The aim of the proposed study to explore the real effect of banking crises in global recession and the recent impact of financial crises on the financial institution in the developing countries like Pakistan. The global financial crises set off by the sub-prime credit crises in the USA, which resulted the destabilized, the financial markets of the developed world. Banking crises are also usually followed by low GDP growth.
This research will present fundaments and facts that are responsible for financial crises across the globe even in advanced countries also. This research will contain all the practical approaches of the researcher that he is interested to present the significance of the research for those who are associated with financial stakes
This research will present a practical research aiming to know how the global recession impacted or has a significant impact on the Asia Pacific Region The research will also contain the significance of the authorities need a coherent strategies for addressing such crises especially the higher management of the banks.
CHAPTER 1
1.1 Introduction
"Banking is an art of striking balance between risk and revenues". The present research is an attempt to study the "real effect crises in banking sector in global recession" It's about the factors responsible for financial crises and their impact on banking sector. Banks are playing a central role to business activity. A major financial crises on banks and international banking crises which started in 2007 can be seen in 2008.in the US sub prime mortgage. Around the world stock markets have fallen, large financial institutions collapsed. The USA has faced banking crises in 2007/08 which also spilled over to Europe and later to the whole world. The study contains the discussion that how global recession crises begin due to bad mortgages in 2007-08, starting with the US housing crises.
The transatlantic banking crises intensified after the US decided to let Lehman Brothers go bankrupt. These events have a worst effect on the banking sector. In September/October 2008, the US government and the European Government also organized the multi billion dollar organized the rescue packages to capitalize the banks, but the national Government's have not addressed the structural problems. In Pakistan, Mostly financial institutions suffer financial crises in 2008 and some are till now facing. Even mostly bank deposits was fall due to the liquidity crunch and the customers were less reliable on banks, some banks loaned even more to have an excuse to scrutinize those loans
From the start of October 2008, the world financial crises has dominated international news and attention, then the economic situation of Pakistan was already a big grim, a tremendous disaster was skillfully averted, even the well established business in Pakistan, the researcher is witnessed about the collapse and damage, this is why, I was slightly worried when started hearing rumors stating that the Pakistanis banks going bust with of Bank Alfalah Limited specially targeted
The recent financial crises were so series, affected the regions of the world. Firstly from banking, and then it into all parts of the economy. When the banks are in crises, it hits both the public and the private sector, where the consumers automatically suffer. The financial crises affected not only the developing economy but also the developed economy, affecting the significant economic progress of recent years. The global financial crises, which began from the US sub prime disaster mortgage with the help of the government of major countries which are coming up with measure such as provision of liquidity and bail-out packages for distressed banks, this was the sign for the financial markets.
The developing countries- what it has recently achieved how these achievements are now at risk, and what it must now do, is the focus in this study. The banks higher management and policy maker's authority and all the concerned or associated personalities will be the beneficial for this study. In developing countries, the poverty rate is also high, in the financial crises when there is no purchasing power for the people; it is hard to even survive for people. This study discusses that how global recession crises begin due bad mortgages like sub-prime mortgages in 2007-08, starting with the US housing crises. This study will also discuss that what actions, measures should be taken by the authorities
1.2 Construct Definition
"Banking is an art of striking the balance between risk and revenue".(Chancellor of Bank of England 1869)
"Crises are critical event of point or point of decision which, if not handled in an appropriate and timely manner (or if not handled at all), may turn into a disaster or catastrophe."(Quoted from Economics environment by Sohail Akhtar)
"Recession is a period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in stock markets, an increase in unemployment." A recession is generally considered less severe than a depression, and if a recession is continues long enough it is often the classified as a depression. (Quoted from Economics environment by Sohail Akhtar)
1.3 Background information
The researcher is working in a financial institution Bank Alfalah Limited, Defence Phase II branch Lahore.The aim of conduct this research not only to explore the financial crises in banks but also their effects on the economy.
