Authored by:Mr. Ahmed Moustafa
Egyptian Economist and International Youth Coach
Director of Asia Center for Studies and Translation
https://www.linkedin.com/in/ahmed-moustafa-27422814/
Asia Center for Studies and Translation – Directed by Ahmed Moustafa (wordpress.com)
Master Holder in Political Economy 2021, HSE Moscow
Member of CODESRIA, Dakar, Senegal and Group of Strategic Vision
Russia and Islamic World, Journalists Against Extremism
Cellphone: +201009229411
Email: solimon2244@yahoo.com
ahmedmoustafa830@gmail.com
Introduction
The Western financing system has been a topic of debate for some time now, with much of the discussion centering around the conflicts between the ideals and the realities of the current system. This system is a complex and evolving system that has both advantages and disadvantages. On the one hand, it has been a great facilitator of economic growth and innovation, while at the same time, there are significant problems that remain unresolved. This report will examine the ethical and practical considerations of the financing system in the West, the challenges it poses, and propose some possible solutions.
The financing system of the West generally consists of venture capital, private equity, debt capital, and other forms of debt instruments. This system has allowed for great economic growth and innovation in the West, as it enables entrepreneurs to borrow capital and start businesses. However, there is a darker side to this system. In particular, there is a concern that it can lead to the creation of an unequal system where access to capital is more easily attainable for societal elites than for those from disadvantaged backgrounds.
This is becoming increasingly apparent in terms of how start-ups are funded, and it is worrying that the social diversity of the West could be permanently affected by the financing system. This system also has negative impacts on the environment. Since the majority of financing comes from debt instruments, interest payments are necessary and they lead to the depletion of natural resources. In addition, this system often overlooks alternative methods of financing such as crowd-funding and angel investments that would have longer-term positive benefits for businesses and society as a whole.
Lastly, it is also important to consider the way this system has shaped the current economy and the effects this has had on people. For instance, the current economy has been shaped by the availability of debt, which has increased debt-to-income ratios in many countries, leading to ever-increasing levels of household debt. There are a number of possible solutions to the challenges presented by the Western financing system. Firstly, greater transparency and accountability should be introduced in the system, with particular emphasis on the way venture capital funds are allocated. Secondly, alternative forms of financing such as crowd-funding and angel investments should be encouraged as much as possible to ensure that entrepreneurs from disadvantaged backgrounds can also access the funds they need. Thirdly, incentives should be introduced to promote a more responsible investment process, such as tax incentives for companies to invest in social initiatives and green investments.
Suggested report plan
With regard to our research problem, it is (the weakness of the Western financing system in light of the current economic conditions). As for the main questions, it will, be as tailored in this report hereinafter throughout the report.
In order to verify the results and the views of the examined people, we mixed the quantitative and qualitative methods to reach the best possible results in this regard
(First) by conducting a number of expert interviews with specialists in the field of finance and banking, as well as economic writers, loyal and opposition.
(Second) Conducting a survey of an acceptable number of experts and consumers that show the strength and validity of the following main question in this report.
What are the main problems of the Western Finance and Credit system?
The Western finance and credit system is a complex and intricate system with many layers, however, there are a few problems that raise some concern. With the ever-increasing accessibility of consumer credit, the risk of over-leverage has become a pressing issue. When individuals borrow more than they can afford to pay back, it increases their risk of getting into financial difficulties and may lead to further borrowing behaviors such as taking out payday loans or other short-term lenders, incurring overdraft fees, and other risky behaviors.
This can have serious repercussions for the individual and their traditional lenders, as it creates an environment where many lenders are hesitant to take on higher-risk borrowers. Another problem with the Western finance and credit system is the rapidly growing population of debtors who find themselves unable to keep up with their repayments due to high levels of interest and inadequate protection for them. This creates an environment in which the lenders often win as debtors find themselves released to further debt after submitting to unfair and harsh terms. Furthermore, this also has an impact on the wider economy and can lead to increased economic imbalance and inequality.
Finally, one of the most pressing problems with the Western finance and credit system is the lack of financial education and the difficulty in getting access to financial services. It is imperative that individuals, especially those in lower income brackets, are given adequate information and resources on financial literacy, financial protection, and access to services. Without this education, it can create an environment where more vulnerable people are taken advantage of by creditors and financial institutions.
