ARE FINACNIAL MARKETS OF VALUE TO DEVELOPING COUNTRIES - Free Essay Example

Operating financial markets in developing countries during the 1990s is a momentous phenomenon. The dramatic increase in the influence of neo-liberal thinking has recently led to reform of the financial market in dozens of develop countries. Many of the financial market reforms that have received so much attention by policy makers, economist and investor dont touch the very poor. To make the poor a part of the process of economies development, institutions that are specifically designed to make small loans to micro enterprises are required. At the same time transition economics are seeking to develop their capital market as well. According to (Blake, 2000) financial market is a place where, or a system through which, securities are created and transferred. Financial market does not have a particular place it takes place, it could also be exchanging of goods between two countries or nation, and could be classified into different categories such as money market, stock market, primary market, Insurance markets etc. Debit crisis encouraged a preference for foreign direct investment instead of debt in developing countries. This complete change of attitudes towards FDI was a revolution in thinking about equity market in developing countries. Earlier most of the developing country equities extremely limited. Most companies in develop countries were public enterpr ises, family business, or part of financial group whose equity share were not publicly traded. But after these debt crises broke out, increase level of foreign capital flow result in well equity market established and high GDP rate in develop countries. Advantage of financial market, is that it functions as intermediary. Intermediaries perform in the creation of risk transformation or risk reduction. The reduction in risk can be achieved by diversifying the lending and by screening of borrowers. This is to create assets for savers and liabilities borrowers which are more attractive to each than would be the case if the parties had to deal with each other directly. Values of financial market in developing countries could be: Maturity transformation is reconciling the desire of lenders and borrowers. Since lenders want liquidity and borrowers want a loan for certain and minimum period, then clearly what lenders are willing to lend has to be transform into something which borrowe rs want. The ability of financial institution to engage in maturity transformation and to supply the other characteristic of liquidity through large number of depositors firm will expect a steady inflow of deposits and a steady outflow of deposit each day. Secondly, the larger the volume of deposits which a firm control the larger the assets it will also holding. Advance in micro finance In develop countries have allowed lenders to manage the risk and cost of lending to very small borrowers who are depends on income from self employment or business ownership, a previously untapped market niche. Foreign exchange constrain The stock market has played an important role in the saving investment process, helping to promote productive activity and therefore sustained growth of the economy. Foreign exchange constrain due to an influx of portfolio investment produced an excess supply of foreign exchange and appreciation of real exchange rate. This increase the domestic demands for tradable and at the same time produced wealth effects on consumption due to the sudden and substantial imprecation of financial and real assets prices. Debt market Debt market is an important to developing country this debt market enable to Government to borrow to finance their activities. Debts market often referred to generically as the bond market, are especially important to economic activities because they enable to government or corporation to borrow to their finance their activities and the bond market where interest rate are determined. The level of interest rate is especially important to financial market, because changes in interest rate have important effects on indivuals, financial institution, business and the overall economy. Transaction cost In the developing countries transactional cost is a major problem. In developing country Majority of people are middle class and middle level income people. Due to absence of financial market knowledge they approach the stoke brokers to invest their hard earned money in financial market. Investor is who purchasing and selling financial instruments behalf of investor. However stock brokers not taking that much interest in middle level income people investment desire because of small size of investor account. It doesnt make spending time on it worthwhile therefore people get disappointed and realise that they will not be able to use financial market to earn a return on their harder earned savings. Hear financial institution play significant role in financial market of developing countries. The economic function of the financial institutions is to help channel saving into profitable use and to help finance capital formation by attracting savings. Exchange Rates The foreign exchange markets are the most active financial markets and since other financial markets (such as equity markets) are increasingly influenced by developments in exchange rate. Such as foreign exchange rates (the price of the countrys currency in term of anothers) are important because they affect the price of domestically produced goods sold abroad and the cost of foreign goods bought domestically. An important impact on exchange rate is it association involving interest rates national and international, example the selling of natural resources from one countries to another (e.g., the selling of natural gas and crude oil from Nigeria to countries like US and Europe). In recent year, many emerging market countries have experienced financial crisis, the most dramatic of which were the Mexican crisis, which started in Dec.1994, and the eastern Asian crisis, which started in July 1997.an important fact is how a developing country can shift dramatically from a path of hig h growth before the financial crisis. As was true for Mexico and particularly East Asian countries of Thailand, Malaysia, Indonesia, the Philippines to a sharp decline in economic activities, damaging both economic and social fabric of the country. Because of different institutional features of emerging market countries debt markets, strength in banks balance sheet because of increasing loan losses. When financial markets were deregulated, a lending boom ensued in which bank credit to the non private non financial business sector accelerated sharply. Because of weak supervision by bank regulators and lack of expertise in screening and monitoring borrowers at bank net worth capital. Also the institutional structure of debt market in developing country interacted with the currency devaluation to propel the economic into full fledged financial crises. Because most of the firms in these developing countries had debt denominated in foreign currency like dollar and the yen, depreciation o f their currencies resulted in increases in their indebtedness in domestic currency terms even though the value of the assets remained unchanged. REFRENCES Blake, D., 2000. Financial market analysis, (2nd ed), John Wiley Sons LTD: England.