26 March 2014
Fair, inclusive and stable finance in Asia -- a trade union perspective IIIThis is the third section of a paper I wrote for the trade union group, UNI-APRO, on "Towards fair, inclusive and stable finance in Asia: Advancing a trade union agenda".
Finance to serve Asia’s new economic futureThe fundamental role of finance is to serve the economy, such as by mobilizing savings, allocating them to the best investment projects, managing the payments system, offering risk management services, and handling international finance. Despite Asia’s impressive economic development, Asian financial systems have had many shortcomings in fulfilling those roles.
Asia’s financial sectors are still in general relatively under-developed, being bank-centered, with smaller weak bond markets. Regional integration of financial markets remains weak. Countries with large surpluses, like China, Japan, Taiwan and Hong Kong, invested much of these surpluses in the US (rather than Asia), thereby underwriting its US credit binge leading to the sub-prime crisis. And most significantly, financial inclusion remains a great challenge in the region, with largest segments of the population, and micro, small and medium enterprises having no access to the formal financial system.
These past few decades, a big driver of Asia’s development has been supply chains, production networks, set up in Asia’s developing countries, by multinational companies. They outsourced production to take advantage of cheaper labor and other costs, and service their markets back home in the US and Europe.
It is now clear that this cannot go on. US and European markets will be weaker in the years ahead as they try to clean up the financial mess of their unsustainable credit-binge driven growth. Asia must now take hold of its own economic future by developing its own markets more. We can’t rely on US and European markets like we used to in the past.
Rebalancing Asia’s development back home means many things. If adverse trends in income inequality can be reversed, if workers can get a fairer slice of the economic pie, higher incomes can boost domestic consumption.
But finance must also be rebalanced. In the old model, the main sources of finance were foreign direct investment for export facilities, and bank finance for big companies -- although it did not always result not very efficient investments, as finance was it often based on "connections" and government directions, rather than sound project analysis.
To support domestic consumption, citizens require greater access to financial services. And to facilitate greater development of micro, small and medium enterprises, notably in the service sector, these enterprises must also have greater access too.
In other words, the next phase of Asia's development must be supported by fair, inclusive and stable finance.
The following sections deal with these issues in detail.
Financial development in AsiaHow do Asia’s financial sectors measure up?
The Asian region, which has immense economic diversity, also has immense diversity in terms of “financial development”, according to a World Economic Forum survey of 62 economies. The WEF defines financial development by the factors, policies, and institutions that lead to effective financial intermediation and markets, as well as deep and broad access to capital and financial services.
Hong Kong has the highest level of financial development in the world. The island economy bested out the US, the UK and Singapore. Japan and Korea, two countries where there are very close links between big business, big banks and government, are further down the list at 6th and 15th respectively. Other Asian countries are to be found much further down the list: Malaysia 18th, China 23rd, Thailand 34th, India 40th, Philippines 49th, Indonesia 50th, Vietnam 52nd, and Bangladesh 57th.
The overall conclusion is that apart from a few exceptions, Asia’s financial sectors are relatively underdeveloped -- despite the comprehensive reform of the macroeconomic policy framework and financial sector regulation after the Asian financial crisis. At this time, regulatory systems were revamped, ensuring that financial institutions remain sound with capital adequacy ratios well above international norms. Massive external deleveraging was undertaken by the private sector, including bank and nonbank financial institutions. Financial sector reforms centered on bank rehabilitation and recapitalization while upgrading in the prudential norms.
Despite the progress made, most of Asia’s financial sectors suffer from the following shortcomings:
-- financial sector development lags behind the real economy, and is unable to provide necessary funding and financial services for the private sector;
-- financial sectors remain structurally unbalanced with high concentration in the banking system, with much less well-developed domestic capital markets;
-- underdeveloped financial infrastructure and legal and regulatory framework. While countries like India, Indonesia, the Philippines, and Thailand have strengthened financial infrastructure such as electronic payment systems, credit information bureaus, and collateral registries in the past decade, basic financial infrastructure remain inadequate in most low-income developing economies.