How can the ambiance of uncertainty affect negatively the Western financing system?
The Western financing system is built on a sturdy foundation of confidence and security, but when uncertainty arises it can have a severe negative effect on the system. When there is economic uncertainty and a lack of clarity concerning future projections, investors tend to focus more on the risk of their investments and tend to be more conservative.
This reduces the amount of capital available for lending, and can often cause a ripple effect of fewer investments. As a result, businesses can struggle to access capital, which can slow down their growth and lead to stagnation. Additionally, when there is uncertainty, it often leads to market volatility, which can result in stock prices fluctuating unpredictably and decrease investor confidence. Furthermore, if an economy becomes unstable due to fear and uncertainty, it can cause big losses of capital and hurt the financial system.
Lastly, it is important to remember that economic uncertainty can quickly erode consumer confidence, which can lead to a decrease in demand for goods and services. Ultimately, when there is uncertainty in the financial system, it can have an overall negative effect and can make it difficult for businesses and investors alike to move forward.
Economic Uncertainty
Moody’s recent Economic Uncertainty index reveals that economic uncertainty, which rose steeply during 2020 amid the coronavirus pandemic, remained high throughout 2021 (Drew, 2021). The effects of the pandemic, such as the rising unemployment rate, and drastic policy changes have created an overall atmosphere of uncertainty and instability in the financial markets. Uncertainty has reduced capital investment activity, which has in turn had a detrimental effect on productivity and credit availability (Wiener, 2021).
Financial Market Uncertainty
VIX, which measures volatility in the U.S. stock markets, saw an increase of 80% between March 2020 and March 2021, suggesting a sharp increase in uncertainty (Halperin, 2021). While most financial markets had already been in a state of volatility before the COVID-19 pandemic, the index saw huge surges during 2020 due to the worsening economic situation. This heightened uncertainty has caused firms to reduce risk exposure and liquidity, which has led to all-time record lows in borrowing costs and a sharp decline in corporate debt issuance (Smatz, 2021).
Government Policy Uncertainty
Government policies are also affected by uncertainty. According to the Organization for Economic Cooperation and Development (OECD), uncertainty in the public policy environment across European countries has risen significantly in the past few years (OECD, 2021). This has reduced economic growth, private sector investment, and long-term financing. In the United States, a decrease in government confidence due to changing policies has caused a rise in interest rates, reducing the availability of long-term financing (Harding, 2021).
Does racism have a negative impact on the Western financing system?
Racism has long-standing and deep-seated implications on the economic and financial systems prevalent in the Western world today. Studies have shown that the economic disparities between the various racial and ethnic groups in the country, as well as around the world, have grown over time due to racism. Financial institutions, especially banks, have traditionally ignored or avoided lending to minority-owned businesses, housing, and other small enterprises, which in turn has limited their access to capital and stifled economic growth.
Furthermore, financial disparities in credit scoring have perpetuated the gap between working-class and affluent individuals and families. These discrepancies are further highlighted by the term ‘redlining’, which refers to the instances where minority neighborhoods are refused banking services or have access to otherwise limited services. Such disparities reverberate through the entire Western financial system, creating a system that favors some groups while disadvantaging and undercutting other groups. Most importantly, racism affects the degree to which people connect to their local and global economies, which has a significant impact on the larger economic structures. Thus, it can be argued that racism does indeed harm the Western financing system.
What is the impact of the 2008 recession and the coronavirus pandemic on the Western financing system?
The impact of the 2008 recession and the coronavirus pandemic on the Western financing system has been profound. While both crises have caused disruption and tragedy, the long-term implications of these events on the global financial system cannot be overstated. The 2008 recession has revealed fault lines in the global financial system as banks, investment firms, and governments around the world have had to scramble to cover sudden losses, and simultaneously shore up their balance sheets. Worse yet, the severity of the recession has left many corporate and individual entities with unsustainable debt levels, a situation that could take years to correct.
