THE EFFECTS OF GLOBALIZATION ON BANK PROFITABILITY
Globalization is the increasing interaction and integration of the world’s markets and
businesses. This process has materialized faster due to technological advancement
which makes it convenient for people to communicate and do business without distance
barriers. Widespread use of internet and modern telecommunications significantly
speed up this process. Achieving this has both positive and negative effects in various
aspects. This includes industrial, financial, economic, political, informational, language,
ecological, cultural, technical, and religious aspects. Globalization provides more
opportunities for growth and development. However, this process brings an increased
pressure and competition to businesses. Financial globalization could help in increasing
the growth rate in developing countries. Economic globalization can be measured
through the four economic flaws. This includes goods & services, labor, capital and
technology. Goods and services are mainly imports and exports/span> of a proportion of
national income or per capita of population. Labor or people are net migration rates;
inward or outward migration flows, caused by population. Capital is composed of
inward or outward direct investment as a proportion of national income or per head of
population. Technology are composed of international research & development flows;
proportion of populations (and rates of change thereof) using particular inventions
(especially ‘factor-neutral’ technological advances such as the telephone, motorcar,
broadband). Some of the countries with capital account liberalization have experienced
output collapses related to costly banking or currency crises. There is a great impact on
financial and banking system changes as globalization arise. Growth in financial sector
is the most important and dynamic institutional and structural evolution. Crisis in
financial and monetary system are marking the periods for adaptation and reforms to
global evolutions toward a free, private and open economy. Financial activities are
following the commercial exchanges. The payment flows are characteristic for monetary
and financial relations in the precursory stages of globalization. Financial organizations
like insurance companies, investment banks and commercial banks are involved in
transactional market. They make it possible for mergers and acquisitions. Tertiary
transnational and industrial companies are more and more involving in transactions in
financial markets. Financial operations of big international banks and multinational
companies contribute to integration of international financial markets. The capital
movements tend to become self-governing on a great extent, as against financing the
trade and production. Economic globalization is a determinant for changes in
international financial environment. Banking system becomes a market where
international financing is worked out through direct relations between the applicant and
the bank. Global extension of currency market is possible by changing this market in a
free market. Banking products are services by its nature and does not become obsolete.
It has a longer life cycle than non-banking products. The opportunities presented to the
finance organization as a result of globalization are as follows: opportunity to restructure
the finance function for greater value, access to a broader base of skilled workers at
competitive cost, greater access to capital, greater access and opportunity for finance
function innovation, access to differentiated, specialized skills not readily available in
existing geographies, opportunity to provide more diverse leadership to the finance
innovation. International financial flows serve as an important catalyst for
domestic financial market development. The larger the presence of foreign banks in a
country, the better the quality of its financial services and the greater the efficiency of
financial intermediation. Financial globalization has induced certain countries to
adjust their corporate governance structure in response to demands from
international investors and foreign competition. Domestic financial sector liberalizations
that were mismanaged have contributed to many crises that are associated with
financial integration. Financial globalization directs global savings to their highest
returns and, through a more complete range of more liquid international financial
markets, allows the better identification, pricing and trading of risk. There are great
potential advantages for global and national income growth from that development,
though also some new types of risk may be created at the same time. Technological
innovations has helped in globalization. Banks has adapt virtual banking through phone,
mobile and internet banking. This change was driven by competitive forces, changing
consumer preference and technological developments. Negative impact of globalization
are cybercrimes and volatility in global markets. Cybercrimes are difficult to be
controlled and identified. Volatility in global markets has a great impact on the banking
sector. Financial globalization is irreversible. Increasing globalization of the market
affects the corporate finance sector to a certain extent. It benefits corporate entities and
also its customers and clients. All countries should aim to embrace financial
globalization after weighing the risks involved.
Dr. Nicolas Pologeorgis. (2009). The Globalization Of Financial Services. Available: http://www.investopedia.com/articles/financial-theory/09/risk-free-rate-return.asp#axzz1RVFKRy8Z. Last accessed 8th July 2011.
M. Ayhan Kose, Eswar Prasad, Kenneth Rogoff, and Shang-Jin Wei. (2007). Financial Globalization: Beyond the Blame Game . Available: http://www.imf.org/external/pubs/ft/fandd/2007/03/kose.htm. Last accessed 8th July 2011.
Paolo Mauro and Jonathan D. Ostry. (2007). Putting Financial Globalization to Work. Available: http://www.imf.org/external/pubs/ft/survey/so/2007/res0816a.htm. Last accessed 8th July 2011.
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