The lack of an efficient and resilient financial system is still holding back inclusive and sustainable growth in emerging markets, says a report by PwC.

“Developing a well-functioning financial system remains critical to tackling poverty and sustaining economic growth over the long term”, the study said. It found there is “considerable room for further improvement” in key areas, such as financial inclusion, pensions and protection, and policymakers, regulators and financial services organisations should do more to achieve 'fit-for-purpose' systems in these areas.

The report sets out what an efficient, resilient and inclusive financial system should look like, identifying eight key factors. It then rates Brazil, China, India, Indonesia, Mexico, Nigeria and South Africa against these criteria.

Eight areas of financial health

The eight dimensions of a fit-for-purpose financial system:

1. size of banking system: a banking sector should not be too large compared to the economy;
2. pension asset management: a higher ratio lowers the dependency of the ageing population on the working population;
3. mortgage book: a well-functioning housing sector improves personal consumption and is critical to the overall health of the economy;
4. banking spread: a lower price of banking improves borrowers’ ability to service debt;
5. financial inclusion: financial inclusion leads to higher productivity;
6. private sector lending versus banking assets: lending to the private sector drives growth;
7. electronic payments: electronic transactions curtail the black economy and give a boost to the economic growth;
8. life insurance penetration: a higher ratio demonstrates quality of social security and enablement.

The graph below illustrates the eight aspects of a healthy financial system:

How did emerging markets score against financial targets?

The report assessed each of the seven countries against the eight aspects of financial health and was able to highlight considerable room for further development in key areas, which is shown in the table below. Of note is that, while almost all countries had room to improve in almost all areas, China's banking system caused concern for being too large compared to the country's economy.

Regulators need to lead

The aim of the report is to identify gaps in the financial systems of emerging market economies, so these can be addressed by governments and financial regulators. Hugh Harley, global emerging markets FS Leader, said: “Strong regulation and enforcement are essential for financial systems to develop, so regulators across different market sectors should get on the front foot and work together.”

His colleague Andrew Nevin, FS Advisory Leader and Chief Economist at PwC Nigeria and Project Blue Global Leader, adds: “... financial services organisations should realise that many of the ground-breaking innovations in FS are being spearheaded in Asia and other emerging markets. Without ageing legacy systems to hold them back, they have clean sheets upon which to harness the latest developments in technology and develop their own distinctive business models.”

The report ‘Geared up for growth: Shaping a fit for purpose financial system’ can be downloaded here. 

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CTMfile take: This is a useful insight for corporate treasurers within companies operating in any of these emerging markets.