The research will be based on the study of Bank Alfalah Limited who has to be also suffering from the financial crises on global recession. The rumors were designed to damage the economy due to the global recession this is why, the researcher will conduct a detailed research about the factors that is held responsible. The financial crises effect not only the banking sector but also the whole economy globally.
Organization background
Bank Alfalah Limited is owned by the Abu Dhabi Group, this is a United Arab Emirates based group of companies owned by Shiekh Nayhan Bin Mubarak Al Nahayan operating many interests in different countries. It is the largest international investor in Pakistan. Bank Alfalah Limited was incorporated on June 21st, 1992 as a public limited company under the companies ordinance 1984.Its banking operations commenced from November IST; 1997.The bank is currently operating 307 braches in Pakistan and has also commenced foreign branches operations in Afghanistan and Bahrain. The company is financially strong by itself and run by experienced professionals like Bashir Tahir and Pervaiz A. Shahid but its greatest asset is the man behind it; Sheikh Nayhan Bin Mubarak Al Nahayan.
It is very fortunate that the Abu Dhabi Group responded promptly to the malicious rumors by addressing them openly and arranging interviews of Sheikh Nyhan on television channels. His appearances not only reassured investors but also showed the confidence that the Abu Dhabi Group has in Pakistan by announcing plans to further invest billions of rupees, the researcher is witnessed and has a personal experience. This bank has huge investment in Pakistan, when there is so many other opportunities in the world, but this group has potential to take initiates
Strengthened with the banking o the Abu Dhabi Group and driven by the strategies goals set out by its board of management, the bank has invested in revolutionary technology to have an extensive range of products and services
The vision of the bank is "To be the premier organization operating locally & internationally that provides the complete range of financial services to all segments under one roof" and the mission is "To develop & deliver the most innovative products, manage customers experience, deliver quality services that contributes to brand strength, establishes a competitive advantage and enhances portability, thus providing value to the stakeholders of the bank".
PACRA, a premier credit rating agency of the country, has rated the bank 'AA' (double A), Entity rating for long term and AI+ (for short term), respectively.
1.4 Problem Statement
Due to the financial crises, the whole economy suffers, Stock markets have fallen, large financial institutions have collapsed or the result is the mergers and acquisitions. There is the basis that motivates the researcher to motivate him to conduct research because he wants to know which factors are held responsible for financial crises.
The researcher identifies three main problems, that lead to the global recession specially banks, First Sub Prime Mortgages, second Hedging and third Mr. John Sores.
Sub-Prime Mortgages is When a bank has a security against loans and advances etc, A bank has the first right or the holder of the security, A bank approaches to B Bank to handing over the security against credit, later, the B Bank approaches to C Bank for the same porpuse.The money market value effects the economy by boosting up the property by decreasing trend of the currency value, This leads the global recession and the real effects on banking sector to collapse the economy. The Sub prime crises came about in large part because of financial instruments, where banks would pool their various loans into sellable assets
Second problem is hedging, hedging is not introduced in Pakistan but this was the cause of global recession in banking sector, the hedging is created by the differences amongst the currency rates fluctuation, when the bank is offering the advanced rate to the importer as a book forward. Due to the hedging, the world wide banks suffer a great loss, which leads to the global recession.
Hedge funds have become overconfident as they thought, As they initially made more money by taking more risk, they reinforce their own view, They thought, they had spread all their risks effectively and yet when it really went wrong, it all went wrong.
Third problem is identified by the researcher is Mr,John Sores, who challenged to a Bank of England, to collapse a whole bank, that this bank will no more survive He was so powerful in his challenge, and he did. The bank has to say sorry to the John Soros, and then the bank survives. These are the main problems that leads to the global recession, especially the financial institutions has a real effect of these problems
1.5 Research questions
(i) Research Questions
Research Q 1: What happened and why these crises takes place?
Research Q 2: How these crises effect the financial institutions?
Research Q 3: How long the crises will prevail?
