Cost Of Financial Intermediation Research Articles

Accessing Private Markets: What Does It Cost?

This paper provides the first empirical analysis of the costs of financial intermediation across private markets and a framework to estimate ex-post costs using observed fund terms. I access a proprietary dataset, develop a novel model, and estimate that it costs investors $0.05 to $0.26 per dollar committed over funds’ lifetimes. The corresponding fee drag on gross-to-net total value to paid-in capital is 0.1x to 0.7x and 5% to 8% in annualized terms. The results demonstrate cost economies of scale in which larger funds cost less in management fees. Finally, the fraction of costs attributable to non-performance fees is 53% to 75%.

Examining The Impact of Inflation on Financial Development in The Fragile Five Economies with Asymmetric Cointegration Tests

This study examines the relationship between inflation and financial development indicators for the Fragile Five countries between 1981 and 2021. The study analysed the relationship between symmetric and asymmetric distributed lag regression models. Inflation appears to have a negative impact on financial development in countries other than Brazil and India. The results prove that the most extended correction process was experienced in India, and the shortest was experienced in Indonesia among the Fragile Five countries. Research results emphasise that high inflation negatively affects financial development in these economies by increasing the cost of financial intermediation.

Measuring the unit cost of financial intermediation in South Africa: A measure of bank productivity

AbstractThis paper presents evidence on productivity growth in the South African banking industry in the last 30 years. The productivity measures we construct shed light on whether the development, increased contribution and influence of the banking industry have translated into lower cost of intermediation and improved productivity and efficiency of the banking sector. Our results show that there is no apparent trend in the unit cost of intermediation in the period 1993 to 2019, which is indicative of constant productivity.

Keuangan digital: suatu studi literatur

The financial industry has experienced a continuous evolution in service delivery due to digitization, where this evolution is characterized by expanded connectivity and improved information processing speed both at the customer interface and in back-office processes. The role of contracts in the economy has recently received great attention, where contracts are an important element of the operation of a market economy. The relevance of digital finance and financial inclusion for poverty alleviation and economic growth is of interest to policymakers and academics alike, particularly because of a number of issues that if addressed can make digital finance work better for individuals, businesses, governments and economies. Digital finance and financial inclusion have several benefits for financial service users, digital financial providers, governments and the economy such as increasing financial access among poor individuals, reducing financial intermediation costs for banks and fintech providers, and increasing aggregate spending for governments. The purpose of this study was to determine the determinants of digital finance. This study used a systematic literature review method and used 18 articles as study material, which were obtained from the scopus.com and sciencedirect.com pages. The results of the study show the determinants of digital finance, both variables that influence, are influenced or mediate. The results of the literature study did not find digital finance as a moderating variable.

Micro Finance Institution Services and Performance of Restaurants in Mombasa County, Kenya

The expansion of the economy depends on the availability of financial services, notably credit and savings options. As a result, Kenya's economy has not grown and developed as expected as a result of MSMEs. Medium and Small entities encounter several weaknesses that hinder their potential usefulness towards long-term sustainability of the economy. The lack of credit services is one of these concerns. The efforts of microfinance institutions to make their services available to small and medium-sized businesses that have not profited from the traditional formal banking system have been recognized as a result of the growth and expansion of SMEs. Because of this, the researcher evaluates how microfinance services affect the performance of restaurants in Mombasa's core business district. Researchers hope to learn how microfinance training affects the performance of Mombasa CBD restaurants; how the regulatory framework for microfinance affects Mombasa CBD restaurants; whether access to credit affects Mombasa CBD restaurant performance; and the impact of microfinance credit cost on Mombasa CBD restaurant performance. The study was based on Balance Scorecard theory, Resource-based theory, Pecking order theory, Credit Access theory and Management theory. A descriptive survey design was used in this investigation for restaurants over seven years and above. 114 people who worked at the selected restaurants in Mombasa's core business centre were selected whereby, 57 of whom were managers and 57 were waiters. The researchers used the census approach, in which all employees were included. The study data was through questionnaires. Statistical Package for Social Science (SPSS) Version 25 for Windows was used for data analysis. In order to get the most accurate results, we used a variety of statistical methods such as means, frequency tables, percentages, standard deviations correlation and regression. The study found that training and microfinance regulatory framework indicated an insignificant relationship with performance of restaurants in Mombasa County however access to microfinance credit and microfinance credit cost indicated a positive significant relationship with performance by SMEs in Mombasa County. The study concluded that Owners of businesses can benefit from training in the form of expanded professional networks, the transfer of technology, the formation of new businesses, and the acquisition of superior management practices. Business success and continued operation depend on the availability of debt financing. However, MFIs are hesitant to lend to SMEs because they are seen as higher risks and SMEs typically do not have collateral to back up their loans. The study also concludes that the amount of the loan is a crucial factor in microfinance lending since it affects the overall cost of financial intermediation. The study recommends that Microfinance institutions should continue training restaurant owners on financial management for the purposes of sustaining enterprises. This will create better understanding on how to manage their funds more efficiently and effectively. In order to make it easier MFIs to have favorable financial performance, the institutions ought to adopt methods that will make it easier for MFIs to have improved liquidity. This will allow the institutions to be more efficient in their financial operations. The study also recommends that microfinance institutions and policymakers should think about incorporating an affordable micro-insurance plan as part of the microfinance package for all its clients who seek for loans. Small and medium-sized enterprise management should be more proactive in approaching MFIs to analyze their business progress and share their current needs and concerns.

