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Econ Development Lesson 12

Econ-Development-Lesson-12

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Sheila Marie Ann Magcalas-Galura
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35 views43 pages

Econ Development Lesson 12

Econ-Development-Lesson-12

Uploaded by

Sheila Marie Ann Magcalas-Galura
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Finance and

Development
Lecture 12:
Economic
Development
Financial Systems
Financial systems are
usually there to transform
short-term liabilities into
long-term assets.
For example, demand
deposits can be transformed
into long-term loans.
Financial Systems
Finance is a driver of
sustainability. However, to
achieve sustainability through
finance, it is necessary to
rebuild and adapt the
financial system to the
specifics of sustainable
development.
Financial Systems
Modern financial systems can be described as
one-dimensional, focusing on ensuring the
economic security of transactions.
Role of Finance
Financial institution such as
banks, bond markets, or stock
markets link the savers and
borrowers of the economy.
Role of Finance
These are organizations offering financial
services, specifically, banks, building society,
finance company, or credit union.
Role of Finance
Supply of savings coming from “savers”
like households, firms, and other venture
capitalists save up or invest money that are
managed by these institutions to meet the
demand for such savings by borrowers such
as firms, entrepreneurs, or even households.
Role of Finance
The concept of venture capital basically
benefits start-up business entrepreneurs to
develop new products. Since it is a start-up
business, this can be very risky investments to
the point of losing the entire investment.
Role of Finance
Venture capitalists normally
screen new ideas, evaluate the
viability of the business, and
solicit investments for these.
Role of Finance
Apart from screening function of finance, it
also monitors the daily activities of financial
assets that are traded in the market. In fact,
we can check the movement of our stocks and
bonds on various financial platforms like
Yahoo! Finance.
Role of Finance
Borrowing and saving help
smoothen consumption over
a lifetime; it can be the
savings for retirement, or it
can be a mortgage like a car
loan or education loan.
Role of Finance
Financial systems help us borrow and save
money to acquire these assets without waiting
for many years to come.
Role of Finance
Other roles of finance in development are
diversification and transformation of risk
and the management of payment systems,
i.e., reducing transaction costs.
Role of Finance
In view of the stability of the banking system,
considering shadow banking, interbank
lending, and complex relationships between
banks, there is a need for concentrated
interbank network structure that is easier to
increase the probability and degree of risk
contagion.
Role of Finance
Shadow banking is the credit intermediation
of channels funding from depositors to
investors through a range of securitization and
secured funding technique and may cause
systematic financial risks and arbitrage risks.
Role of Finance
Moreover, the management of payment system
is getting easier with the use of mobile
devices.
Role of Finance
In a study by Sun Chang et al, in 2019, due
to smartphones being more popular and the
wireless network infrastructure improving, it
positively affects customers’ satisfaction in
terms of mobile payment usage intention.
Role of Finance
The role of finance in development are:

Screen and
Link the savers Smoothen
monitor
and investors consumption
investors

Manage
Manage risks payment
systems
Role of Finance
Financial development
has been considered an
efficient mechanism for
sustainable economic
growth and development of
emerging markets in the
past decades.
Role of Finance
Income inequality may rise at the early stage
of financial development and fail after a
certain level is achieved.
Role of Finance
In other words, financial development is
essential for reducing income inequality.
Moreover, there is no doubt that financial
development plays a key role in sustainable
economic growth and development.
Microfinance
Microfinance is defined as a range of
financial products (loans, savings/cheque
accounts, insurance, etc.) focused on low-
income individuals who have generally been
overlooked by traditional financial service
providers.
Microfinance
They have been neglected by or denied access
to mainstream financial institutions because of
the perceived risk or relatively low
balances/high transaction accounts to
maintain.
Microfinance
The poor usually are subject to low, irregular,
and unpredictable income flows and their
needs vary from time to time. The usual
pecuniary (or in-kind) are sourced from
family, friends, or remittances.
Microfinance
Microfinance is available as
well, like the rotating
savings and credit
associations (ROSCAs),
microlenders, store credit,
and money lenders.
Microfinance
Microfinancing has been directly related to
the economic growth of a country. It was
found that the degree of economic growth
affects the relationship between the financial
sector development and microfinance activity.
Microfinance
When the economic growth is high, the
development of the financial sector positively
influences the activity of microfinance sector.
Microcredit
One of the many financial tools today is
microcredit. These are ways of improving
access of the poor to a variety of financial
services, including microsavings and micro
insurance.
Microcredit
Microcredit does not
require collateral,
relatively because of the
value of the loan. It may
be borrowed one time or
on a recurring basis,
depending on when a need
arises.
Microcredit
Interests on microcredits are relatively high,
sometimes as much as 35% per annum or
higher, but these organizations, especially
successful ones, do not allow individuals to
borrow more than they can afford to pay.
Microcredit
The proponent of
microcredit is the Nobel
Prize winner and awardee
of the Indira Gandhi Prize
for Peace, Disarmament
and Development,
Muhammad Yunus,
PhD.
Microcredit
Yunus believes that poor people will repay
loans given the opportunity to
commercialize their ideas, making
microcredit a viable business model.
Microsavings
The idea of pooling resources
is not new in terms of savings
for Filipinos. Group
cooperation among
individuals is inevitable as
well as the desire to help one
another in times of need.
Microsavings
One example of microsavings that is prevalent
today is the rotating savings and credit
associations (ROSCAs). They are informal
financial institutions that exist worldwide, in
which participants contribute to a common
fund and take turns to receive a return.
Microsavings
ROSCAs are common in developing countries
and among migrant groups in developed
countries.
Microsavings
In India, they call their ROSCAs as chit fund,
Susus in Nigeria and Ghana, tontines in West
Africa, pasanaku in Bolivia, hui in China,
arisan in Indonesia, and, of course,
paluwagan in the Philippines.
Microsavings
There are two common types of ROSCAs:

Random Auction
ROSCA ROSCA
Microsavings
Random ROSCA is familiar to the regular
paluwagan of Filipinos, wherein a fund is
formed by contributions of those who agreed
on the microsavings and every agreed time,
they would take the pooled amount.
Microsavings
For example, Estela, Adelaida, Luzviminda,
and Merlina agreed to contribute Php5,000
each, and when brought together would
amount to Php20,000. in the span of four
months, each would receive Php20,000 every
month, usually done at random draw lots.
They do not need to wait for weeks to receive
Php20,000 except fro the last one in the
paluwagan.
Microsavings
With auction ROSCA, a bid is tendered by
those who want to pool money. The one who
bids the highest would be the first to receive
the total amount, and so on.
Microsavings
Auctions ROSCA allows those with urgent
needs to receive funds earlier than those with
less urgent needs. However, the bid amount
will be deducted from the total amount to be
received by the members of the ROSCA.
Microsavings
Using the same example, Merlina bid Php500 and
Estela Php1,000. The highest bidder is Estela;
therefore, sh will be the first one to receive the
total amount by (Php20,000 – Php1,000), i.e.,
Php19,000, and Merlina would receive in the next
month, the amount of (Php20,000 – Php500), i.e.,
Php19,500, the savings of Php1,500 would go to
the one managing the collection and Adelaida and
Luzviminda would have to draw lots for the third
and fourth recepients of the fund.
Any Question??

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