The banking sector in Creditpia consists of only three banks; Bank of Creditpia, Creditpia Commercial Bank and Framers Bank. Bank of Creditpia is in charge of 60% of the market share while the other two banks each control 20% of the banking business in Creditpia (Diane and Dann, p. 276). This is an oligopoly market because there are only a few sellers in the market. The banks belong to an organization; the Financial Service Institution of Creditpia (FSIC), which is a cartel. Because of this, they use restrictive practices in trade. These practices include colluding to work together and laying down strategies of market sharing, in an attempt to do a lot of profit and maintain their books. Through FSIC, these banks form a strong body which has the potential to develop and implement laws of the banking sector in Creditpia, while at the same time influencing the decisions of the government about banking. This has had the effect of locking out new players out of the market, and ensuring that any alien banks that try to get into the Creditpia market find it difficult to do so.
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This market has a variety of clients who include farmers, employees and self-actualizing businessmen. It also has unemployed people, which makes it a realistic market in terms of customers. As a result, it has a wide range of customers basing on their financial position. Although the three banks in Creditpia are interdependent through FISC, there is still remarkably fierce competition between them. This is because of a large number of none-performing loans. The main source of profitability for banks is interest paid for loans. A high number of credit defaulters thus mean a reduction in the bank’s profitability. Creditpia’s banking sector is facing a tough financial time with many non-performing loans. Each bank hence has to fight hard to make sure that it does not fall out of the race due to losses. This situation in the banking business of Creditpia may lead to a perfectly competitive market. CEO’s decision to lead the market is a critical step towards helping the banking sector in Creditpia to stabilize and continue making high profits.
CEO may hence be tempted to dominate the market so that he can help in reducing the number of non-performing loans, which will eventually lead to an increase in profitability of banks, in form the interest they shall have earned from repayments from loans. CEO may also be tempted to control the market in a bid to prevent new sellers from taking advantage of their situation and getting into the market. If the CEOs decide to control the market, they may do it in a manner that they all benefit from the scheme. First of all, they will set a target to reduce or eliminate the problem of non-performing loans in the banking sector (Diane and Dann, p. 298). This will take place through the setting up and implementation of new loan guidelines and rules, which will help combat this problem. This may include policies that will act as the main basis for qualifying loan-applicants. People who apply for loans will have to take a credit-history examination to validate their credit records. They may also decide to give loans to people who have substantial collateral only, hence avoid non-secure and highly risky loans.
Before banks give loans, they will first have to establish the sources of finance of the loan applicants. This is critical to investigate if the loan applicants have the capability to repay these loans. There are a number of public policies that may apply here, as described in the book. Banks in Creditpia will have to take the first step of controlling the amount of money in Creditpia’s economy through the use of interest control policies. Banks will impose high interest rates to loans so that only few people, who have the ability to repay, can take loans. High interest rates will help them to recover part the lost loans. At the same time, it will be reducing the amount of money flowing in the market as banks recover from a session of reduced profit. It is mandatory for people to pay their loans; non-performing loans result from loan defaulters and irregular payments of loans. To curb this situation a number of policies may be employed; banks should write letters to citizens who have non-performing loans and ask them to complete their loans; as per the loan agreement they made with the bank, when they were borrowing their loans. If this does not work, banks in Creditpia can then resort to other policies that are applicable. This includes possessing the material belongings of loan defaulters, which were acting as a security against loans. Banks should then auction these goods in a bid to recover some money to cover up for the loans. This is especially applicable for people who have small loans.
On the other hand, banks can sue those individuals or businesses who took jumbo loans and did not bother completing their loan repayment. In this case, the court will have to make a ruling which may include giving banks the power to posses the personal material and other goods belonging to loan defaulters, which can act as a cover up for their loans. Through the court, some people or businesses may also turn out to be bankrupt, which will mean a loss to banks. Banks in Creditpia should also learn to take insurance cover, so that they can avoid suffering heavy losses in such cases. The government of Creditpia has the responsibility of creating a favorable operational environment for businesses. The government should set in strongly to help make the banking business less risky, and help them to establish a capitalized base for their operation. This support will, however, depend on the health of individual banks and will target certain areas of operation in these banks. Direct financial support may be necessary depending on the severity of the situation of individual banks. However, direct regulatory forbearance may also set in to control the situation. The government, on the other hand, may buy preference shares from FISC to help fund the banking sector of Creditpia. Soundness of the banking sector of Creditpia can be promoted by the government through setting sensible standards, and taking the initiative to reinforce legal infrastructure.
Bank of Creditpia is likely to receive the greatest support from the government considering that it has the largest market share of the market. This is because a failure in the operations of this bank will have extremely heavy implications on the economy of Creditpia. However, it should also consider supporting Farmers Bank and Creditpia Commercial Bank, so that it can help revive the whole banking sector, while also avoiding future possibilities of a monopoly market, should the two banks collapse. This situation is wanting and should be addressed without delay and save the banking economy of Creditpia.
Diane Swanson and Dann Fisher. Business Ethics Concepts and Cases. New York: Cengage publishers. 2011. Print.