Some of these and other issues are developed in the following sections.
Human capital in the finance sectorRecurrent financial crises and lack of access to the formal finance sector highlight the importance of financial institutions hiring, retaining and training employees for sustainable financial development.
A worrying trend however is that banking and insurance companies are increasingly hiring employees through temporary work agencies (TWA). This means that in a typical workplace you will have regular and temporary employees sitting side-by-side, doing the same job, but with the temporary employee earning a reduced wage. Overall, there is a trend towards a reduction of regular employees and increasing financial service deliveries through web and mobile telecommunication platforms.
This trend is particularly worrying because it exacerbates income inequality and compromises the goal of decent work. Moreover, trust and confidence of the customer is critical in the finance industry, and loyal regular employees of financial institutions develop skills and competencies to retain loyal customers for banks. It’s a win-win. By contrast, relying on recruitment of irregular employees, without paying adequate emphasis in providing professional advices to customers, reflects a short term focus and needs to be critically evaluated by financial regulators and supervisors.
Because of the effect of temporary workers, seeking upward revisions of terms and condition of employment of unionized employees has become difficult. The overall effect of this new trend will be a reduction in service quality in the finance sector, and a loss of trust and confidence.
This is of critical importance, especially in a region like Asia where many potential customers are unfamiliar with financial market services, due to their long term financial exclusion. It is important to develop a fair finance industry, which is conscious of risks and focused on customer needs.
Asian bond marketsThe AFC highlighted one particular shortcoming of Asian financial markets, namely underdeveloped local-currency corporate bond markets.
In part because of this, many East Asian corporations took out short-term bank loans from foreign banks to help finance longer term investment projects. They suffered badly from the “maturity mismatch” when refinancing these short-term loans was suddenly impossible because of the sudden and dramatic change in market sentiment towards East Asia. They also suffered from a “currency mismatch” when their currencies suddenly depreciated, as they had borrowed in foreign currency for a local investment project.
Thus, it is argued that a local-currency corporate bond market would provide corporations with greater opportunity to obtain longer term financing for local projects, and thereby eliminate both the maturity and currency mismatches. In addition, deeper and more developed corporate bond markets would foster a long term yield curve which could serve as a benchmark for a more long term thinking attitude by business.
Governments in emerging Asia have recognized the importance of developing capital markets and local bond markets in particular. At the national level, efforts have included: removing policy distortions; enhancing market infrastructure to support the functioning of bond markets; strengthening the regulation and supervision of capital markets in accordance with international standards and practices; and developing government bond markets which can provide benchmarks for corporate bond markets.
Much progress has also been achieved through regional initiatives.
-- The Asian Bond Markets Initiative (ABMI) was launched by the ASEAN+3 finance ministers in August 2003, and has the objective of enhancing market infrastructure for local currency bonds and facilitating market access to a diverse issuer and investor base so that robust primary and liquid secondary markets are created in the region.
-- Together with technical support from the Asian Development Bank and driven by the East Asian central banks, two Asian Bond Funds, ABF1 and ABF2, were launched.
-- Since 2008, ASEAN+3 countries have cooperated to establish an Asian Bond Market Forum as a common platform for regional bond market integration.
-- ASEAN+3, with an ADB contribution, has established the Credit Guarantee and Investment Facility to provide credit enhancement for investment grade companies seeking to issue local currency bonds.
Thanks to domestic reforms and collective regional efforts, emerging East Asia’s bond market has come a long way since the Asian financial crisis in terms of market depth, and regulatory and market infrastructure, in particular:
-- the local currency (LCY) bond market of emerging East Asia (EEA) has risen from approximately $1 trillion in 2001 to $6.5 trillion as of end 2012. EEA is defined as China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Viet Nam.
-- total LCY bonds outstanding in EEA at the end of September 2011 were approximately 8.1% of the global bond market against 2.1% in 1996.
-- the domestic corporate bond market has been the growth driver for the EEA LCY bond market as a whole over the past few years -- but it still only accounts for about a third of total bonds outstanding in the region.
