Internal and External Factors v. Becoming a Global Financial Centre Essay

Global Financial Centre

The term Global Financial Centre has been widely used but it has not been well defined. There are several definitions to the term Global Financial Centre which refers to the link between financial service industry and the real economy which has to give a reliable system for the supply of capital.

It is also defined as the hinge between the various central banks and other players in the provision of financial services in the local economy in terms of employment, tax revenues, Gross Domestic Product (GDP) foreign debt among others (Farrugia, 2012)..

There are a number of reasons why financial centers in some parts of the world like Africa, Ex-Soviet Union Territories, Middle East, South America and India Sub-Continent will ever become Global Financial Centers.

This is because of the following reasons;

Internal Factors

1. National Economic Development Policies. Most of the governments have poor policies on attracting the best performing firms and financial institutions. This has made the diversification of the economy a difficult task and the regional governments are unable to develop their cities and country into global financial centers.
2. Participation. There has been massive reluctance by governments to facilitate and provide resources for the growth of regional market for financial services.
3. The development and investment strategy employed by governments. Governments have failed to deepen the financial service sector. They do not use the financial sector to develop and improve the broader development and investment strategy.
4. There has been a shortage in the supply of skilled human capital to provide expertise in the financial sector.
5. There has been a tendency of the GDP contribution in these countries shifting from developed markets to emerging ones (Lannoo, 2012).
6. Size and scale – shift to simple and transparent products will impact margins and necessitate higher volumes (Farrugia, 2012).

External Factors

1. The economic crisis facing the already developed countries of the world. There has been an outspread reduction in the economic activities and growth in the developed countries of the world which provide a ready financial market for the developing countries. This means that there will be a reduction in the opportunities for financial services in the developing countries.
2. Arab spring. Most of the countries in the Middle East such as Syria and in Africa such as in Egypt and Tunisia have been faced with political instability which has shifted investment from these countries in the region to other regional financial stable centers. This has led to slow development of transparent and robust financial systems.
3. Existence of rules that weaken the Global Financial Centers. This includes rules that require financial centers to have a centralized trading block. The trading block may be challenged by the non-existence of a common currency and different foreign currency regime. There has been increased cases of tax avoidance and lack of enough liquidity which hits these markets. There have been a lot or regulation and deregulation.
4. Protectionism – This is where these countries are faced by extraterritoriality, and trading blocks having limited access to third country funds.
5. Compliance – Most of the countries that aim at being Global Financial Center are faced with the challenge of compliance in terms of their quality of legal framework where they have very rigid laws and regulations, lack of transparency in their dealings and change in government statutes (Lannoo, 2012)..
6. Global currency – Lack of a globally acceptable currency has been a major hindrance to these countries in becoming Financial Centers.

References

Farrugia, K. (2012). Exploring the rise of regional financial centres. Web.

Lannoo, K. (2012). Financial Centre Competition. Web.