6
Kellee Tsai,
the Division Head and Professor of Social Science
at HKUST, and
Arnaud Ventura
, entrepreneur and founder of
PlaNet Finance Group, MicroCred Group, and mBank Holding,
discussed the challenges facing emerging market entrepreneurs
excluded from the formal banking system and having to look
elsewhere for financing.
Prof. Tsai explained that China has a unique dualism in state
capitalism by having a mixed economy that is both state-
dominated and market-oriented. One consequence of having a
state-dominated economy is that the financial interests of smaller
businesses and entrepreneurs tend to be ignored. She made
it clear that not all forms of informal financing are necessarily
illegal in China and there are a wide range of informal financial
institutions. There is uninstitutionalized financing in the form
of uncollateralized loans amongst family and friends, and semi-
institutionalized forms of finance such as non-governmental
investment alliances or reciprocal loan guarantee networks.
Finally, there are nongovernmental institutionalized forms of
finance like microfinance companies. Prof. Tsai even mentioned
online peer-to-peer lending, an area of virtual lending rapidly
growing throughout the developing and developed worlds.
In short, informal lending vehicles and services have begun to
proliferate amongst small-to-medium scale businesses and lower-
income groups as financing via traditional bank lending has
become more difficult to obtain.
To illustrate financial inclusion within these groups, Mr. Ventura
used the example of a small village in Madagascar which,
being too far away from a bank, had to develop its own forms
of finance. He pointed out that even the poorest of families—
Sasidaran Gopalan
, a Post-doctoral Research Fellow
at HKUST IEMS and the HKUST Jockey Club Institute for
Advanced Study (IAS), presented his research on foreign bank
entry (FBE) in emerging and developing economies (EMDEs),
which have been subject to increasing financial sector
internationalization in recent years. Dr. Gopalan investigated
the impact of FBE on macroeconomic and financial stability,
a topic of great research interest along with FBE’s impacts on
banking efficiency and EMDE financial development.
The study of Interest Rate Pass-Through (IRPT) is of significance
given the growing popularity of inflation targeting and
the use of interest rates as a tool for macroeconomic
management. In EMDEs where the financial system is mainly
bank-based and government-dominated, how changes
in policy rates affect market interest rates and aggregate
demand is an important topic. High degrees of FBE on the
one hand can improve banking efficiency and enhance
financial development, thereby increasing IRPT. On the
other hand, it may reduce IRPT because it can weaken moral
suasion, which is the main way that policy affects lending
rates in EMDEs with under-developed financial markets and
limited competition in the banking sector.
those living on less than $2 a day — make use of various
financial instruments: they may save money under a mattress,
entrust money to relatives, or take loans from friends and local
businesses.
Many of these people have unpredictable incomes and even
more unpredictable health conditions — what Mr. Ventura
calls “fragilities”. Because upwards of 60% of the world falls
into this group, it remains a huge untapped opportunity from
a financial standpoint. Only a handful of NGOs existed in the
1990s offering microfinance services to the poor, reaching an
estimated 10 million people. By the late 2000s to present day,
dozens of microfinance institutions exist, both nonprofit and
for-profit, reaching an estimated 200 million people. Growth in
the microfinance market is only expected to continue, as the
vast majority of the world’s poor — whether because of lack of
microcredit availability, lack of awareness, or other reasons —
have yet to avail themselves of microcredit opportunities.
Dr. Gopalan examined how foreign banks influence the
degree of IRPT and the threshold effect of FBE’s impacts.
His empirical results showed insignificant effects of foreign
bank entry on money market rates using a baseline model.
However, when splitting the sample into high and low levels
of bank presence, Dr. Gopalan found that increases in FBEs
are associated with reductions in lending rates only when
foreign bank penetration passes a sufficient threshold. He
also found that the impact of FBE on IRPT declines when
controlling for banking concentration, suggesting a role for
regulations to avoid sector oligopoly by foreign banks.
Dr. Gopalan joined IEMS in August 2014 and studies financial
development in emerging markets in Asia. He is one of two
Post-doctoral Research Fellows employed by HKUST IEMS
and IAS, the other being
Christina Jenq
, a family and labor
economist specializing in China and the developing world.
FINANCIAL INCLUSION:
AN UNTAPPED MARKET
HKUST Business Insights Presentation Series
(2014.10.07)
HOWDOES FOREIGN BANK ENTRY AFFECT
MONETARY POLICY EFFECTIVENESS? :
EXPLORING THE INTEREST RATE
PASS-THROUGH CHANNEL
HKUST IEMS Academic Seminar
(2014.09.22)
Watch the presentations at
Learn more about the event as well as the
related Thought Leadership Brief authored
by Dr. Gopalan at
Arnaud Ventura
Christina Jenq
Kellee Tsai
Sasidaran Gopalan