-- the largest LCY bond market in EEA is in China with $3.4 trillion in bonds outstanding at end 2011.
-- notwithstanding the impressive development of emerging East Asia’s bond markets, most corporate bond markets in Asia remain underdeveloped and small compared to the region’s equity markets, with the major exception of Korea. But while corporate bond markets are growing fast in China, most issuers are government-owned entities.
-- Korea, Malaysia, and Thailand had the most liquid government bond markets – as measured by quarterly turnover ratios – at the end of 2011. But overall, liquidity remains limited. The most important structural issue holding back liquidity in EEA is the need to increase investor diversity.
Overall, despite the impressive progress in developing bond markets, Asian financial systems are still dominated by the banking system, whose share relative share declined only moderately from 54.5 per cent in 2005 to 50 per cent in 2010.
Pension funds and other institutional investors, which are a growing force in Asia, should be encouraged to invest in local bond markets. According to TheCityUK research, global pension assets are valued at some $34 trillion, far outweighing sovereign wealth funds which only weigh around $6 trillion.
Asian financial market integrationAsian financial markets are weakly integrated with each other, as well as being underdeveloped. In fact, individual Asian financial markets are more integrated with financial markets in advanced countries than with each other. In other words, Asia’s surplus savings are still mainly invested outside the region to the advanced markets.
What needs to be done to achieve deeper market integration? First of all, development of financial markets. Then, harmonizing and mutual recognition of regulations. And lifting of exchange controls and capital controls. To this end, well-sequenced opening of capital accounts and harmonization and/or mutual recognition of rules, regulations and market practices would be important.
There would be many potential benefits from deeper integration of Asian financial markets. It would provide investors with long term investment opportunities in the region. It would also open up the door investment opportunities in the many Asian countries where infrastructure deficits are enormous, such as India, Indonesia and the Philippines.
Mobilizing Asian savings for Asian investment could be a very important response to the rebalancing imperative, providing a new source of regional growing by unlocking up new investment opportunities.
Financial access in AsiaMore interesting than the WEF’s financial development rankings, are its assessments of “financial access” in Asia, the region with the largest number of the world's poor people. Access to financial markets for consumers and entrepreneurs can reduce poverty, by providing the poor with access to banking services and credit.
Which countries provide businesses and consumers with the best access to financial services? Sweden tops the 62 countries surveyed for financial access, followed by Canada and Belgium. Overall, Asia scores much less well for financial access than for financial development, with Hong Kong ranking 4th, Singapore 14th, Korea 22nd, Japan 27th, Malaysia 28th, China 41st, Vietnam 43rd, India 45th, Bangladesh 51st, Philippines 53rd and Indonesia 54th.
Comments in the WEF’s country notes are insightful. Even in the case of Hong Kong, the WEF says “While commercial access to capital remains very strong, retail access is a clear area for improvement.” There is a similar message for Singapore, “Financial access scores are mixed, with Singapore scoring high in terms of commercial access to capital, but quite low with regards to retail access.” “Financial access continues to be a weak point for Japan.” “For financial access, India has a development advantage for commercial access, but an important development disadvantage for retail access.” And for the Philippines, “Financial access, particularly retail access, remains an area for improvement.”
All things considered, Asia is lagging in its financial development, and especially in its access to financial services for its citizens.
A World Bank study on “financial inclusion” confirms the dire state of too many people Asia in terms having an account at a formal financial institution like a bank, credit union, cooperative, post office, or microfinance institution. In the high-income OECD economies some 89% of adults have an account, while in East Asia the figure is 55% and in South Asia it drops down to 33%.
In the advanced countries of the Asia Pacific, there is almost universal access to formal financial services, with the following shares of the population having an account at a formal financial institution -- Australia 99%, Canada 96%, Hong Kong 89%, Japan 96%, Korea 93%, Singapore 98%, and the US down the list at 88%.
In middle income Asian countries, access to formal financial services is much lower -- China 64%, India 35%, Indonesia 20%, Malaysia 66%, the Philippines 27%, and Thailand 73%. And in low income Asian countries, access to formal financial services is even lower again, with for example Bangladesh at 40%, Cambodia 4%, Laos 27%, and Nepal 25%.
