Kembara's Financial Solutions-The Savers and Borrowers are who?
As we've already seen, many savers are people or businesses who have extra funds they're not currently using. Instead, they will invest this money, maybe by making a bank deposit or by purchasing bonds or stocks. The lenders we have dealt with thus far are businesses looking for funding to either launch (like CareerComic) or expand from an existing base (like Zoom). However, individuals also borrow money. We are aware that a lot of people struggle to make ends meet, especially when it comes to buying expensive products like appliances (washing machines, refrigerators, and televisions) or a home. When such people take out loans to buy such purchases, it is obvious that they can be borrowers. Mortgages are loans used to purchase homes Sometimes, the funds are borrowed for a specific objective, such as a car loan or a mortgage loan to purchase real estate. Other times, cash can be borrowed for a consumer good like a widescreen TV or a washing machine. Personal loans are a common term used to describe them. Additionally, some types of borrowing may need to be repaid immediately, while others may take much longer. The bank overdraft, a type of loan on which the bank might require quick repayment, is an excellent illustration. In contrast, a normal mortgage can take 25 or 30 years to completely pay off. Governments are a significant category of debtors that we have not yet encountered. By charging taxes to its citizens, many governments are able to raise sizable sums of money each year that they can use for a range of things like roads, hospitals, defense, education, and employee salaries. Government spending occasionally exceeds government revenue. It is typically necessary to fund the difference in some other way, usually through borrowing. However, the majority of the money that the government borrows is obtained through ordinary bond issuance from citizens and businesses rather than banks. In fact, the UK had outstanding bonds totaling more than £2.1 trillion (or two thousand one hundred billion pounds) by the beginning of 2021, while the US had more than $28 trillion. The national debt of the nation is these sums. Governments are not always debtors. The government generates a surplus that puts it in the position of being a saver rather than a borrower in locations like Norway, some Gulf States, and Singapore. This is frequently brought on by an abundance of natural resources, particularly oil and gas, in Norway and the Gulf. In Singapore, it is mostly because of the country's robust economy and prudent fiscal management by the government.
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Kembara's Financial Solutions - Bond
The issuance of IOUs (IOU = "I owe you") by borrowers, generally in the form of bonds, is the third significant method that savers and borrowers are connected in the financial markets. The banks are not involved because these IOUs are issued straight to the investors. An additional form of debt that requires repayment and on which the borrower must pay interest is borrowing money by issuing bonds. If a borrower needs to raise £100 million, it can divide the sum into one million bonds, or IOUs, with each bond representing £100. The borrower might pledge to repay the bondholders their £100 in ten years while agreeing to pay them interest every year up until that time. In this example, we'll assume that the business pays the lender 7% in interest annually. Kembara's Financial Solutions - Equity
Businesses wishing to obtain capital may choose to sell stock as an alternative to bank loans. Equity, which denotes ownership, is sometimes referred to as shares or stock. The owners of a firm are the people who hold its equity. As a result, a corporation that has been formed as a business can raise money by selling shares. Just like in the earlier CareerComic example, money was raised by selling a portion of the company's equity. So why should equity be preferred to borrowing as a source of finance? There are several distinctions between the two that must be taken into account. The fact that interest must be paid on borrowing and that the money must be repaid may be the main differences at this time. Equity is not subject to interest charges and does not require repayment. Shares sales are not just used by startups to raise capital; occasionally, huge corporations will engage in initial public offerings and sell significant amounts of equity (IPOs). A notable instance is Zoom Inc.'s significant IPO, which occurred in April 2019. Zoom Inc. is a US communications company. In its April 2019 initial public offering, Zoom Communications inc. sold 20.1 million shares at a price of $36 each, generating a total of just over $725 million and valuing the firm at $9 billion. The shares doubled to $72 on the first day of trade. Zoom's business then had enormous growth during the COVID-19 epidemic that occurred in March 2020 and put the entire world on lockdown, and its share price reached $250 in June 2020. As a result, several investors sold their shares for a substantial profit. These investors' shares would have doubled once more if they had continued to hold onto them, though. Zoom's share price was $441 in March 2021, more than 10 times what it was at its initial public offering. Kembara's Financial Solutions - The Function of Banks
Banks have historically served as an easy conduit between savers and borrowers, profiting from the discrepancy between what they pay savers and what they charge borrowers. The bank is willing to offer interest—say, 5% per year—for the surplus funds that the depositors deposit there. The bank will then lend the deposited funds to borrowers, possibly at an interest rate of 8% annually. Therefore, if a bank received deposits totaling £100 million, it would have to pay £5 million in interest over the course of the year (5% x £100 million). If the bank was successful in lending the $100 million, interest payments would total £8 million for the entire year (8% x $100 million). The bank is making a £3 million profit because it is earning £8 million in interest while only paying out £5 million in interest. This is not a profit; rather, it is a surplus that must be used to cover costs like employee salaries, office rent, and taxes. Profit is what remains after deducting these expenses. Kembara's Financial Solutions -Impact Investing
