] Ibid.
[199]
Ibid.
[200] Jean-Pierre
Chauffour and Mariem Malouche, ‘Trade finance during the 2008-9 trade
collapse: key takeaways’ (September
2011) 66 World Bank Economic
Premise 5 and de la Torre, Augusto; Martínez Pería,
María Soledad; Politi, María Mercedes; Schmukler, Sergio
L.;
Vanasco, Victoria, How Do Banks Serve SMEs? Business and Risk Management
Models (2008),
<https://openknowledge.worldbank.org/handle/10986/12959>.
[201]
Ibid.
[202] International
Finance Corporation (IFC), The SME Banking Knowledge Guide (2010),
<http://www.ifc.org/wps/wcm/connect/b4f9be0049585ff9a192b519583b6d16/SMEE.pdf?MOD=AJPERES>
.
[203]
International Finance Corporation (IFC), above n 180,
44.
[204]
Ibid.
[205]
Ibid.
[206]
Ibid.
[207] International
Finance Corporation (IFC), above n
180.
[208]
Ibid.
[209] Claire Fargeot,
How the Investment Industry Can Facilitate SME Access to Finance in
Europe, CFA Institute (22 February 2013),
<http://blogs.cfainstitute.org/marketintegrity/2013/02/22/how-the-investment-industry-can-facilitate-sme-access-to-finance-in-europe/>
.
[210]
Financial Stability Board, Global Shadow Banking Monitoring Report 2012.
[211] Ibid at 3. Share of GDP
comes from authors based on nominal GDP in 2007 as reported by the World Bank.
[212] Ibid.
[213]
Ibid.
[214] Ibid at Annex 2.
[215] We do not report assets
managed by specific types of NBFIs – such as insurance companies or
finance companies. Such data would
not necessary provide any additional insight
into our thesis that Asian policymakers need to balance pro-development
financial policies
with managing the risks of rapid growth in this relatively
unregulated sector. We also do not discuss the role of relatively complex
financial products (such as credit default swaps and special purpose vehicles)
as mechanisms for non-bank financial intermediation.
Such a discussion is beyond
the scope of this paper.
[216]
Korean bank assets have hovered at about 200 percent of GDP – illustrating
a broader trend in the larger, developed countries
like Japan and Korea that
formal banking institutions have succeeded in providing funding to more
generally and thus reduced the
need for
NBFIs.
[217] Risk premia
charged by Asian banks may vary not only according to the borrower’s risk
of default but also by the bank’s
own ability to price such risk. For a
further description of this mechanism and data from Asia, see Lina, Jane-Raung
Lin, Huimin
Chung, Ming-Hsiang Hsieh and Soushan Wu, ‘The determinants of
interest margins and their effect on bank diversification: Evidence
from Asian
banks’ (2012) 8(2) Journal of Financial Stability, 96–106.
[218] For more on the impacts
of NBFIs on labour and other markets, see Jeffrey Carmichael and Michael
Pomerleano, The Development and Regulation of Non-Bank Financial
Institutions (World Bank, 2002).
[219] For a fuller discussion
of these risks in an easy-to-digest form, see David Luttrell, Harvey Rosenblum,
and Jackson Thies, ‘Understanding
the Risks Inherent in Shadow Banking: A
Primer and Practical Lessons Learned’ (Working Paper No. 18, Dallas
Federal Reserve,
November 2012).
[220] Reserve Bank of India,
Credit Market (31 May 2007),
<http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=502>
.
[221]
As we describe below, the Action Plan presents a set of vague policies rather
than concrete and specific rules. As such, recent changes
to the Indonesian
legal framework governing NBFIs remain at the policy level.
[222] Financial Stability
Board (FSB), Shadow Banking: Strengthening Oversight and Regulation –
Recommendations of the Financial Stability Board (27 October 2011),
<http://www.financialstabilityboard.org/publications/r_111027a.pdf>
.
[223]
Section 45IA of the RBI Act (1934) reported in Reserve Bank of India,
Working Group on the Issues and Concerns in the NBFC Sector – Report
and Recommendations, August 2011, 18.
