MS34B, UWI Mona, Department of Management Studies International Business Management (MS34B)...

MS34B, UWI Mona, Department of Management

Studies

International Business Management (MS34B)

International Financial and Monetary Systems

Facilitator: Densil A. Williams


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Contents Composition of the Monetary System:

National vs International Governing Institutions

- Bank- Fund

Institutional Challenges

International Capital Markets


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Composition of Monetary Systems : National vs. International

National Monetary System International Monetary System

Central Bank- e.g BOJ IMF , BIS

Commercial Banks- e.g NCB, Scotia, Pan Caribbean International Operations of Commercial Banks- HSBC, Citi Bank

Development Banking Activity – e.g. DBJ World Bank Group (MIGA, IFC,FIAS etc.)Regional Development Banks e.g. IADB,CDB, ADB- African Development Bank etc.


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International Institutions The World Bank Group World Bank International Finance Corporation Multilateral Investment Guarantee

Agency Foreign Investment Advisory Service-

ICSID


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The World Bank Genesis: o 1944 Bretton Woods Conferenceo Initially involved in reconstruction of post

WWII Europe.

Present Role:o Development: Lending money to

developing countries (IBRD and IDA funding).

o Movement from Project Lending to Non-Project Lending.


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Reforms Recommended by WB i.e. Structural Adjustment

Programme Reduce budget deficits Privatise state owned companies Liberalise trade by decreasing tariffs and

other import barriers Reform tax system to increase the incentive

for productive activity and to increase tax collections

Allow price to reflect market mechanism by removing government subsidies and price controls.

Float exchange rate


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Other Institutions in WB Group International Finance Corporationo Promote development of private institutions in LDCs

by lending and purchasing equity in private firms in LDCs.

o Also, assists LDC firms to obtain financing. Multilateral Investment Guarantee Agencyo Mandated to promote economic development by

encouraging FDI flows to LDCs.o Thus, provides insurance and policy advice services.o Gives consultancy advice to members to enhance

their investment climate and promote specific investment opportunities.


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Other Institutions in WB Group Foreign Investment Advisory Serviceo Emerged from IFC’s Development

Departmento Joint Venture between WB, IFC and MIGA.o Provides policy advice in areas of legal

reform, investment policy, investment promotion programs to LDCs interested in attracting FDI.


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International Monetary Fund

Genesis:o 1944 Bretton Woods Conference. Early Objectives:o Monitor international monetary systems.o Be a banker to the world’s Central Bank. Activities pre-1970s. Managed fixed exchange rate system System collapsed in the 1970s Birth of Floating Exchange Rate.


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International Monetary Fund (cont’d)

Present Role: o Lender of last resort to LDCs suffering from B.O.P

difficulties.

o Different forms of lending: Compensatory Financing Facility; Oil Facility; and Extended Fund Facility.

o The implementation of Stablisation Programmes (currency devaluations, decreases in government budgets, and elimination of government subsidy programmes).


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Institutional Challenges Increased need for funds to end

financial crisis around the world.

More measured policies to deal with new economic challenges that have not being experienced to date.


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Institutional Challenges Conflict between institutions’ developmental

vs commercial roles. Criticisms:

Imposing austerity Duplication of functions Assumption that principal constraint facing LDCs

is an absence of capital and inappropriate macroeconomic policy.

Adjustments without human face


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The International Capital Market

A capital market is a system that allocates financial resources (debt and equity) to their most efficient uses.

It provides a mechanism through which borrowers and investors can carry out their activities most efficiently.

The market consists of individuals, companies, financial institutions and governments that invest and borrow.


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The International Capital Market (ICM) differs from National Capital Market in that the former deals with transactions across national boundaries while the later is confined to national boundaries.

Large international banks play a critical role in the ICM by gathering the excess cash from investors and channel it to borrowers across the globe.


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This activity is particularly important to firms in countries with small or developing capital markets as it expands the supply of money from which they can borrow.

This expanded supply of money also reduces the cost of money to borrowers.


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Factors expanding the ICM Information Technology: Electronic

trading after the close of daily trade facilitates faster response time and reduce cost of communicating. This thus facilitates greater participation in the market.

Investors and Borrowers can now respond faster to breaking news on the ICM.


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Deregulation: This has increased competition, lowered the cost of financial transactions and opened many national markets to global investments and borrowing.

Financial Instruments: Greater competition leads to more innovative financial instruments.

This results in the repackaging of hard to trade financial assets into more liquid and marketable financial instruments (securities).


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E.g. Some agencies (General National Mortgage Association in the US) guarantee mortgage against default and pool them as assets.

They then sell securities in capital markets that are backed by these mortgages.


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Components of the International Capital Markets International Bond Market: consists

of all bonds sold by companies, governments and other organizations outside their national boundaries.

Large international investment banks such as Barclays Capital, Citi Bank etc. typically manage the sale of these bonds for corporate and government clients.


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Components of the International Capital Markets

International Equity Market: consists of all stocks bought and sold outside the issuer’s home country.

Large international companies generally list on several national stock exchanges.

Stock exchange listing the greatest number of international companies are:

London, New York, Frankfurt E.g. of Caribbean Companies listing on

International exchange : Sagicor of Barbados on the LSE


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Components of the International Capital Markets

Eurocurrency Market: consists of currencies that are banked outside their countries of origin.

E.g. US$ deposited in Jamaican banks are called Eurodollars, £ deposited in US banks are called Europounds etc.

The market that these currencies are traded in is called the Eurocurrency market

The LIBOR is the rate offered to large investors for Eurocurrency.


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Concluding Remarks This lecture outlined how the world’s

financial system is organized and governed.

It is important that managers in developing countries have an understanding of these issues as they will eventually affect the competitiveness of the enterprises that they operate.

Concluding Remarks Further, the enabling environment in which

these enterprises operate is heavily shaped by the policies of supra-national institutions thus, the long term survival of these enterprises rests on the critical understanding of the policies espoused by these supra-national institutions.

Therefore, the challenges that confront these institutions will have tremendous implications for the way we do business in the developing world.

MS34B, UWI, Mona, Mona School of Business and

Management

MS34B, UWI Mona, Department of Management Studies International Business Management (MS34B)...

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