The Effect of Foreign Banks on the National Economies of Cambodia and Pakistan - Paper Sample

Introduction

The effect of foreign banks on the national economies of Cambodia and Pakistan varies. Cambodia displays a better positive effect than Pakistan, which shows positive and negative impacts. Foreign banks are influential in developing countries' economies because they introduce new management styles, products, and technologies that change the dynamic of the financial market. They have a better credit portfolio than the local banks; therefore, they are better positioned to perform and impact the economy. The following shows the effect of foreign banks in the national economies of Cambodia and Pakistan.

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Cambodia

Cambodia is experiencing a reasonable rate of growth in the economy with a low inflation rate. The entrance of foreign banks in Cambodia spiked an improvement in the banking sector with increased profitability and efficiency (Vorlak et al., 2019). It is because they have better organizational structures, expertise, management, and banking technologies. The foreign banks have minimal interest in Cambodia's political structure; therefore, they focus more on their interests than those of the country. They are open-minded and can work with different sectors and companies within Cambodia to improve their financial health, which positively affects the economy (Vorlak et al., 2019). It makes them more profitable than local banks with different political interests or affiliations with specific sectors and companies.

Positive Effects

The leading indicators of profitability and efficiency include overhead costs, after-tax income, and return on investments. Foreign banks in Cambodia tend to have lower overhead costs, high after-tax income, and investment returns (Vorlak et al., 2019). However, bank ownership does not determine overhead costs, but other factors such as management techniques and banking technologies. Therefore, foreign banks record higher returns on assets than domestic ones because they are better in management and have cutting-edge technologies (Vorlak et al., 2019). They operate better than domestic banks, making them more efficient.

However, the local banks are feeling the competition from foreign banks, and they are improving as shown in their increasing return on investment and income after tax. New foreign banks in Cambodia may not initially get a high return on investment, but they catch up after a while because they have better systems than local banks and have lower non-interest costs than local banks (Vorlak et al., 2019). Foreign banks have lower overhead costs meaning that they can invest more capital in the economy and contribute to its growth.

Foreign banks improve competition in Cambodia, leading to economic growth. Cambodia is one of the fastest-growing developing countries, and it owes a considerable part of it to foreign banks (Vorlak et al., 2019). Efficiency in the banking sector increases with high competition as local banks strive to catch up with foreign ones. There is high competition for customers in Cambodia, as the number of market participants is high. Foreign banks offer higher-quality services at lower cost costs (Vorlak et al., 2019). Therefore, it breaks the local banks' monopoly, and they have to adapt to maintain their customer base.

High competition in the banking sector leads to an influx of better technologies and other financial products. Derivative products are examples of new ones that have a massive impact on Cambodia’s economy (Sothan & Zhang, 2017). One of them is how foreign banks offer custom services to big corporations. It enables large corporations to thrive in Cambodia’s economy as they get top services from foreign banks to suit their operations (Sothan & Zhang, 2017). Foreign banks hold a low percentage of Cambodia's assets, but they significantly impact the economy, primarily because of the derivatives they offer to large corporations.

Foreign banks are improving stability, liquidity, and solvency in Cambodia (Sothan & Zhang, 2017). The banking system is benefitting from foreign banks' impact in Cambodia with better liquidity and solvency. Solvency is at a high because foreign banks have more capital than local banks. They also have a more extended reputation in the banking sector as they expand to Cambodia (Sothan & Zhang, 2017). They originate from countries with mature economies, for example, the United States. Local customers have better trust in foreign banks because of their stability (Sothan & Zhang, 2017). In turn, it improves the company's liquidity and is a massive factor in Cambodia’s economy's growth.

Local customers are confident that foreign banks will have better stability in a crisis; therefore, their money and investments are more secure with them. It is accurate as foreign banks have the power to get more revenue from international sources (Sothan & Zhang, 2017). It improves the stability of foreign banks in Cambodia, and they can contribute more to the economy because of the minimum risk of interruption from the loss of customers. Foreign banks can aid the economy and local banks in crisis because of their diverse source of revenue (Sothan & Zhang, 2017). They develop their financial muscle as the depositor’s confidence increases, as they are less likely to suffer in a crisis.

Negative Effects

The entrance of foreign banks in Cambodia is essential to its stability and development, but it has its adverse effects. Cambodia’s economy is continuously growing, and it is partly due to the involvement of foreign banks, but there are notable demerits (Sokang, 2018). One of them is the impact of external crisis and risk. International financial crises are inevitable, and foreign banks' involvement in Cambodia increases the country's adverse effects. Foreign companies may transmit international financial fluctuations to Cambodia’s economy as more foreign banks flood Cambodia’s economy, the risk of the effects of international financial crises (Sokang, 2018). Cambodia’s economy relies on foreign banks' performance and stability to maintain a sound financial system. However, reliance may lead to cut-and-run situations (Sokang, 2018). These situations do not occur with local banks as they do not live in a financial crisis.