(ii)Research objectives
1. The main objective of the research is to identify the effects of the global recession on bankig sector provides the possible solutions for the authorities which are in the control of the organizations and based on this study, certain recommendations and the role of the authorities will be described regarding stabilization and to manage these crises
2. To identify the factors held responsible for global recession in banking sector
1.6 Research Hypothesis
Ho: There is no positive correlation between banking crises and global recession
H1: There is a positive correlation between banking crises and global recession
1.7 Scope and limitations of the research
The scope of the study is vast because this research is not only based on a single organization but also based on the whole banking sector but the specially population of the Bank Alfalah Limited targeted.
Limitations:
Following limitations may also be observed during the research procedure and methodology adopted:
1 .Data will be collected only from the authorities like higher management people, who directly or indirectly involved associated with the subject
2. Researcher may not have access to all levels of authorities, who involved in higher management and the related activities
3. The accessed higher management people, may do not have the much time to respond to the researcher
4. Inadequate time of the researcher may be abound to complete the research within a specific time, on the other hand, the higher management people may meet to a limited time
5. Limited knowledge of the people may also be a barrier for the researcher
6. Data will be collected by the researcher itself
7. Respondent may not be able to respond properly because of their tight schedule
8. Personal observations of the respondents may create biasness in the study
9. Diversity of age, experience and hierarchy of management may have their own effects on the study
10. Researcher may ask those questions which will not be considered as interference in the professional privacy of the employee and management
1.8 Significance of Study
The proposed study is related to the financial crises and will explore or highlight the real effects on the economy in global recession. The study will help to the management of financial institutions to know the reasons why this occurs and what factors are responsible. This study will also helpful to overcome, target the plans and approach to the change. This study will also help the organization to take corrective measures to avoid those factors that are endogenous, in the control of the organization
The researcher is elaborating the importance of the topic how it is important not only for banks but all the associated organizations and businesses to banks like when the banking system fails, the other businesses also effect directly or indirectly in the context that if bank increases a mark up on limits that the other businesses has used in a shape of credit limit, the businesses associated also increase the price rate of their products and services, buying power of the consumers will remain same but the prices increases, the inflation also takes place and also recession period comes because a continuously and persistent rise in inflation, the researcher will also explain the effects and relationship of these factors. I would also like to explain the significance of the study in the context that the organizations management and concerns will be seems quite challenging and will turn the exigencies into opportunities. The study will also explain that how a small act of the bank, s management or concerned staff will go a long way in contributing towards the achievement of the bank,s corporate and cherished objectives and strengthened the bank
The study will also explain that by taking the ownership of individual capacities by the population of the bank will be able to make a conscious effort to strength the system of internal control and improve the processes that are in the control of the organization. By controlling these factors, the organization will be able to renewed efforts directly towards enhancing the concentration on implementing the new plans that must be developed to control the endogenous factors that are responsible for these crises. The study will also explain that how the downwards slide of the economy is leading the industry towards the growing non performing loans in bank.The study will explain that by puuting the planned efforts, the non performing loans can be excecuted towards the recoveries and maintainace of low non performing loans by strict adherence to provisioning requirements. The study will explain that how each one of the organization can put an offer towards the overall success of the organization by strict adherence to regulatory framework.
1.9 Test for hypothesis
The co-relation or regression statistical tool will be applied in this study
CHAPTER 2
2.1 Literature Review
As Nicholson, 2008 highlighted that financial crises in banking sector which initiated in United States has now become a global phenomenon. Now, at present, not only United States but also Asia and Europe, financial institutes and stock exchanges suffer and crashed, Nicholson (2008). It is said that crises was started with the downfall of US sub prime mortgage industry, While enlightening the factor that why US sub-prime mortgage crises turn into global banking crises, Khatiwada and McGuire (2008) stated "many of these sub-prime mortgages actually never made it on the balance sheets of the lending institutions that originate them",Khatiwada and Mnguire (2008) and they were made attractive to foreign banks by high investment grading, "while sub-prime borrowers failed to repay their mortgages, the originating institutions needed to finance the foreclosure with their own money, to bringing the assets back on its balance sheet. This leads to banks in crises.
