Transformation of the Ecuadorian financial system: regulation and response

2015 ◽  
Vol 23 (1) ◽  
pp. 84-102 ◽  
Luisa Ana Unda ◽  
Julie Margret

Purpose – The aim of this study is to analyse the transformation of the Ecuadorian financial system using the regulatory dialectic approach (Kane, 1977). This research examines the initial conditions and motivating factors of the reform process, as well as the interplay between government and bankers during the period 2007-2012. Design/methodology/approach – Kane’s regulatory dialectic suggests that regulation of financial institutions is a series of cyclical interactions between opposing political and economic forces. Three main stages are identified: thesis (measures and regulatory actions), antithesis (avoidance/lobby against those reforms) and synthesis (adaptive reregulation resulting from the interaction between interest groups). Findings – Since 2007, the government focused on regulating interest rates, developing a liquidity fund for banking emergencies, increasing taxation and restricting international capital flows. These government initiatives took place against a background of conflicting interests. Private bankers opposed the majority regarding them as burdensome new rules, rather than enlightened reforms. Publicly, these reforms as intended by the government were seemingly supported. Finally through the political process, they were approved. To date, these reforms have strengthened the financial system, produced encouraging social policy results and placed the financial sector to serve the government’s development strategy. Originality/value – Using Kane’s notion of regulatory dialectic, we explain the process of financial reform in Ecuador as part of a cyclical interaction between opposing forces. Drawing on this framework enabled insight into the nature of government intervention. Hence, we show how that intervention affected the growth, development and structure of the banking system.

Significance Forecasts of modest GDP growth next year assume a recovery in domestic investment, driven primarily by government spending to deliver a six-year growth and development strategy. Impacts Rising yields on government debt next year may disrupt plans for new issuance. Higher bond yields will add to pressure to raise interest rates. Restricted public borrowing will reduce funds available for public investment. The government is promising more rigorous methods for quantifying strategic goals, but only by end-2019.

Significance The new programme will support recapitalisation of the banking system, allow orderly -- rather than fire-sale -- divestment of state-owned assets and promote liberalisation of the energy market. In exchange, Greece must implement 'prior actions', which include extensive changes to the tax system (already itemised) and to pensions and labour law (yet to be finalised). The rigour of the reforms makes it almost certain that the government will call fresh elections to reinforce its mandate. Impacts Germany wants no write-down in Greek debt's face value but longer maturities and lower interest rates, which could have comparable effect. It also wants IMF involvement in the deal, but the Fund will not make up its mind until after the first programme review in October. If a 20-billion-euro first tranche is released by August 19, it will meet outstanding obligations, including an ECB repayment on August 20.

Abdul Quadir

Purpose The purpose of this study is to examine how the Islamic banks fix their mark-up for Murabaha contract strategically when traditional banks also co-exist in a country. This study also aims to investigate what role the varying degree of Iman (faith) plays in shaping the preferences of the consumers to choose between the services of Islamic banks and the traditional banks. Design/methodology/approach This paper constructs a mathematical model like the Bertrand competition in neo-classical economic theory. A religiosity parameter for the consumers has been inserted into their demand functions for their products. A simple optimization technique from mathematics has been used to arrive at the results. Findings This paper applies game theory to analyze how Islamic banks determine their mark-up when they are facing competition with traditional banks. It considers the demand functions of the consumers for the products of Islamic banks and traditional banks. The demand functions depend on the mark-up, as well as on the interest rate with the difference that they also depend on the religiosity of the consumers. The paper shows that Islamic, as well as the conventional banks charge lower prices for their loans if there is consideration of religiosity aspect of the consumers. Further, it shows that as religiosity increases in a country, the lending rates decrease. The theoretical result is also consistent with the real practices of the banks. Therefore, the dual banking system is welfare enhancing for the customers. Research limitations/implications The Islamic banks can leverage the religiosity aspect of the consumers and expand their business competitively by charging them lower mark-up. The adherence of religious customers to the services of Islamic banks creates some kind of loyalty premium for them. This could lead to the reduction of mark-up price triggering competition between both types of banks to attract more customers. Therefore, it is prudent for the government to develop a system for furthering the quality of honesty that is an integral part of Islam. Originality/value To the best of author’s knowledge, this is the first paper where it has been analyzed theoretically how the Islamic banks determine their mark-up for Murabaha contract strategically. This approach explains why the rate of return of Islamic banks hinges on the interest rates of traditional banks. One of the novel feature of this paper is that religiosity character of the consumer is good for banks because religiosity prohibits the people to default on their loans.

Humanomics ◽  
2017 ◽  
Vol 33 (2) ◽  
pp. 189-210 ◽  
Issa Salim Moh’d ◽  
Mustafa Omar Mohammed ◽  
Buerhan Saiti

Purpose This paper aims to identify the appropriate model to address the financial challenges in agricultural sector in Zanzibar. Since the middle of 1960, clove production has continually and significantly decreased because of some problems and challenges that include financial ones. The financial intermediaries such as banks, cooperatives and micro-enterprises provide micro-financing to the farmers with high interest rates along with collateral requirements. The numerous programmes, measures and policies adopted by the relevant parties to find out the solutions to the dwindling clove production have failed. Design/methodology/approach The authors will review and examine several existing financial models, identify the issues and challenges of the current financial models and propose an appropriate Islamic financing model. Findings The numerous programmes, measures and policies adopted by the relevant parties to find out the solutions to the dwindling clove production have failed. This study, therefore, proposed a Waqf-Muzara’ah-supply chain model to address the financial challenge. Partnership arrangement is also suggested in the model to mitigate the issues of high interest rates and collateral that constrains the financial ability of the farmers and their agricultural output. Originality/value The contribution of the agricultural sector to the economic development of Zanzibar Islands is considerable. As one of the important agricultural sectors, the clove industry was the economic backbone of the government of Zanzibar. This study is believed to be a pioneering work; hence, it is the first study that investigates empirically the challenges facing the clove industry in Zanzibar.