Deregulation and Financial Intermediation Cost: An International Comparison

AbstractCalculations for 15 countries reveal falling unit costs of financial intermediation in most cases, especially where unit cost was high during the 1970s. This result coincides with the concomitant convergence of both unit cost and the deregulation index over the period: Countries with a high unit cost were initially more strictly regulated and subsequently deregulated more. Despite this, the international unit cost barely declined due to the decreasing weight of low unit cost countries in total financial production after the mid‐1980s. Focusing on the specific effect of deregulation, the econometric analysis displays a negative and significant link between deregulation change and unit cost variation. Further analyses reveal that the effect of a change in deregulation depends on banks' market power. Thus, the stagnating unit cost observed in the United States and the United Kingdom, the two largest providers of financial services, could be due to weaker deregulation reforms—deregulation was already high in these countries during the 1980s—and a concomitant reduction in competition.

Determinants of the Cost of Financial Intermediation: Evidence from Emerging Economies

This study examines the determinants of financial intermediation costs of banks in ten Emerging Economies (EEs) in the period 2000–2018 using panel data of 1335 banks. Empirically, this study applies the single-stage dealership model and its extensions by introducing new bank and country-level variables. We find robust evidence that investment in government securities and market openness positively affect bank intermediation costs while the trilemma index negatively affects them. During the world financial crisis, bank intermediation costs increased. Moreover, we observe that cost inefficiency, credit risk, and regulatory regime are the crucial drivers of bank intermediation costs. We draw important implications for scholars and policymakers.

Market competition, capital regulation and cost of financial intermediation: an empirical study on the banking sector of Bangladesh

PurposeThis study aims to examine the impact of market competition, and capital regulation on the cost of financial intermediation of banks of the Bangladesh banking industry.Design/methodology/approachThis study has used a balanced panel dataset comprised of 340 firm-year observations for 34 commercial banks in the Bangladesh banking industry from 2011 to 2020. The Prais Winsten panel estimator has been used to assess the impact of market competition and capital regulation on the cost of financial intermediation of banks.FindingsBased on the regression results, this study has documented that greater market competition results in a lower cost of financial intermediation for banks. Similarly, an increase in the regulatory capital of banks increases the cost of financial intermediation of banks. The main findings of this study are found robust by using alternative proxies for the cost of financial intermediation, market competition and capital regulation. The regression results also suggest that private commercial banks tend to have a higher cost of financial intermediation than state-owned commercial banks.Research limitations/implicationsThe regulatory reforms should aim to foster sustainable and optimal market competition for the Bangladesh banking industry to regulate the market power of banks to reduce the cost of financial intermediation. The regulatory authority of Bangladesh should find the optimal policy measures for implementing the capital regulation in the banking industry which would reduce the cost of financial intermediation margin of banks.Originality/valueUnlike previous studies which have used structural market competition measures, this study has used non-structural market competition measures to assess the relationship between market competition and cost of financial intermediation in the Bangladesh banking industry.

The limits to FinTech unveiled by the financial geography of Latin America

To address the paucity of research on the financial geography of Latin America and contribute to the emerging geographical literature on FinTech, we use quantitative financial data and qualitative insights from expert interviews, to explore the relationships between FinTech development and financial geography of the region, with focus on Brazil, Mexico and Argentina. We show that despite its fast growth driven by high costs of financial intermediation, policy of financial inclusion and financial regulation, FinTech in Latin America has thus far played out on the margins of the global FinTech industry and the margins of its financial systems, with limited impacts on financial inclusion. We argue that FinTech has not challenged but contributed to an already high level of concentration in the geographies of financial services in Latin America. This is affected by the proximity of FinTech firms to incumbent banks (which are active in FinTech), sources of capital and skilled labour, and reinforced by the fact that leading financial centres in Latin America are also the main centres of technology industry. Finally, we demonstrate that FinTech has not yet had a significant impact on the low level of financial integration in Latin America, with fragmentation determined by political, economic, and financial instability, combined with a lack of compatibility in financial regulation. Put together, our findings add to the literature that advocates a degree of scepticism about the impacts of FinTech on financial centres, if not the financial system overall.