As the name implies, "impact investing" refers to financial investments that aim to have a good influence on society or the environment as well as provide a financial return. Investors are able to make investments with peace of mind knowing that they will have a positive impact. Microfinance and gender lens investing are two forms of impact investing. Gender-focused investment Focusing on investments that will advance gender equality and open doors for women is known as gender lens investing. These possibilities can include providing funding so that women can start or grow their enterprises or contributing to the development of goods and services that will benefit women and girls. Investors can also use a "gender lens" by pressing for a proper gender balance on the board of directors and in the overall workforce, as well as by putting pressure on the business to achieve parity in working conditions, such as pay rates for male and female employees. Microfinance Microfinance aims to help people with low incomes or those without jobs who wouldn't typically have access to traditional financial services. Microfinance often takes the form of low value loans (microloans), which are frequently accompanied with some financial or business education. It frequently targets underdeveloped or developing countries. It typically assists sole proprietors, family enterprises, and small cooperatives in becoming more organized in order to purchase the necessary equipment, which makes them more solid and robust. Importantly, it can also eliminate the need for the poor to turn to expensive and frequently unethical moneylenders. 6)Introduction – Saving and Borrowing Don't let us deceive ourselves. To the majority of us, the financial services industry appears to be quite complex. Why is that so? Well, it's mainly due to the technical jargon that is used to explain things; just a few examples include bonds, shares, funds, interest rates, and inflation rates. You might benefit in a number of ways from this. Perhaps you might consider a career in finance. Maybe all you need to do is learn how to better handle your own or your family's finances. We hope that this program of study will enable you to accomplish either one or both! Let's begin by attempting to convey the financial industry as simply as possible. Consider it as the connecting factor between two groups; we'll call one "savers" and the other "borrowers." The fortunate savers currently have more money than they need, so they want to invest it in a way that will hopefully cause it to increase. Some of these savers have significantly more extra cash than others, and they could be people, businesses, or governments. In the financial services industry, people with significant financial surpluses are often referred to as "high net worth individuals" (HNWIs). A number of businesses also have cash on hand. Apple, for instance, had over $36 billion in its bank accounts at the end of 2020. Borrowers might be people, businesses, or governments, just like savers. A small start-up company like CareerComic, which is described below, is an example of a borrower. Example Young college grads with a fantastic concept. They believe that other college grads and schoolchildren would adore having access to a database of jobs that are presented in a humorous, straightforward, and understandable manner. They plan to compile a comic strip called CareerComic that depicts a day in the life of each career. They have discussed their ideas for CareerComic with others, and they may have even found an investor who will give them some funding so they can create a high-quality prototype of the comic. The investor will receive a 50% stake of the company in exchange for their investment; they are anticipating that the company will grow and become very valuable in the future. The bridge connecting savers and borrowers is provided by financial markets. There are three basic ways to connect the two: through banks, stock, and bonds. Kembara's Financial Solutions - Responsible Investment
The fundamental goal of investing may still be to increase the amount of money invested over time, but this objective can be supplemented with additional ethical standards to determine which investments are appropriate or inappropriate. Hopefully, the confluence of these elements will lead to more responsible investment decisions that will improve society and the environment. The term "responsible investing" is used to describe this. Therefore, an investor may wish to first evaluate how responsible a company is before agreeing to buy shares. What constitutes responsibility, however, is likely to differ. Due to the potential harm to society or the environment, some investors might desire to steer clear of businesses that they believe are engaging in improper activities. Companies that manufacture tobacco, gambling, alcoholic beverages, or firearms could be appropriate examples. Others might prefer to limit their investments to businesses that have a beneficial influence, like those that generate organic food or renewable energy. Microfinance and applying a gender lens are two particular instances of this kind of responsible investing that are taken into account. Finally, and most importantly, it's feasible that as upholding moral and ethical standards grow more crucial, businesses that already uphold them will prosper and appreciate in value. Therefore, making responsible investments may help you achieve higher investment returns than you otherwise might. Kembara's Financial Solutions - Factors affecting environmental, social, and governance (ESG)1/20/2023 Kembara's Financial Solutions - Factors affecting environmental, social, and governance (ESG)
