In layman’s language financial services can be termed as mobilizing and allocating savings. It includes all the activities involved to transform savings into investment. While important for all categories of countries, improved access to financial services is particularly relevant for developing countries. The fundamental reason is that from an economic perspective, size ultimately matters as a source of economic power to the extent that it translates into large and growing domestic markets that are participating in the global demand for and supply of products and services.
Causes for Financial Services Innovation in Developing Countries
- Low Profitability – The profitability of the banks has been very much affected in recent times. So, they have been compelled to seek out new products which may fetch high returns.
- High Competition – The entry of many FIs in the financial sector has led to severe competition among them. This keen competition has paved the way for the entry of varied nature of innovative financial products so as to meet the varied requirements of the investors.
- Economic Liberalization – The recent economic liberalization measures have opened the door foreign competitors to enter into our domestic market. Innovation has become a must for survival.
- Improved communication technology – The communication technology has become so advanced that even the world’s issuers can be linked with the investors without any difficulty by mean of offering so many options and opportunities.
- Customer Service – Customers want newer products at lower cost or at lower credit risk to replace the existing one. To meet this increased customer sophistication, the financial intermediaries are constantly undertaking research in order to invent a new product which may suit to the requirement of the investing public.
- Investor Awareness – There has been a distinct shift from investing the savings in physical assets like gold, silver etc. compared to financial assets like shares, mutual funds, etc. Again, within the financial assets, they go from ‘risk free bank deposits to risky investments in shares.
Challenges Faced by Financial Services
Though financial services sector is growing very fast in developing countries, it has its own set of problems and challenges. The financial sector has to face many challenges in its attempt to fulfill the ever growing financial demands of the economy. Some of the important challenges are shortage of qualified personnel, lack of transparency, not updated recent data and lack of efficient risk management system.
Expectations from Financial Institutions
The main objective of the financial sector reforms is to promote an efficient, competitive and diversified financial system. This is very essential to raise the allocate efficiency of available savings, increase the return on investment and thus to promote the accelerated growth of the economy as a whole. In these days of complex finances, people expect a financial service company to play a very dynamic role not only as a provider of finance but also as a departmental store of finance. With the opening of the economy to multinationals, the free market concept has assumed much significance. As a result, the clients of developing countries expect the financial services company to innovate new products and services so as to meet their varied requirements when exposed to the phenomena of volatility and uncertainty.