The impact of trade openness on the cost of financial intermediation and bank performance: evidence from BRICS countries

PurposeThe purpose of this paper is to examine the impact of trade openness on the cost of financial intermediation and bank performance. Developed and developing countries are currently pursuing trade openness to achieve higher bank performance with less intermediation costs.Design/methodology/approachIn attaining the study's objectives, several regression methodologies were employed (i.e. system generalized method of moments (GMM), fixed effect, pooled ordinary least squares (OLS) and vector error correction model (VECM)). The authors tested the hypothesis on data of 885 banks from BRICS countries, which span 18 years (2000–2017).FindingsThe results from this robust study showed that embedding higher trade openness reduces financial intermediation costs and improves banks' performance. The results remain robust following the use of different estimation methods and alternative variables as proxies. In addition, results were still valid upon considering bank level, industry level and country level as control variables. It was also observed that the relation pattern holds its rigidity during “good” and “bad” times (i.e. the global financial crisis).Originality/valueThe results provide better references for bank regulators, academics and policymakers to take advantage of the low financial intermediation costs resulting from trade openness.

Did Financial Consumers Benefit from the Digital Transformation? An Empirical Investigation

This study aimed to test, through empirical investigation, how the rapid advancement of digital transformation (DT) has impacted the price of financial services. To this end, we compiled a set of macro-level indicators on the aggregate outcomes of the financial services sector in Korea over the last three decades and conducted an analysis to gauge the effects of DT on the country using those indicators. Using the ARDL-ECM (autoregressive distributed lag error-correction model), we show that, over time, the unit cost of financial intermediation in Korea has tended to move in tandem with the growth in economic output, although the profit portion of the unit cost has not exhibited a long-term relationship with the GDP trend. The long-term effect of the DT trend is negative (i.e., cost-saving) for labor input, capital expenditure, and the total unit cost of financial intermediation, which are all shown to be statistically significant. Consequently, we conclude that DT contributed to enhancing consumer benefit, mainly by achieving the operational efficiency of labor and capital, from 1990 to 2019 in Korea. From a policy perspective, our finding implies that DT-driven innovation in the sector can benefit financial customers if excessive levels of profit are restrained through market competition.

Financial intermediation and occupational choice

This paper explores how financial intermediation costs affect occupational choices, using a model with employers, own-account workers, and wage workers. An intermediation cost drives a wedge between the return on saving and the cost of borrowing that increases the cost of borrowing, reduces the return on saving, and depresses the wage rate. As a novel channel in this paper, a lower return on saving induces agents to seek self-employment to manage their wealth. Quantitatively, the observed variation in the intermediation cost explains about a quarter of cross-country differences in the share of own-account workers. In terms of policy implications, these findings suggest that governments should increase the efficiency of financial intermediation and provide households with better saving opportunities.

Financial sector transparency and bank interest margins: do quality of political and financial regulatory institutions matter?

Purpose This study aims to examine the effect of private (PRST) and public (PUST) sector-led financial sector transparencies on bank interest margins (BIM) termed as social cost of financial intermediation in different institutional quality setups. Design/methodology/approach This study uses a two-step dynamic generalized method of moments panel data and bootstrapped quantile models with 91 economies between 2004 and 2016. Data is sourced from World Development Indicator and Global Development Finance databases. Findings The results show that under strong and weak political and financial regulatory institutional setups, the reducing effect of PRST on BIM are observed and reported while the full sample reports no significant nexus between PRST and PUST on BIM. Furthermore, under political institutional quality sample, economies with strong corruption control and regulatory quality are able to reinforce the dampening effect of PRST on BIM while under the same political institutional quality sample, economies with weak rule of law are able to heighten the reducing effect of PRST on BIM. Moreover, under financial regulator institutional quality sample, economies with strong overall weighted and unweighted, chief executive officer and policy dependent central banks are able to intensify the diminishing effect of PRST on BIM while under the same financial regulator institutional quality sample, economies with weak limits on lending are able to amplify the reducing effect of PRST on BIM. However, PUST is reported to propel lower levels BIM in the bootstrap models, especially in strong institutional economies. Practical implications These findings imply that policymakers may rely on PRST to reduce BIM, especially under financial regulatory institutional quality. Additionally, economies must be careful on their reliance on PRST because the effectiveness of PRST to tame high BIM is dependent on the strength of political and financial regulatory institutions. Originality/value To the best of the authors’ knowledge, this study presents first time international evidence on the effect of private and public sector-led financial transparency on BIM in strong and weak political and financial regulatory institution economies.

