Britian's new banker

HELLO ALL, 

This post will be a fairly brief one as I am currently quite busy organising graduation stuff such as clothes and shoes (being a girl and all..), but I promise a more in-depth analysis on the next topic is coming very soon!

*****

So if you're living in Britain, and if you read any news online or newspaper, it will be impossible to miss that Britain and it's central bank is about to experience a significant change-over. After 10 years of holding the position as Governor of the Bank of England, Sir Mervyn King (now Lord King) will step down and Canadian Mark Carney, currently the Governor of the Bank of Canada, will officially replace Lord King as of next Monday. 

Carney's total annual benefits package, including salary, housing allowance and pension contribution is at a very generous £874,000, more than that of Meryvn King. This more than generous figure reflects George Osborne's efforts to woo a once reluctant Carney from Ottawa to London, and also that Carney may just be worth it. After all, no one get's called a "financial rock star" or the "George Clooney of central banking" for no reason. 

And I for one, believe that Carney can bring fresh thinking and perspectives at the Bank of England. This in turn, can lead Britain on to a stronger and long lasting path of growth and employment. For example: 

Carney was the governor of the Bank of Canada throughout the financial crisis. Canada, unlike most other industrialised nations and G7 countries, was weakly affected by the 2007-9 episodes in comparison. Its banks also did not need to seek government bail-outs. Carney has been described as "effective" and "helpful" during this period and his clear record of success, which not many central bankers can claim, is certainly reassuring to Britain - we can look forward to a replication of such success over the next 5 years. 

And given that Canadian banks are relatively conservative, risk-averse (only 5% of Canadian mortgages were sub-prime) and more willing to lend especially during the crisis due to a better managed banking system comparatively to US and UK counterparts (which is another reason Canada remained generally unaffected), Carney is also likely bring this conservative ethos or even related reforms into Britain's banking system. Carney's past as a banker (of Goldman Sachs) can help him to leverage any policies related to reigning in banks to banks' management - he effectively understands how such policies could be at a huge cost to banks' profit and capital structures, inevitability affecting contribution to national GDP. At the same time as a central banker, he can engage in a viewpoint for the good of the general economy. 

Further, there is some heavy hinting that Carney will adjust QE packages to revert to the 2% target inflation in order to achieve GDP growth. Could we finally see a interest rate increase? I believe so, but not immediately. Radical changes is likely to attract opposition from Carney's colleagues of the Bank. 

So while monetary policy, fiscal policy or other structural banking system changes won't be immediate, he has already brought in 'new thinking'  and a new tone of communication by appointing key staff. Those among several include a female banker - Charlotte Hogg - for COO and Jeremy Harrison, Carney's current press spokesperson from the Bank of Canada. 

And of course, Carney's new job is no easy job as he himself has recognised. I can think of a handful of challenges and big 'to do' things on his list:

• Monetary policy - more QE with the £375 billion available? Or raise interest rate? Or both?
• Supporting a path of higher and longer lasting GDP growth. How to effectively do so?
• What to do about a ~2.7% inflation rate, or a ~7.8% unemployment rate? 
• How to reform the banking system, beyond incoming regulatory changes such as Basel III or Dodd-Frank?
• Assessing effectiveness and managing the newly formed PRA.
• Undoubtedly playing a role in the near-future privatisation of RBS and LBG.
• How to reform the Bank of England itself? Only 35%-40% of British households are satisfied with their central bank at present. 

Obama was hailed very much as the 'messiah' of political change probably after the Bush years were so dark and also for being the first black president. Carney has certainly been portrayed as a face of change, but to a much less extent than Obama. The next 5 years under Carney will be different and possibly exciting. How different it will be and whether Carney will really deliver remains to be seen. I don't expect radical changes over the next few months but his style will bring in a new culture at the Bank of England to start with. We can only look forward to the August MPC meeting - the first under Carney - and also Carney's first quarterly inflation report. 

The 2Cs that lie ahead for Mark Carney 

JH

Some thoughts on microfinance

MICROFINANCE IS the umbrella term encompassing microcredit, microinsurance, microsavings, remittances and other financial services for the poor in primarily developing regions of  South Asia, Latin America, South East Asia and Africa. 