Without an account in a formal financial institution, it is all the more difficult for these people to save, obtain credit, receive wages or government payments, and send/receive remittances to family and friends. Without inclusive financial systems, poor people must "scrape by" to survive in life or become entrepreneurs. "Scraping by" can mean building up your own savings, borrowing from family and friends, running up a tab at the local shop, to name just a few strategies etc.
What are the reasons? The results are fairly similar between East Asia and South Asia, with the most important factors in order of importance being: a family member already has an account; formal financial institutions are too far away; they are too expensive; a lack of necessary documentation; a lack of trust; and religious reasons.
Clearly, there are things that can and are being done to address some of these factors:
-- Addressing the special concerns of micro, small and medium enterprises, one of the main pillars of job creation. Banks are too often reluctant to lend to these enterprises because of their high business risks, lack of reputation, inadequate credit information and history, and collateral. The most visible progress has been made in the region’s middle-income economies, where secured and nonsecured lending regimes have been established with collateral management systems, credit information bureau, etc. But in low-income developing economies, lack of legal and regulatory framework, inadequate information and market transparency, weak corporate governance, and underdeveloped financial infrastructure continue to hamper effective finance.
-- Microfinance has become a very powerful instrument for improving financial inclusion. Microfinance has now expanded beyond microcredit to microsavings, microtransfers and microinsurance. Microinsurance is of particular importance since the poor are vulnerable to a vast array of risks such as natural disasters, crop failure, and health, social, economic, political and environmental risks. As microfinance continues to expand, there is a need to adapt existing regulations for the benefit of greater financial inclusion. Reports of harsh collection practices, suicides, over indebtedness, and high fees highlight some of the critical issues. At the same time, microfinance remains hampered by high transaction costs, due to the high cost of collecting and disbursing small amounts of cash to a large number of people – whether these small payments are for savings, credit or insurance.
-- Public banks are an indispensable element of a well-functioning financial sector in many countries, especially in contributing to financial inclusion. Two successful cases are the Union Bank of India, a public bank which promotes financial inclusion yet remains commercially viable, and the Khan Bank of Mongolia, which has been privatized, re-nationalised and re-privatised, and now successfully provides microfinance services to the whole country. Regrettably, however, too many public banks provide privileged access to large enterprises (often state-owned), with the result that micro, small and medium enterprises are deprived from financial services.
-- Mobile banking can facilitate access to financial services, such as cash deposits and withdrawals, third-party deposits into a user account, retail purchases. That there over 1 billion people in emerging markets today who do not have a bank account but do have a mobile phone, shows the potential. The Philippines has become one of the world capitals of mobile banking, with Smart Communications and Globe Telecom offering ollowing electronic money products “Smart Money” and “G-cash”. Mobile phone banking presents challenges to regulatory capacity, as it cuts across various regulatory domains including banking, telecommunications, payments systems and anti-money laundering.
-- “Branchless banking” can achieve better financial inclusion is to take banking transactions outside of banking halls and into agents like post offices, retail commercial outlets, lottery kiosks, pharmacies, etc, which exist in every village and every neighborhood. In Asian countries like Bangladesh, Laos, Nepal, and the Philippines, more than 10 percent of account holders already report using bank agents.
-- Financial identities. One reason why lower income segments of the population and small and medium enterprises may have difficulty accessing formal lines of credit is because they do not have a financial identity (or even any identity, if they lack a birth certificate) or a financial history. There are many options that are being worked on or explored to establish citizens' financial identity. For example, the Bank of Indonesia has launched the Financial Identification Project (FIP) to provide unique financial identity number (FIN).
-- Financial capability and financial education are necessary both to enable citizens to make use of their access to the financial system, as well as to empower them to make sensible financial choices. Trade unions are already active in providing financial education to workers, and there is great scope to expand such financial education amongst the community by trade unions could be a good alternative to build alliances with consumer and community organizations for farmers, fishermen and artisans.