Environmental, social, and governance, or ESG, has grown in significance over the past few years. ESG and ethics are related because it determines whether a corporation is "doing the right thing" with regard to its effects on the environment, the society in which it operates, and its governance. Because businesses are corporate entities, governance is frequently referred to as corporate governance. Here are some examples of what might be evaluated: • Environmental criteria: • The amount of energy the business consumes and its commitment to energy conservation. • The degree to which the business reduces waste and pollution. • The company's conservation initiatives and the effect they have on the environment. The amount to which the business supports its neighborhood is a social criterion. • The business's donations to charities. • How highly the workforce's health and safety are valued. • The principles upheld and demanded of the company's suppliers, such as their treatment of workers and working conditions. The company's management and board of directors should be diverse in terms of age, experience, ethnicity, and gender. Additionally, there should be a balance between executive directors (who make day-to-day decisions) and non-executive directors (acting in a more consultative capacity). the standards of moral behavior expected by the workers, especially senior management. Kembara's Financial Solutions - Financial Services Ethics
The rigging of LIBOR (the London Interbank Offered Rate) and other interest rate setting processes around the world is one example of how recent scandals have damaged the integrity of people and practices in the financial services industry, as we indicated at the beginning of this chapter. In order to establish benchmark interest rates (such the LIBOR rate), banks are required to submit the actual interest rates they are currently paying or anticipate paying for borrowing from other banks. It is essential to have a fixed interest rate since it acts as a standard for pricing corporate and government bonds, mortgages, student loans, credit cards, and other financial goods. However, it was found that some bank traders at institutions including Barclays, Lloyds, UBS, Deutsche Bank, JPMorgan Chase, Bank of America, and HSBC had been manipulating interest rates to make trades more profitable or to appear more creditworthy than they actually were. Benchmark interest rates are used to calculate financial products for people trying to obtain a mortgage or take out a student loan, so this had significant negative effects on consumers and financial markets around the world, even though it benefited banks and specific traders involved in the scandal. In the end, this led to billions of dollars in fines for the participating banks as well as prison terms for some of the culpable parties. The result of this strategy was the exact opposite of how the relationship should be; the interests of the consumer became subordinate to those of the banks and individual dealers. The banks and those complicit in the scandal did not act in a fair and unbiased manner, or in a clear, simple, honest, or transparent manner. Sales is another area of financial services that is especially vulnerable to the possibility of unethical behavior. The examples that follow go into more detail about the morals of marketing financial services. Example A business has created a respectable product and is figuring out the best way to market it in the face of competition. The business determines that the best way to accomplish this is to compensate sales representatives for each item they sell. Performance-based compensation is provided to the sales staff. They make more money the more they sell. One could argue that there is nothing wrong with such a structure because it merely reflects a practiced way of conducting business that is used for practically every large or even relatively small commodity. However, there are fundamental distinctions in the financial services industry that could especially impact the interaction between the salesman and the client. For instance, if you buy a car, you may see it, test it out, and find out very quickly if it functions as described and as you anticipate. In the case of a new car, the manufacturer will also give you a warranty. Thus, even if you are aware that the salesman will almost likely receive a commission as a result of your purchase due to the compensation structure in the automotive business, you may make your decision to buy with a great deal of confidence. Compare that to a hypothetical financial product: Example You, the customer, want to secure your financial future. You can do this by purchasing a product in one lump sum or by making a series of payments over time. You notice an advertisement for a financial instrument that looks appealing; it guarantees a return of 5% annually, as opposed to the 2% your bank deposits will earn. Despite never doing business with the well-known company before, you get in touch with them. A salesperson visits you and provides a general overview of the product, paying special attention to the return policy. They lay out the process through which the business raises your return above and above what you would get from your bank. Because you lack financial literacy, you may not fully comprehend all the salesman says. You are now in the zone where salespeople have the most potential, particularly in the financial services industry, to either demonstrate adherence to ethical beliefs and behaviors or to disregard them. When a buyer purchases a financial product, they are generally purchasing something whose performance will be evaluated over time. In order for you to be relatively certain that you know what the product is and who you are purchasing it from, the ethical salesperson will walk you through its structure. They will outline the risks that affect the rate of return being given and clarify whether it is a real rate or an anticipated rate that depends on the occurrence of certain other events that the product's creator might not be able to predict. They will also disclose the compensation they will receive if you purchase the item. In other words, the honest salesperson will provide you with all the information you require to decide whether you want to invest. They will be upfront and transparent, plain and honest, direct and honest, knowledgeable, and fair. A dishonest salesperson, on the other hand, would try to sway you by saying things like, "No one else has questioned me about that," "Don't worry, I wouldn't offer a product that I didn't have trust in," or "No, I don't understand it either, but we have rocket scientists to create these things." Or they can say that you only have a short window of time to decide whether you want to take advantage of this chance. The salesperson may reassure and persuade you using uninspiring language that actually says little, and you'll be urged to make a decision before you have enough information. Think about whether they are being fair and knowledgeable, unbiased and transparent, open and honest, and clear. Pretty clearly, no. Does the salesperson exhibit moral principles, traits, and actions? Once more, it is obvious that they are not. Kembara's Financial Solutions -The Practice of Ethics