[224] Art 3.2.i, available at:
http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/FRWS250811.pdf
. Other proposals aim at providing certain exemptions from minimum capital
requirements if the NBFI does not take funds from the
public.
[225] Reserve Bank of India
Act (1934), section
45-IA(4)(d).
[226] Reserve Bank
of India, above n 225, 20.
[227] Notably the Capital
Markets Law (CML), No 8/1995, which replaces the Presidential Decree No. 53/1990
and MOF Decree No.
1548/KMK.013/1990.
[228]
Indonesian Ministry of Finance, The Capital Market and Non Bank Financial
Industry Master Plan 2010 – 2014, 149-153, available at:
http://www.bapepam.go.id/pasar_modal/publikasi_pm/info_pm/MASTERPLAN_BAPEPAMLK_2010-2014_ENG.pdf.
[229]
Ibid, point 1.2. We have cited the original objectives from the text –
explaining the rather jargon-laden construction of that
sentence.
[230] Ibid. We take the
wording from the plan (from the second part of point 1.2), again explaining the
sentence’s clumsy wording.
[231] Interest Rate
Restriction Act 1954 (Risoku Seigen Ho), Law No 100, Enacted 15 May 1954,
unofficial translated version available at:
http://www.asianfinancegroup.com/projects/translation/japanese-legislation/interest-rate-restriction-law/;
official version is available at:
http://law.e-gov.go.jp/htmldata/S29/S29HO100.html
[232]
Ibid, Article 1(1).
[233] Such
as the Law Concerning the Regulation of Moneylenders (1983) and the
Money Lending Business Act
(1983).
[234] The FSB provides
11 recommendations. We do not have the space to provide an assessment of each
country’s performance in adopting
each of these recommendations.
[235] Mudita Tiwari &
Deepti K.C., Mobile Payment Systems: What Can India Adopt From Kenya’s
Success? (2 April 2013) The Consultative Group to Assist the Poor (CGAP)
<www.cgap.org\blog\mobile-payment-systems-what-can-india-adopt-from-kenya’s-success>.
[236] Plyler, Haas and
Nagarajan, Community Level Economic Effects of M-PESA in Kenya: Initial
Findings (June, 2010)
<http://www.fsassessment.umd.edu/publications/pdfs/Community-Effects-MPESA-Kenya.pdf>
.
[237]
Ibid.
[238]
Ibid.
[239] Global
Partnership for Financial Inclusion, GPFI,
<http://www.gpfi.org/about-gpfi/countries/global-partnership-financial-inclusion>
.
[240]
Jeanette Thomas, Regulation Spurs Innovation in the Philippines, CGAP (5
November 2012),
<http://www.cgap.org/blog/regulation-spurs-innovation-philippines>
.
[241]
External remittances account for about 10 per cent of Filipino GDP and internal
remittances between workers in urban areas sending
money to their family in
rural areas are a common feature of life in the
Philippines.
[242] Jeanette
Thomas, above n 242.
[243]
Ibid.
[244] Chris Bold,
GCASH Supports the Philippine Government’s Programs, GCAP (29 March
2011),
<http://www.cgap.org/blog/gcash-supports-philippine-government ’ s-programs>
.
[245]
Ibid.
[246]
Ibid.
[247]
Ibid.
[248] Mudita Tiwari,
Mobile Payment Systems: What Can India Adopt From Kenya’s Success?,
CGAP (2 April 2013),
<http://www.cgap.org/blog/mobile-payment-systemswhat-can-india-adopt-kenya ’ s-success>
.
[249]
Ibid.
[250] Ibid and Reserve
Bank of India, Mobile Payment in India – Operative Guidelines for
Banks,
<http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1365>
.
[251]
Mudita Tiwari, above n
250.
[252] Such a handbook is
the principal goal of a current research project funded by the Centre for
International Finance and Regulation
in Sydney. See “The Regulation of
Mobile Money, E226”, available at http://www.cifr.edu.au/site/Projects/Financial_Market_Developments.aspx
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