By Karen Hindson, Researcher in the City of London Research Team
In their recent report, the World Bank discussed the value of openness to competitive international financial sector in contributing to faster growth and giving households and business around the world access to financial services. In this blog post we discuss how investment in emerging markets also represents significant opportunities for UK financial services.
Openness to international financial services is key for emerging markets
International banks represent an important source of finance, constituting between 40–60 percent of the banking industry in many developing regions[i]. Domestically, the competitive pressure provided by international financial services can promote market penetration - improving access to finance for SMEs and households that have historically been excluded. They also facilitate exchange of skills and new technologies, and invest in R&D to bring novel products and ways of working to improve efficiency and market access.
More widely, international finance also plays an important role in bringing much-needed capital and longer-term investment; stimulating foreign direct investment and international trade flows, and transmitting liquidity to local financial systems via cross-border bank flows. Despite a sharp decline after the global financial crisis, international Foreign Direct Investment inflows to developing countries have since recovered (see fig), and bank lending continues to be an important source of funding for emerging markets, enabling infrastructure investment, and stimulating business and job growth.
More than ever, remaining open to international financial services is key to ensuring developing countries continue to benefit from global flows of funds, risk-sharing and diversification, and knowledge and skills transfer.
Emerging markets are also a source of opportunities for UK financial services
By 2030, over half a billion Africans[ii] and a billion people in Asia[iii] are projected to be middle class, representing a significant future demand for banking and financial services abroad. This is one of the key trends highlighted in The City of London Corporation’s Asia Next Decade Campaign, which emphasises the wider opportunities for UK financial and related professional services in Asia across the next ten years.
Fintech is rapidly expanding in emerging markets, where it also represents valuable opportunities to meet a growing demand for innovative financial products, both for fintech firms as well as traditional financial services. Fintech is helping to drive forward a crucial evolution in financial services, particularly in emerging markets, where it is reducing the cost and improving the ease of conducting financial transactions. Technology is facilitating a movement away from traditional ‘bricks and mortar’ banking, and establishing access to financial services via mobile phones for many rural and remote communities – giving previously under-banked households and SMEs access to financial services. As our report ‘The Value of Fintech’ highlights, London’s role as a leading global fintech hub makes UK Financial Services well placed to capitalise on this growing market.
The World Bank’s research speaks to the clear mutual benefits that international finance can bring. For emerging markets, it can play a crucial role in improving access to finance – promote entrepreneurship and act as an accelerator for economic growth. Where international financial services are dynamic and respond to the enormous commercial opportunities that emerging markets provide, this can strengthen global relationships, and help to secure a shared prosperous future.