Over the past ten years, credit has expanded at a high pace in emerging economies. The recent significant rise of credit in emerging markets (EMs) are the outcome of a number of factors, such as macroeconomic stability, financial deepening, the availability of new lending instruments, as well as economic growth. Over the past ten years, average credit growth has exceeded 10% in some nations, including Brazil, Indonesia, Russia, and Turkey. Other nations display slower rates of credit expansion where, the composition of the credit portfolio and in particular the contribution of each type of loan that is, corporate, consumer and housing to the expansion of the stock of credit has been different across EMs.
But the thing which really matters EMs is that, either consumer finance had any positive impact on GDP growth or not. Or has the mix of credit in the forms of lending for homes, for consumers, and for businesses had an impact on GDP growth? Because EMs are exploring financial development and the composition of credit expansion which may have a variety of possible effects on economic growth.
Some financial experts believe in the fact that, greater economic growth promotes credit growth because it increases collateral values and creditworthiness, by the decline in unemployment, through higher investment and consumption so, consumer financial services including consumer finance has visible impacts in the domains of:
- Economic Modernization and the Emergence of international retail chains: A new environment for consumption characterized by economies of scale brought about by the emergence of international retail chains, the concentration of shops in shopping centers, and the expansion of consumer credit availability may logically call for the formalization of business dealings and hiring practices. Rapid urbanization, economic modernity, and the automation of value chains favor larger businesses with comparative advantages in a disproportionately greater way, changing consumer behavior to the detriment of smaller businesses. Financial liberalization and the banking sector’s quick expansion, which make it easier for people from all income levels not just the wealthy to obtain credit cards and consumer loans, further amplify this effect. As a result, in many fast-growing economies, not only is the form of consumption spending changing but so is the mechanism of consumption finance.
- Demand for formal contracts: Given the need for income verification in order to access loans, workers are more likely to demand formal contracts in an environment of inclusive financial services.
- Effective government inspection: Given that most jurisdictions strive to strengthen rules and infrastructure in order to extend the use of electronic payment technologies, monitoring payments and expenditures made through electronic systems is a more effective tool for the government to combat informality.
This undertaking assumes that as more people utilize financial services and as the economy adopts the three aforementioned modernizing trends, there will be a decrease in the informal sector. The formalization of employment in the wholesale and retail sectors is anticipated to be highest for a number of reasons, even if modernization and shifting consumer patterns may have direct and indirect positive effects on formal employment in every sector.
Another hurdle in the economic growth of EM’s and developing nations is the informal work which negatively impacts millions of low-income households’ access to social safety, protection, and health services. Additionally, informality drives a wedge in the labor markets and restricts the collection of public tax revenues which can be reduced through the process of financial integration and globalization. The advantages of integration include:
- Expanding the home economy’s credit supply and
- Fostering economies of scale when more productive businesses dominate sales.
More specifically, liberalization and integration bring in foreign companies for domestic production as well as more affordable financing, which is then passed on to consumers who previously had borrowing restrictions. This phase is characterized by the modernization of payment and consumption practices, as well as the decline of traditional consumption patterns in developing nations because consumers with less restrictive borrowing policies are more likely to use new financial products like credit cards and consumer credits that weren’t available during the autarky. The channel for consumer credit may aggravate the decline in informal employment and may appear as significant as the channel for company credit so, instead of depending primarily on traditional policy measures like subsidies and expending enormous amounts of money on audits and inspection, countries should prioritize electronic payment systems and the use of financial instruments to combat informality which automatically translates into economic wellbeing of the nation.
The Author is MD IRP/ Faculty Department of H&SS, Bahria University Karachi