The researcher has also a personal experience in October 2008, the financial crises faced by Bank Alfalah Limited, the customer were less reliable on bank that this institute is no more and our money is not saving in this bank. Even that the most valuable customers of the bank, whose amount in hundred of millions in the term deposit receipts (TDR), they demand their money back in cash without any hesitation of 0.3 % cash withdrawal tax.
The banks deposits were continuously falling. This will just happened duet the global recession, where the most stabled banks were closed in developed nations like US and Europe
When the people sees or feels the problems in financial institutions, their confidence fell quickly, lending slowed, in some cases they blocked or sensed and even now in many banks, some banks takes more and more risks in making unsecured loans specially personal loans, and there the banks collapsed quickly. The mostly banks with strong capital reserves ran out. The extent of the problems has been so severe that some of the world's largest financial institutions have collapsed. Others have been bought out by their competition at low prices and in other cases.
Because of the critical role banks play in the current market system, when the larger banks show signs of crisis, it is not just the wealthy that suffer, but potentially everyone. With a globalize system, a credit crunch can ripple through the entire (real) economy very quickly turning a global financial crisis into a global crisis.
For example, an entire banking system that lacks confidence in lending as it faces massive losses will try to shore up reserves and may reduce access to credit, or make it more difficult and expensive to obtain. The financial crisis is likely to diminish the status of the United States as the world's only superpower.
Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of "socializing the costs while privatizing the profits." The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place).The bail-out package is this when a bank or any organization is collapsed and going near to be closed, the government will support the organization to make it stable and re-generation of profits. Mostly, the bail-out package can only be seen where the public interest involved, Hyun-Soo (2008).
The researcher will also identified, how the extensive marketing and mortgages becomes the factor to put the banks into financial crises like a huge volume in car financing and home loans, when the banks made these loans, afterward the people hand over keys of their houses and vehicles because their repay back these loans was poor. Ultimately, the banks have now more vehicles and houses for resale but the purchaser was not available, the non performing loans are increasing day-by-day. In these results, the banks also increased their reserves to make provisions. The result is this; there is extensive increase in bank's liabilities and no buyer in market.
Conceptual Framework
Conceptual framework According to this study, the proposed model will explain the variables which explains the impact of global recession on the financial markets in developing countries
Global Financial Circes
Contagion Effect
Financial Institutions
Sub prime mortgages in US
Hedging
John sores
Bailout packages
Extensive marketing and mortgages of banks
Increasing bad debts
World economic crises and war on terror
Global financial crises
The cause behind the recent global crises is complex, and is linked to the financial markets decline. In US economy, banking industry has been badly hit due to mortgages backed by sub-prime mortgages fallen in value. Due to increasing bad debts financial institutions were reluctant to lend money. On April 8, 2008 the international monetary fund released information regarding the magnitude of the financial crises:
Market to market losses on mortgage backed securities, collectivized debt obligations, and related assets through March 2008 approximately $ 945 billion. This represents the largest financial loss in history,
Effects on Financial Institutions in Developing countries
As according to the Fitch ratings, the international credit rating agency, with head offices in New York and London, the Pakistani banking system has, over the laser decade, gradually evolved from a weak state owned system to a slightly healthier and active private sector driven system, Pakistanis banking system has not been as prone to external shocks as have been banks in Europe like closure of banks However, banks in developing economies have to suffer contractions in credit lines and reduced financial flows. Due to failure of leading financial institutions such as IMF.IMF failed to response to Asian crises during recession.
The Causes and Management of Banking Crises
Central banks are concerned for the stability of the banking sector, but the world seems to be continually baset for the banking crises. The structural evolution of the banking sector may have a significant bearing on questions of solvency and stability. The causes of banking crises can be categories under several headings: macroeconomic instability; deficient supervision; poor strategies; weak management; inadequate control systems; operational failures; fraud.