Foreign banks may bring financial problems to Cambodia, and it is a risk to the stability of the financial system and the economy (Soeng & Cuyvers, 2017). Foreign banks rely on adequate cash flow from their international branches, and a breach in its stability in its home country affects its foreign ones because of the high demand for credit flow. However, it depends on the foreign banks' home country as mature economies; for example, the United Kingdom recovers faster (Soeng & Cuyvers, 2017). Therefore, a financial crisis may not be negligible or non-existent. However, a global financial problem may need more testing as it affects all countries (Soeng & Cuyvers, 2017). Therefore, Cambodia’s economy is at risk, given its reliance on the performance of foreign banks.

Foreign banks are different, as some are bigger than others. Therefore, the bigger ones are less likely to cut and run in a financial crisis. Their investment in developing countries is high, and they would not want to withdraw (Soeng & Cuyvers, 2017). It poses a risk to their stability as it strangles their financial coffers because it reduces credit flow. Foreign banks consider market share crucial in investment and would not want to throw it away unless they perform well in the host country (Soeng & Cuyvers, 2017).

Foreign banks typically have to assure their host countries of support in case of a financial crisis. However, it is more about foreign banks’ moral responsibility, and it is an informal way of assuring the country (Kumari & Sharma, 2017). Foreign banks have to follow their stand as they risk damaging their reputation, which is detrimental to future investments and profits to maintain their business model. Foreign crises might not affect the international banks as much as local ones; therefore, they can bail out the local ones if the effects affect Cambodia’s economy (Kumari & Sharma, 2017). It shows the importance of foreign banks to Cambodia’s financial system and the economy. Therefore, Cambodia’s economy counts on the stability of foreign banks for sustainability. However, moral assurances are weak as there are no boundaries, and Cambodia stands to lose out in the deal (Kumari & Sharma, 2017). Some foreign banks alter their brand names when venturing into international markets to reduce the risk of damage to their reputation. Therefore, it poses less legal stress on the company’s brand name.

Cambodia’s small and medium-sized enterprises (SMEs) depend on foreign banks for capital. SMEs play a massive role in developing Cambodia’s economy as they create employment for many citizens (Chhorn et al., 2017). Therefore, it boosts the revenue cycle in the economy with more investments. However, credit is vital for SMEs to survive. SMEs get their capital from the banks in Cambodia, and the influx of foreign ones makes it more accessible. However, Cambodia worries that foreign banks are not entirely supporting SMEs in the country (Chhorn et al., 2017). Foreign banks prefer large companies and corporations to get value for their investment, and fewer SMEs may access the capital (Chhorn et al., 2017). Some foreign banks have lending systems that may not accommodate smaller businesses in Cambodia, primarily because of organizational diseconomies.

SMEs that get opportunities with foreign banks have an opportunity to grow their loan portfolio with fast payments (Chhon et al., 2018). Therefore, it leads to more capital reaching SMEs even if the foreign banks’ lending rates are low. However, as Cambodia is a developing country, some foreign banks are adapting to SMEs' demands as local ones offer better support. Therefore, high competition for customers is essential to improving the lending systems of foreign banks (Chhon et al., 2018). The increase of capital to the SMEs is essential to boost the fast growth rate of Cambodia. Small and big borrowers all play a massive part in Cambodia’s economy, and foreign banks need to increase their lending power.

Pakistan

Foreign Direct Investment (FDI) is essential to the development of Pakistan. Foreign banks are a form of FDI in Pakistan because they increase capital investment in the country, which boosts the employment rate and is essential in reducing the inflation rate (Ehsan & Javid, 2018). FDI is essential for improving the level of technology in the banking sector and management strategies. Right management strategies involve providing more training programs to employees and improving Cambodia's quality of financial products (Ehsan & Javid, 2018). As technology continues to evolve worldwide, there is a need for Cambodia to catch up. Foreign banks are playing a massive role in the developments as they bring better exposure.

The primary contributions of foreign banks to Pakistan’s economy include sustainability, improving technology and skills, and more employment (Khalil & Siddiqui, 2019). Pakistan benefits from the external financial flow as foreign banks invest in the country. Therefore, they transfer technology and different banking skills to the country to create a good foundation for Pakistan to develop and be sustainable. Many foreign banks are willing to invest in Pakistan because the country has vast development opportunities (Khalil & Siddiqui, 2019). The local financial system is not as competitive without foreign banks. They improve the market as Pakistan gears up to achieve a...