Significance The RBA has cut its growth forecasts amid rising job losses, weakening demand and increasing signs that the latest COVID-19 lockdowns will continue to slow the economy until the pace of the vaccine roll-out programme can be increased. Impacts Although the RBA is independent, the government will hope it keeps rates low ahead of the elections due next year. Commercial lenders could raise interest rates independently of the RBA if inflation remains high. Wage pressures will re-emerge as labour markets tighten but may be mitigated by the extent of underemployment. Economic growth will be uneven across the country in coming months as pandemic-related restrictions vary by location.

2020 ◽  
Vol 11 (5) ◽  
pp. 1033-1053
Siew-Peng Lee ◽  
Mansor Isa ◽  
Noor Azryani Auzairy

Purpose The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia. Design/methodology/approach The data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates. Findings The results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks. Originality/value This study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.

2019 ◽  
Vol 12 (4) ◽  
pp. 335-356 ◽  
Rafik Harkati ◽  
Syed Musa Alhabshi ◽  
Salina Kassim

Purpose The purpose of this paper is to investigate the influence of economic freedom and six relevant subcomponents of it on the risk-taking behavior of banks in the Malaysian dual banking system. It also aims to make a comparative analysis between Islamic and conventional banks operating in this dual banking sector. Moreover, the study is an effort to enrich the existing literature by presenting empirical evidence on the argument that the risk-taking behavior of the two types of banks is indistinguishable given that they operate in the same regulatory environment. Design/methodology/approach Secondary data of all banks operating in the Malaysian banking sector are collected from FitchConnect database, in addition to the economic freedom index from Foundation Heritage for the period 2011–2017. Generalized least squares technique is employed to estimate the influence of economic freedom and the six relevant subcomponents of it on the risk-taking behavior of banks. Findings The level of economic freedom influenced risk-taking behavior within the banking sector as a whole, conventional and Islamic banking sectors negatively during the study period (2011–2017). Risk-taking behavior of conventional and Islamic banks is similar. However, conventional banks turn to be less influenced by economic freedom level as compared to Islamic banks. Practical implications The government and regulators may benefit from the results by rethinking and setting the best economic freedom index that better serves the stability of the banking system, and lessens banks’ risk-taking inclination. Originality/value To the present time, this paper is thought to be of a significant contribution. Given the argument that Islamic and conventional banks behave in the same way. This is one of the first attempts to address this issue in light of the influence of economic freedom and six subcomponents of it on the risk-taking behavior of banks operating in a dual banking system.

2016 ◽  
Vol 29 (5) ◽  
pp. 782-792 ◽  
Amira Sghari

Purpose Employee recognition is presented in the literature as a mean to achieve change according to a schedule already established by the management of the enterprise (planning process). Such an approach overlooks the fact that organizational change can be explained by other processes such as the political process, the interpretive process, the incremental process and the complex process. Each of these processes offers specific characteristics of change. Through this research, the author tries to answer the following question, while driving an organizational change project does employee recognition favour a change according to the planned process? The paper aims to discuss these issues. Design/methodology/approach To answer the research question, a qualitative research case study is conducted within Basic Bank, a banking leader institution on the Tunisian market. The author analysed a proposed change induced by the implementation of a Global Banking System. Findings The results show that monetary recognition helps develop employee motivation to change, thus, ensuring a planned change. However, its variability has encouraged the emergence of conflicts between the actors resulting in an increase of change according to the political process. Originality/value Found results enrich the previous work on the role of the staff recognition in the change process. Its originality lies in the study of the relationship between employee recognition and explanatory process of change in a dynamic perspective which enables having an overall view on the evolution of this relationship throughout the implementation of the change.

1998 ◽  
Vol 51 (1) ◽  
pp. 36-66 ◽  
Timothy P. Kessler

Market reform is advocated in developing countries to improve economic efficiency and prevent privileged groups from obtaining rents from the policy-making process. Yet this prescription fails to address the complex political process that governments are likely to confront when moving toward the market. This study shows how political considerations during President Salinas's administration distorted economic reform in Mexico.During the 1990s Mexican finance policy contradicted the government's declared neoliberal principles. While the banks were reprivatized and deregulated, they were also given a high degree of protection from competition, enabling the new owners to charge excessive interest rates. In addition, the government artificially inflated the value of the currency through exchange-rate intervention. These contradictory policies are best understood as a coherent political response to the electoral vulnerability of the ruling party (PRl) at the end of the 1980s. When viable political opposition threatened the PRl's ability to maintain power, it responded by using financial policies to distribute economic benefits to social groups, particularly business, the middle class, and the poor, whose support was critical for electoral victory.

Significance At its first meeting of 2017, on January 10-11, the COPOM reduced the benchmark Selic interest rate to 13%. The 75-basis-point (bp) rate cut decision, the largest in nearly five years, accelerated the monetary easing cycle that started in October 2016. Economic recession has been relieving inflationary pressures and opening room for more intense cuts in interest rates. Impacts Further reductions of interest rates may contribute to controlling government debt. Private debt renegotiations at lower interest rates may facilitate a recovery in domestic demand and output. Any positive effects of monetary policy on activity may help contain popular dissatisfaction with the government.

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