Bad loans would be a problem and some investments banks like Lehman Brothers got into mortgages, buying them in order to scrutinize them and sell them on. Some banks create more loans that is excess in ratio that they would authorized through extensive marketing like which resulted defaults of people. Some banks were in practice to buy securities from others. Many banks were taking risks increasing their exposure to problems. The banks increasing activities in marketing, like in 2007/08, through extensive marketing, the banks creates competition each others, the Bank Alfalah Limited is also a part of banking sector, it also adopted some extensive marketing strategies. This competition leads to a great loss for banking sector that some banks go into closures or mergers between each other. In Pakistan. Even most stable financial institutions got merger like Union bank in Standard chartered, Prime bank into ABN Amro bank and later on ABN Amro bank into Royal Bank of Scotland, PICIC into NIB and much more. After their mergers, even till now, these financial institutions are struggling to survive, because there is also lack of management after their mergers because the thoughts, visions and their management style, strategic and planning divisions are differing their opinions.The way of getting things done is different when two or more bank,s management works together, the conflicts arises. This is also a factor to go down of banking sector. Because of these factors, the banks went into the process of restructuring, In Bank Alfalah, when they restructured the banking departments during 2008-09 like establishments of centralized car finance hub, credit administration, home loan, when these departments were centralized, this also effects that people started their to loss confidence, because this process is time consuming and snatches the right to make a decisions on branch levels, now the branch staff in dependent on the thinking and decisions of the centralized hub decision making authorities. The customers feels hesitate to go through their documentation through centralized process and the branch population of the bank also feels less confidence that we are no more authorized to make decisions at our owns. The result is this to short fall in bank,s advances. Its means the experimentations also leads to the financial crises.
Government's role
Here, the government role is very crucial in financial crises like bail-out packages, government need to take into account the social impact of financial globalization while allowing financial institutions to benefit from the global capital markets. Governments are providing support and doing what so ever they can to prevent their economic structure, US government injected $800 billion in the economy to support the structure, UK government has announced a package of $ 692 billion, European Union is about to start an economic recovery plan and IMF has called to minimum financial support of $100 billion (BBC news 2008)
How long the crises will prevail? It is indeed very difficult to answer this question; because there is till recession, the stock markets till is down. The economic stability is also the question mark. Warne (2008) believes that it's the matter of confidence of investors, as long as it is restored, crises will be over, it need some financial stability.
CHAPTER 3
Methods and procedures
3.1 Methodology
In order to answer the research questions mentioned in chapter 1, I would elaborate here the different choices of methodology that have been adopted in this research paper
3.2 Population
The population, associated management level and employees of Bank Alfalah Limited will be access. A number of people from other banks will also be included in the research study.
3.3 Sample
The sample will consist according to the scenario like convenient sampling with in the organization Bank Alfalah Limited and out side the organization, others financial institutions
3.4 Sapling techniques
Different types of sampling techniques like convenient sampling, judgment sampling, cluster sampling, stratified sampling will be used
3.5 Research tools
This study is an explanatory study which is imbed at explaining the impact of global crises and what effect it will have on the financial institutions. For his purpose the several research papers and articles related to development economics will be examined. Data from various sources will be examined thoroughly that has the significant impact on the financial institutions.
CHAPTER 4
Data collection
In order to collect data for the proposed study will be collected through self structured questionnaire. In order to collect data (both primary and secondary).The major resources are approached using questionnaire and survey method The secondary data will also be focused to know the factors responsible which motivate the researcher to conduct research on the subject
Data Analysis and Representation
This chapter will contain information related to data analysis and graphical representation
CHAPTER 5
Findings, conclusions and recommendations.
This chapter will contain and conforms the global financial crises has a significant impact on the financial institutions and finings, conclusions and possible recommendations