Microfinance is different from conventional consumer banking products as the underlying aim is one of financial inclusion, targeting the financially undeserved.  Microfinance is provided by ‘microfinance insitituions’ (MFIs), credit unions and through rural/village banks.

Take microcredit (often used interchangeably with 'microfinance' and confused together). Microcredit is different from plain money-lending as it targets the poor (who are traditionally excluded from formal financial markets due to high transaction costs from banks’ perspective) and female clients (who have difficulties accessing loans in often patriarchal societies). Many MFIs require no collateral, lends in small doses -between $100-$1000  - and often has a social function; there is the aim of lending to micro-entrepreneurs, promoting literacy, children’s health and education it’s among clients.

Microcredit, pioneered in 1978 by Muhammad Yunnus (founder of the Grameen Bank) in Bangladesh, typically lends using a group lending mechanism so that social assets and local knowledge improves screening, enforcement and monitoring. In reality, loan default still occurs under group lending and some empirical studies have proved default under group lending to be just as common as individual lending. Some MFIs such as Bank Raykat Indonesia, who serve the ‘richer of the poor’ have reverted to using an individual based lending serves as a testament that group lending is not all designed to minimise what it is supposed to minimise. Individual lending is also less cumbersome and can allow wealthier (but still poor) clients to access more credit without the burden of their poorer counterparts who are more likely to default.

As microcredit targets entreprenuers, microcredit at face value clearly encourages self-initiative and self-sufficiency, potentially and hopefully for the long term.  It is no surprise that for some, microcredit is the savior of all the developing world’s problems and poverty eradicator.

For me, the impact of microcredit and also microfinance is more arguable. Like everything in this world, there is no such thing as ‘perfect’ and microcredit is not without it’s problems, some more serious and others. Just off hand, I can think of several: 

• Microcredit is focussed on lending to entrepreneurs but often, there is no strict enforcement by loan officers to spend loans for the purpose of building up their business. Effectively, this reduces the impact of promoting long term self-initiative.
  
  
• The vast majority of smaller MFIs are not financially sustainable – they rely on donors, government grants and ‘soft loans’ rather than securer customer deposits.
  
  
• No doubt have MFIs been affected by global macroeconomic difficulties. The financial crisis of 2008 reduced lending to MFIs from western commercial and investment banks. For such banks, regulatory changes such as Basel III and its national equivalents can also increase the cost of  holding some loan portfolios (such as in terms of regulatory capital) as lending to an emerging market is more risky. This effectively endangers the funding of MFIs.
  
  
• Over- indebtness: A lack of stringent regulation on MFIs has caused a MFI explosion in many developing countries. Individuals therefore have the chance to take on several loans by several MFIs resulting in own over-indebtness. The direct result is default and the tragic human cost can be exemplified by the Andhra Pradesh crisis.
  
  
• Last but not least, microcredit to some has been crowned as the solver of world poverty. The logic behind this is understandable; giving the poorest access to credit for starting a micro-business provides them with the initial capital.  Earnings from their micro-business provides income that can be used initially for basic everyday essentials. Further lending gives the client the scope to expand on the size of business and grow self-initiative/dependency and so on. Development economists through randomised control trials have proved microcredit to reduce poverty in a household and also have shown that there are positive spillover villiage effects compared to households/villages not in receipt of microloans.
  
  
  The big question is that, if microcredit can make households wealthier, why is aggregate is the take up so small at only ~5% of the world’s poor?  The main answer to this question lies in the fact that what is desired by the poor is an actually more stable and long term borrowing instrument(s) as well as opportunities to save, transfer remittance funds  and also to insure against the inherently risky nature of developing nations.
  
  
  It is important to remember that microcredit is NOT the sole champion in eradicating poverty. It is one tool, but other we need to mobilise microsavings and microinsurance and remittance services to help the ‘microfinance movement’ go down in history as something that helped to fight one of the world’s most prolific humanitarian problems – poverty.

Microcredit is not the golden bullet, but I wonder still, without it, wouldn’t the lives of poor households in developing countries be even more bleak?

JH