PwC: Emerging markets still deprived of fit-for-purpose financial systems

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A new report from the stable of PwC has challenged Policymakers, regulators and financial services organisations to be more active as part of measures to shape a financial system “that is fit for purpose”.

The report explained that lack of an efficient and resilient financial system is still holding back inclusive and sustainable growth in emerging markets.

These are the main findings of  the new PwC Project Blue report ‘Geared up for growth: Shaping a fit for purpose financial system’.

Made available to www.citybusinessnews.com , in the paper, PwC sets out what an efficient, resilient and inclusive financial system looks like across eight key dimensions; and how leading emerging markets – Brazil, China, India, Indonesia, Mexico, Nigeria and South Africa – rate against its ‘fit for purpose’ targets.

It argued that while growth in emerging markets continues to outstrip developed counterparts and hundreds of millions of people have been lifted out of poverty, “developing a well-functioning financial system remains critical to tackling poverty and sustaining economic growth over the long term”.

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It explained that emerging markets need a robust and broad-based financial infrastructure to channel funds efficiently, draw people into the market economy and enable them to share in the benefits.

In the PwC research, all seven emerging markets perform well on private sector lending, which is known to drive growth.

With the exception of Brazil, the banking spread (difference between bank lending and deposit rates) in the emerging markets is low, improving borrowers’ ability to service debt.

Another key area in which most of the seven emerging markets do reasonably well is controlling the size of their banking system,  “Only the size of China’s banking sector – compared to its economy – could raise systemic concerns”.

Making reference to Nigeria, it explained that financial system significantly impeding growth

The report said: “This can’t be said about the other African country in PwC’s assessment. Not only has Nigeria by far the highest percentage of its population living in poverty, its financial system is also showing the least progress of all seven emerging markets.

“In five of the eight key areas, Nigeria’s financial system scores significantly below PwC’s fit-for-purpose targets, holding

South Africa: on the right track, but with a long way to go

“Although poverty reduction has stalled in recent years and it has the worst income inequality of all seven emerging economies, South Africa is showing the most progress towards a fit-for-purpose financial system. Four of the eight key areas for a healthy financial system are already supporting inclusive and sustainable growth, and while more work is needed – for instance on the high levels of indebtedness – the country is moving in the right direction in the other four areas.

China and Indonesia underperforming in number of key areas

“Compared to the other emerging economies, China has the biggest difficulties with its pension asset management and the size of its banking system. China’s banks are facing a troubling collision of swelling balance sheets, high corporate debt levels and a rise in insolvency and default. Indonesia seems particularly off track when it comes to financial inclusion and a well-functioning housing sector.

India: financial system showing mixed signs of progress

“Strong innovation coupled with regulatory support is proving to be a boon for financial inclusion in India, with the Indian payments industry standing out from its emerging market counterparts by driving above-average growth in non-cash payments. However, the country’s pension asset management and life insurance penetration are both significantly below healthy targets.

Brazil and Mexico moving in right direction with e-payments

“Brazil’s household debt and comparatively high banking spread make its financial system vulnerable. But policymakers are actively working to reduce its banking spread. Another positive sign is the country’s use of electronic payments, opening up access to financial services for under-served communities. Mexico’s banking spread is already low, while it’s also actively promoting e-payments to accelerate economic development. However, it has more work to do on financial inclusion and life insurance penetration.

“Hugh Harley, Global Emerging Markets FS Leader, believes policymakers, regulators and financial services organisations should be more active in shaping a fit for purpose financial system:

“A fit for purpose financial system fosters inclusion, investment, access to credit and support for people when they retire, while promoting efficiency and protecting against systemic risks. The development of this financial system isn’t organic or passive. You shape it. Strong regulation and enforcement are essential for financial systems to develop, so regulators across different market sectors should get on the front foot and work together.”

Andrew S. Nevin Ph.D., FS Advisory Leader and Chief Economist at PwC Nigeria and Project Blue Global Leader, stresses that emerging markets should try and learn from their peers:

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