-- Consumer protection policies are necessary to address technical and delivery security, reduce predatory lending and increase disclosure of information, facilitate efficient dispute settlement, enhance data protection and improve comparability of offers. The key elements are transparency, fairness, responsibility and fair recovery practices. Given that financial literacy is low in all developing countries (and many developed countries), consumer protection is a critical partner to financial education.
Efforts by trade unions themselves can foster financial inclusion through cooperatives, thrift, medical insurances etc. A good case study is that of Japanese labour banks, like the Rokin Banks, and labour insurance introduced after World War 2.
Japan’s rushed attempt to rebuild its economy by investing in its infrastructure and corporations left workers with little or no access to secure financial institutions. As a result, workers were subjected to high interest burdens, loan sharks and liquidizing of assets. In 1950 the establishment of the Rokin bank in Hyogo and Okayama as a financial organization with the central goal of promoting sincerity and openness while supplying fair and decent loans to workers was pivotal in developing a more balanced and inclusive banking system.
Following the collapse of Lehman Brothers in 2008 and upon the request of the Japanese government, Rokin bank restructured and expanded its activities and devised the “Special Financing Program to Support Workers” as a means to support workers struggling with loan repayment conditions. In addition, the bank launched awareness campaigns on better personal financial management, created security loan funds for the unemployed and initiated education-led overseas development projects, such as the “Hearty Soshina Project”. With a fast growing need for financial institutions to take on more social responsibilities, Rokin bank with its 60 years of experience may serve as inspiration to institutionalize social finance for workers.
Concluding commentsThe Asian financial crisis of 1997-98, the global financial crisis which began in 2008, and the period in between, have taught Asia many bitter lessons.
In this context, finance industry trade unions have a challenging agenda to achieve decent working conditions, and inclusive growth, and to deliver services to their members. Most importantly, this is not only a trade union priority, it is critical for our whole societies. This has been recognized by none other than the World Economic Forum, which has identified increasing income inequality as the number one global risk for business.
Some specific issues include:
-- there is a need for Asian regional initiatives -- like the Chiang Mai Initiative Multilateralized, the ASEAN+3 Macroeconomic Research Office (AMRO), and the Asian Bond Market Intiative -- to minimize the risk of and cope with financial crises.
-- an Asian regional payment and settlement system, which has also been recommended by the Asian Development Bank, could minimize the risks of global liquidity shortages, and interest and exchange rate volatilities.
-- more developed financial markets, with more active local currency bond markets, are necessary to serve the real economy -- but more developed financial markets must strike the right balance between innovation to improve financial services, and regulation to improve financial inclusion and reduce the risks of financial crises.
-- Asian financial markets are only weakly integrated which means that many Asian investors are more attracted to Western markets, rather than Asian markets. If more Asian savings, notably from pension funds, could be attracted to Asian investment opportunities in areas like infrastructure in particular, this would provide an important boost to Asian development and employment.
-- the trend of banking and insurance companies to increasingly hire employees through temporary work agencies threatens the quality of financial services, and can lead to a loss of trust and confidence in the financial sector. It is also leading to growing income inequality in the finance industry, and compromising the goal of decent work.
-- too many Asian citizens and micro, small and medium enterprises do not have access to formal financial services.
This paper argues that, while there have been many national, regional and international policy discussions and initiatives over many years, meaningful progress on addressing these issues has been woefully inadequate in terms of ensuring fair, inclusive and stable finance in Asia.
Asian Century Institute
REFERENCES:- World Economic Forum. The Financial Development Report 2012.
- Asli Demirguc-Kunt and Leora Klapper, 2012, "Measuring Financial Inclusion: The Global Findex", World Bank Policy Research WP 6025.
- Cyn-Young Park. Asian Financial System: Development and Challenges. ADB Economics Working Paper Series No. 285. November 2011
- Hannig, A., and S. Jansen. 2010. Financial Inclusion and Financial Stability: Current Policy
- International Labour Organisation. ROKIN Bank: The story of workers’ organizations that successfully promote financial inclusion. Employment Working Paper No. 97