Technology Adoption, Market Structure, and the Cost of Bank Intermediation

This paper studies the high and persistent U.S. cost of financial intermediation (CFI) documented by Philippon (2015) and its inverted U-shape behavior since the mid-1960s. We build a novel model of endogenous growth and bank intermediation and introduce imperfect bank competition, bank IT adoption and bank entry, and an occupational choice that determines the relative size of the labor force and the economy's average level of managerial ability. The interplay between verification costs, market structure, and occupational choice delivers implications for the CFI which are qualitatively consistent with the stylized facts of the U.S. economy. We find that the banking sector structure is the main determinant of the long-run level of the CFI. We also show that the U.S. productivity growth slowdown from the mid-1960s to the mid-1980s is a major driver of the simultaneous increase in the CFI and the number of banks during this period and their subsequent decline.

ISLAMIC REGULATIONS AND ISLAMIC BANKS MARGINS: AN EMPIRICAL INVESTIGATION INTO ASEAN COUNTRIES

This paper examines the impact of Islamic regulations on Islamic bank margins in ASEAN countries, utilising the fixed-effect method. The sample consists of 27 Islamic banks in Malaysia, Indonesia, Singapore and Thailand covering the period 2009 to 2017. The results suggest that Islamic regulations, such as the Islamic regulatory framework and Shari’ah supervisory board, are negatively associated with Islamic bank margins. These results have important policy implications for regulators, indicating that they should impose a separate regulatory framework for Islamic banks and bank managers to increase the number of Shari’ah scholars on the Shari’ah board in lowering Islamic bank margins. Overall, the findings suggest that Islamic banks should adopt regulations that should follow Shari’ah requirements, as they help to lower the cost of financial intermediation. As for the other control variables, only the Lerner index has a positive and significant impact on ASEAN Islamic bank's margin. Therefore, appropriate policies are necessary to foster competition in Islamic banks.

Institutional quality and social cost of intermediation in Africa: Does the level of financial market development matter?

AbstractThis article examines the effect of institutional quality on social cost of intermediation in high and low developed financial markets across 29 African countries between 2006 and 2013. Employing bootstrap‐quantile and two‐step system generalized methods of moments models with bank level data of about 330 banks, the results provide interesting and new insights. The results show that improvement in institutional quality in high or low developed financial markets translates into reduced social cost of intermediation to the society. However, it is evident from the results that improvement in institutional quality is more robust, persistent and weightier in reducing the social cost of intermediation in low developed financial markets which are often characterized with weak regulatory regimes and enforcement. Hence, improvement in institutional quality shores up regulatory supervision, monitoring and enforcement which translates into heavier dampening of social cost of financial intermediation in less developed financial markets. Moreover, bank size, credit shocks, return on equity and liquidity are key drives of social cost of intermediation both in low and high developed financial markets. These findings have policy implications and recommendations for policymakers and regulators of financial institutions. Policymakers and regulators, especially those in less developed financial markets, must endeavour to create, implement and advance mechanisms and enabling environment that enhances the quality of institutions since improved institutional quality reduces social cost of intermediation to the benefit of society.

Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12% to 28% (8 to 20 basis points) lower underwriting fees than similar non-CDS firms do. Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds. This paper was accepted by Karl Diether, finance.

Relationship among cost of financial intermediation, risk, and efficiency: Empirical evidence from Bangladeshi commercial banks

The global financial crisis and stiff market competition enhance risk exposures that raise debate on the cost of financial intermediation and the supremacy of banks’ efficiency. This study examines...

Financial intermediation and risk in decentralized lending protocols

We provide an overview of decentralized protocols like Compound and Aave that provide collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance ecosystem (DeFi). We obtain publicly available information on rates, supply and borrow activity, and accounts to analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking.

Financial wealth effects and consumption expenditure

AbstractThere has been a renewed interest in the wealth effects on household consumption expenditure mostly in the background of the global financial crisis and Eurozone turmoil. The available literature on wealth effects mostly focuses on advanced economies. Hence, this article studies the financial wealth effects on private final consumption expenditure (PFCE) in an emerging economy like India. We use the quarterly data for the period 1951–2015 and employ the ARDL method that has the flexibility in overcoming the econometric issues associated with the traditional methods in the analysis of time series models. The results suggest that financial assets wealth in the form of stock market capitalization (MC) significantly affects the PFCE. This article establishes the long‐run positive relationship between financial wealth assets and household consumption. The major inference is that households are closely linked with the financial markets through their investments in the form of insurance, mutual funds, company deposits, company stocks, and other forms. Hence their consumption behavior is significantly affected by the financial wealth created by the financial markets. The policy implication is to make the financial markets more transparent, easy to access by reducing the related financial intermediation costs leading to a deeper integration of the households with the financial markets, which in turn would result in increased financial asset wealth generation and consequently increased household consumption to boost economic growth.