The purpose of this research paper is to examine the risk factors associated with starting a business in a given country. It is a comparative risk analysis for New Zealand (top on the ranking) and Somalia (last on the ranking) based on Doing Business 2017 published by the World Bank Group (Doing Business, 2016). Country risk is usually a wide concept covering economic, political, historical, financial, sociological, structural risks, and other applicable parameters. From a general perspective, country risk reflects the possibility of challenges in a given country that any foreign firm may face.
The Company
Bank BABS is one of the most prominent Islamic banks, with its roots in the Middle East. It boasts of being a leader in Islamic banking globally, claiming equality, ethics, and integrity in all aspects of its operations as it strives for growth, modernity, and global expansion. Banking BABS has continued to recorded year-over-year success because of the recent remarkable expansion in Islamic banking services. The bank has more than 25 years of experience, and it expanded to other regions with exception Africa. Resources are available for further expansion, and the bank now seeks the best alternative destination for foreign investment.
New Zealand
Economic Risk
The economic risk for New Zealand was assessed based on different categories. First, the financial system (bank) stability or risk is generally presented as stable, sound, and efficient. The liquidity and capital buffers are beyond the recommended levels. Noted increments are in costs funding and loan loss provisions. Nonetheless, the industry is profitable comparable to international standards. Three major risks are noted in “housing market vulnerabilities, bank funding pressures, and dairy sector indebtedness” (Reserve Bank of New Zealand, 2016, p. 2).
The financial sector, mainly led by banking, is sufficiently advanced and competitive, providing a wide range of financing services to diverse clients (Heritage Foundation, 2017). Second, the gross domestic product (GDP) is $168.2 billion, with a growth rate of 3.4% with an unemployment rate of 5.9%, and with a low rate of inflation of 0.6% (Central Intelligence Agency, 2017). New Zealand has a population of 4.6 million people.
The government strives to ensure a tight rein on public expenditure, maintaining public debt low and under control and promoting inclusive financial health (Heritage Foundation, 2017). Monetary policy or financial stability is attained through the regulation and supervision of financial institutions and the use of effective financial market infrastructure. Financial Stability Report is available every six months.
Political Risk
Political risk is evaluated based on the following categories. Corruption is not tolerated in New Zealand, and it is ranked fourth out of 168 countries in the Transparency International Corruption Perceptions Index of 2015. All government procurement processes are aimed to be competitive, transparent, and not riddled with corruption. The government system is borrowed from the British systems, and it is extremely stable. There are no cases of government non-payments or restrictions on profit repatriation (Bureau of Economic and Business Affairs, 2015). Information is readily available, the country is transparent to the international standards, and institutional risk is low because of limited corruption and red tapes. Besides, the regulatory and policy environment is formulated to encourage investment. Overall, New Zealand is a stable democracy.
Legal Risk
The legal environment supports trade, and the judiciary is independent and not corrupt or influenced by other forces.
Structural Risk
The population is about 4.6 million people, and majorities are found in the age bracket of 25-54 years old. For hard infrastructure, New Zealand is highly developed in terms of physical infrastructures. The labor market is designed to be dynamic, and laws are generally well enforced, and disputes are normally handled by an independent labor authority.
Credit Risk
The only known risks are “housing market vulnerabilities, bank funding pressures, and dairy sector indebtedness” (Reserve Bank of New Zealand, 2016, p. 2).
Operational Risk
Limited operational risk is observed because of advance systems, mature internal markets, educated consumers, and well-developed infrastructure. Contracts are most honored, and limited disputes have been noted.
Technology Risk
New Zealand has robust technologies to support the banking sector. Nonetheless, like any other economy, the banking sector faces disruption from technology-based financial services providers (Fintech).
The current position of New Zealand is extremely stable, and the country reached here through a commitment to economic freedom, openness to global commerce and foreign investment, prudent management of public resources, a supportive legal system, and a transparent system that supports start-ups. It also has numerous international trade agreements with various economic blocks and single countries, but the investment agreement with the Gulf Cooperation Council (GCC) of 2009 has not been signed yet.
