Why is credit more expensive in emerging markets?

Because of greater risk.
87% (26 votes)
Because of lower competition.
13% (4 votes)
Total votes: 30

Comments

In my opinion, a volatile financial and economic environment that causes fluctuations in the financial and banking markets, reduction of borrowers 'solvency, errors in legal aspects of banks' activity, incorrectly formed strategies of banks are constant threats to the normal functioning of banking institutions, which cause their financial stability to be gradually lost. In banking, the presence of risk is quite normal. You need to take reasonable risk to make a substantial profit. As the most profitable item of banking business and a significant share of bank assets is the provision of loans, credit institutions are likely to suffer the most from credit risks. In the pursuit of profit, banks are forced to take risks by cooperating with customers who have doubts about their reliability and solvency. I believe that credit risks are the main risks that arise in the course of operating activities of banking institutions, the appearance of which is caused by mistakes made in assessing the creditworthiness of the borrower, the early detection of bad loans, and the failure of credit control in banks.
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Expert vote

The question is why credit is more expensive in emerging markets, and you have to analyse two specific hypotheses, namely greater credit risk or lower competition. In order to answer this question correctly, you beed to compare the credit markets of developing countries with those of developed countries, having regard to both risk and competition, in order to try to explain the credit cost differential. And also bear in mind that banks are not the only institutions that provide credit.
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Not all the competitors are present in an emerging market. This causes for those who are present to set the rules. The local market, still insufficiently stable, can only partially cover the risks. The lack of a real competition determines the inefficiency of the investments and implicitly the increase of the credit cost, make the credit more expensive.
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Adequate legislative framework and regulatory support are required to develop the financial and banking market. The high risks of banks when lending have the same effect for banks, depositors, and bona fide borrowers, who are forced to pay the high cost of borrowed money. Unscrupulous clients use loopholes to avoid loan repayments. We need to place a bid on the mass sale of consumer loans, because the percentage of bad debt on such loans is the lowest. Financial analysts claim that banks will soon be in competition with the market for short-term loans from small financial institutions (pawnshops, credit unions)
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They are assured through national bank agreement and capital's financial assurance through another banks. The only risk for the bank it is not investment itself, but could be a radical political change from free emerging market to business nationalization. Otherwise if they have solid and legal contracts they have profit.
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I consider that the credit is more expensive in emerging markets than in developed markets due to the fact there are more risks in the first one. To begin with, I can say that in emerging markets there could also be a lower competition and that's why the price of a credit is higher. Nonetheless, to be honest, it's not because of that. Emerging markets have bigger and higher risks such as the most important one: creditors wouldn't have a possibility to return theirs money due to unstable situation. To cut the long story short, basically the credit is more expensive because of there are higher risks on the emerging markets and there are probability that creditors would never receive theirs money back
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Expert vote

In most developing countries, the monetary system consists of two sectors. The first is the organized sector of the monetary system and the organized money market. It is usually small, often controlled from the outside. The organized money market mainly caters for the financial needs of medium and large local and foreign enterprises in the modern industrial sector. The second sector is a large but chaotic and unorganized money market, uncontrolled, illegal and often usurious. The low income population is forced to turn to this sector. Such a monetary system structure only reflects the dual economic structure of many underdeveloped countries. In addition, it is a consequence of a tendency in developing countries to serve the needs of the wealthy elite, neglect the needs of the poor. The main cause of instability of national currency units is their weak state control. The ability of central banks of developed countries to effectively perform administrative and regulatory functions is due to the fact that these countries have a highly integrated holistic economy, a complex and advanced financial system, an educated, professionally trained and well-informed population. Central to the credit system of developed countries is still the powerful commercial and investment banks, which in terms of their activities have become transnational. The development of the credit system is characterized by increasing concentration and centralization within individual credit institutions, the development of universalization and specialization of their functions, increased financial control over industrial companies and competition between different credit institutions in a single country within the world economy.
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I agree with all the considerations made above. I want to add my own thoughts. Let me remind you that interest on a loan (credit) is a variant of the price of financial resources. Objectively, the absence or low level of competition from sellers in the market can affect the price of any economic resource in the direction of its increasing. However, in most of the emerging markets, in my opinion, the more important factor is the variety of risks that accompanies such emerge. Let's look at some indicators of the financial market of Ukraine for 2019 (although it is somewhat difficult to classify financial market of Ukraine as an emerging market). Thus, bank rates on business loans averaged 17-24% per year, loans without collateral for the population - 40-86%, credit rates in credit unions - up to 30% per year, in pawnshops - up to 200% per year$ the Ukrainian Government’ debt securities were sold at a rate of at least 14% per year (as opposed to 0-2-4% in the developed financial markets). Such a high level of interest is, first of all, a compensation for the risks inherent in an economy that is growing or taking the first steps to the growth.
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That is good
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The analysis of the credit risk and the mechanisms of default are vital for bond pricing, risk management and the regulation of financial institutions. I believe that the credit risk is more important when we talk about an emerging market that the lower competition. The fact taht we talk about an emerging market and not about an developed market is the first indicator when we try to remain stable and to make profit. The credit risk can be a vulnerability because includes lost principal and interest, disruption to cash flows, and increased collection costs- so it can stop or make harder the normal procedures of the capital. The lower competition isn't really an problem; when we talk about capital and money, the most important aspect is to remain stable. as long as the competition is lower, we can improve and develop the standard and the market. In the developed markets the reputation system is highly developed, and they can assume an higher risk rhat the ones in the process of development. On the other side, the competition can be bigger, or, if the competition is lower, can apper problems from the outside: foreign invest credit can start to invest in the country. In the developing countries, talking about credit markets, there is a large share of informal financial institutions. Some of the aspects of the credit market can be thought in the idea that a lot of the credit markets in the developing countries are in the rural area so the people think at this apects in the rural scales. Another important aspect is the fact that as countries develop, the mobility increases and traditional networks fall apart. All in all, there are a lot of aspects which can be factors for the why credit is more expensive in emerging markets. Beside the lower copmetition and the credit risk another examples are related to culture, the level of education of the people and to the wauy that the ideas are promoted.
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