Doing the right thing could be used as a simple substitute. The most important aspect of ethical decision-making is that you choose the course of action. Regulation or the law and ethics are not the same thing. You can behave unethically without breaking the law; you can behave in an unpleasant or antisocial manner without infringing the law. However, breaking the law makes your acts unlawful as well as unethical. One of the observations made about ethics occasionally is that, both from an individual and a corporate standpoint, the benefits of disregarding ethical norms and behavior far outweigh those of adhering to them. In other words, a decision made only based on what appears to be best for the doer (you) makes perfect logic. Keeping the phone is advantageous in the preceding example of discovering the cell phone on the bus. You have what you desire, but you didn't steal it—you just happened to find it. You have no personal connection to the owner (the person who lost it), so your behavior won't be influenced by that. This argument, however, ignores the fact that while pursuing your own interests may appear rational and viable for a little period of time, in our society the inevitable result is likely to be at the very least social and at the very worst criminal repercussions. Furthermore, whatever economic justification for the immoral behavior there may have looked to be is likely to be overturned by either of these outcomes, whether a social or legal consequence. In other words, any apparent short-term benefit will probably pale in comparison to the unavoidable long-term harm. So what might you do in a circumstance where doing the correct thing might not be clear at first glance? There is one easy question you should ask yourself, and it contains four important principles: Is what I'm about to do or the course of action that I'm about to take clear and honest, unbiased and up front, direct and transparent, well-informed and equitable? Let's return to the example of the mobile phone to test this. You make the choice to keep the phone rather than give it to the driver. How would your behavior in maintaining a pricey phone that you had discovered rather than stolen fare under scrutiny? • Did you act in a fair and honest manner? Did you ask anyone if they had dropped their phone on the bus or scan the area to see if anyone else was looking for it? Did you make an effort to identify the owner of the phone so you could return it? If not, you cannot say that your activity was open. • Was your behavior honest and transparent? This ought to be easy. Your phone was located. The fact that you do not know who owns it does not matter; it does not belong to you. It cannot be considered honest to keep it for oneself. • Were your actions clear-cut and honest? Your response to your pals appreciating your new phone will determine how you respond. Your activities are not transparent if you are unwilling to explain how you obtained the phone. • Did you act fairly and with knowledge? How on earth can you justify keeping something that doesn't belong to you? You have taken something away from its proper owner. You haven't made use of the technique for restoring misplaced items. What at the time seemed like a wonderful idea should now be haunting you! Kembara's Financial Solutions - What does acting ethically entail to you?
Think you understand? You do, of course! Does anyone not? Everyone is aware. It is about acting honestly, fairly, and correctly. Values, integrity, and morality are phrases that are frequently used with ethics or even in instead of it. The majority of us frequently have to make moral decisions, and typically, especially in our personal lives, doing the right thing is obvious. For instance, it is unlikely that you would steal your friend's cellphone. However, what would you do if you discovered a smartphone on the bus, especially a high-end model that you had been saving up to purchase for yourself? A temptation to keep it could exist. Maybe, but you are aware that it is not yours and that it is worth at least £1,000, so the idea of keeping it ought to make you uneasy. In light of this, you make the decision to give it to the driver, whom you can rely on to give it to the bus company's lost property office. Consequently, acting morally and rightly would seem simple. Why then are there so many documented business scenarios where ostensibly morally upright persons are accused of acting unethically? • Is it as a result of their decision? • Is it because they believe that some circumstances call for the application of ethics while others do not? • Is it because they didn't believe their actions violated morality? • Or maybe they just believed they could get away with it? Could it be that it combines all of these ideas and deeds, as well as potentially some others? There is also the problem of why ethical behavior, particularly in the financial services industry, has become such a hot topic. Ethics must have always been significant if they are as important as people currently claim. That's a resounding "yes" in response. Ethics have always been significant. The financial services industry suffered a significant loss of trust as a result of the collective failure of those working in the industry to maintain the value of ethical behavior at the forefront of their thoughts and actions. Unfortunately, trust is much simpler to destroy than to rebuild. As Dr. Mark Carney once quipped, "Trust arrives on foot, but leaves in a Ferrari." (Bank of England Governor, 2013–20). |
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