No major risks noted for the bank in New Zealand.
Somalia
Somalia is currently among the riskiest place for foreign investment, and economic data that are more reliable are not available. In fact, Somalia would score zero in several areas of ranking due to a lack of data.
Economic Risk
The banking sector is evolving, and there are about six banks, which have grown from money transfer services. The environment is extremely instable. The GDP is about 3.7% growth as estimated by the Heritage Foundation 2017 and $5.8 billion (2014 estimate) as shown by the CIA. No official statistics on unemployment rates are available and the labor market is characterised by informal hiring practices. There is no control over monetary policy, although the Central Bank of Somalia, opened in 2009, struggles to ensure fiscal stability and a stable, competitive financial sector (Sufi, 2016).
Political Risk
Somalia is recovering from several decades of civil war. Political risk is high because of the transitional government without clear structures. It only controls some urban areas, while the rest of the country is under warlords and other militia groups. Piracy is a major challenge in the country. Institutional risk is high because of red tapes. Regulatory and policy environment is not stable for foreign investments.
Legal Risk
The non-functional judiciary system deters any legal progress, and the lack of central authority has reinforced inconsistent practices, fragmentation in the application of the rule of law. Militias and terrorists have different laws to follow, and Sharia law is more entrenched and constantly abused. On corruption index, Somalia ties with the most corrupt in the world, and the country is not transparent. The legal system cannot guarantee property rights because property ownership has driven civil war for decades, land grabbing and population displacements are common.
Structural Risk
With a population of about ten million people, the labor force is informal, hard infrastructures are poorly developed. The inadequate infrastructure hinders the formation and operation of businesses in a stable environment.
Credit Risk
The current system of Islamic banking used in Somalia presents a greater risk to operators. Islamic banks rely on the profit and loss system and this poses huge risk in an unstable market environment.
Operational Risk
Operational risk faced in Somalia is high. The government systems, infrastructure, poorly educated consumers, and failed internal systems are largely responsible for major operational risks in the country.
Technology Risk
Technology does not present significant risk of disruption to the banking sector in Somalia due to unavailability or poor adoption.
The current state of Somalia emanated from a long running civil war following the collapse of Siad Barre’s ruling. Since then, Somalia has known no piece and major economic activities are only restricted in Mogadishu. The country heavily depends on foreign remittances to support locals and foreign exchange.
There are also no known trade agreements that Somalia has signed with any other countries. This implies that a foreign investor can become the target of a corrupt government, warlords, land grabbers, and militias.
Major Risks and Suggestions
Risks presented by New Zealand are minor and can easily be mitigated using effective internal control processes because the external environment is largely functional (Kaplan & Mikes, 2012). However, Somalia is a failed state, which presents all categories of risks to the bank and no risk mitigating efforts can provide assurance for the investor because of state failed systems. Thus, a foreign investment now is the riskiest venture for any business irrespective of cultural orientations.
New Zealand is the most suitable investment destination for the bank. It is most likely to face competition from well-established players, but the bank can mitigate such risks using internal processes that it can easily develop.
References
Bureau of Economic and Business Affairs. (2015). 2015 investment climate statement – New Zealand. Web.
Central Intelligence Agency. (2017). The world fact book. Web.
Doing Business. (2016). Doing Business 2017: Equal opportunity for all. Washington, DC: The World Bank.
Heritage Foundation. (2017). 2017 index of economic freedom: New Zealand. Web.
Kaplan, R. S., & Mikes, A. (2012). Managing risks: A new framework. Harvard Business Review. Web.
Reserve Bank of New Zealand. (2016). Financial stability report 2016. Web.
Sufi, M. (2016). Somalia’s banking system and risks involved in the banking sector. East Africa Business Journal. Web.