The current coronavirus pandemic has served to compound the economic challenges of the 2008 recession, wreaking havoc on both already fragile consumer and business finances. Throughout the West, we are seeing a large decrease in economic activity, skyrocketing unemployment, and a major hit to corporate revenues. Governments have had to step in with unprecedented stimulus packages, due to the collapse of consumer demand. We have seen an increase in risk aversion and corresponding volatility in the global financial markets, as well as a large increase in credit risk.
This has resulted in decreased loan activity from both banks and investors and more stringent lending requirements and loan terms. At the same time, both the 2008 recession and the pandemic have exposed long-term weaknesses in the way that the Western financing system works. The potential for a shock to the system that could cause a collapse of entire financial industries has been brought into stark relief, and we are learning the sobering lesson that the current frameworks in place are ill-equipped to protect us from economic downturns.
Companies and individuals are left to their own devices to manage short-term financial challenges, and governments are running up massive levels of debt to prop up economies. It is clear that in the wake of the 2008 Recession and the coronavirus pandemic, the Western financing system needs a major overhaul to make it more resilient to future shocks.
What are the negative impacts of Western financing on Africa?
In recent years, Africa has experienced a rise in the volume of debt. It has transitioned from differing levels of economic development into a growing interdependence within the global economy and has gradually come to experience a debt crisis. This paper will provide an overview of African debt and the consequences it has had on the African continent.
Since the early 2000s, Africa has become increasingly attractive to external lenders from the International Monetary Fund (IMF) and World Bank, to other financiers and creditors such as China. Currently, Africa’s total external debt is estimated to be over $400 billion — twice as high as it was before the 2008 global economic crisis. This debt has been incurred from both public and private sources, and the structure of the debt has shifted from concessional to credits with higher interest rates and shorter maturities. The result is that a burden placed on African countries that can be difficult to manage.
The African debt has had significant economic consequences across the continent. A great amount of the resources and savings of many African countries has been channeled towards paying off external debts, reducing their ability to invest in economic and social development. In addition, the economic and growth potential of African countries is hampered as lenders tend to impose restrictions and conditions on loans such as reductions to their respective budget deficit.
The debt can also lead to a lack of political and economic stability, as it can provide a pretext for external actors to exert influence and control to ensure that debt repayments are met. This control may take the form of ensuring that African countries signed the 2017 IMF Debt Treaty, which requires signatory countries to seek IMF approval before taking on a certain amount of debt or any debt restructuring.
The African continent is one of the least developed places on Earth. Despite having great potential and large reserves of resources, it has failed to realize its full potential in terms of economic growth and development. This is due in part to the negative impact of Western finance on Africa. Western finance has been implicated in numerous problems including currency manipulation, debt and poverty, and environmental exploitation. Thus here we explore the negative impact of Western finance on Africa, detailing the ways in which it has impacted the continent’s economic and social stability.
Currency Manipulation and Debt in Africa
One of the most damaging effects of Western finance on Africa has been currency manipulation and debt. Since the 1980s, the International Monetary Fund (IMF) has been responsible for making structural adjustments to African economies that require countries to accept loans in order to pay for socially beneficial policies. The loans are often placed in foreign currency and include stipulations that drive countries further into debt, as repayment conditions are often so difficult that the recipient countries fail to make repayments on time. This leaves countries in a state of perpetual debt, as interest rates rise and the recipient country fails to make repayments. In addition, Western finance has also included practices such as currency devaluation, which has led to a decrease in the value of African currencies relative to the US dollar and other Western currencies, making goods from other countries more attractive to African customers and reducing the spending power of African consumers.
Poverty and Inequality in Africa
Another negative effect of Western finance on Africa is increased poverty and inequality. In order to repay the loans taken out from the IMF, countries have had to engage in austerity measures, which often lead to cuts in social spending on essential services such as healthcare, education, and infrastructure. This has led to an increase in poverty and inequality, as the poor suffer more than any other group due to these cuts. In addition, Western finance has also encouraged governments to pursue development policies that prioritize the interests of multinational corporations at the expense of local populations. This has led to a greater concentration of wealth in the hands of the few, leaving the majority of African citizens poor and without essential services.
Environmental Exploitation in Africa
Finally, another detrimental effect of Western finance on Africa has been environmental exploitation. The IMF’s structural adjustments have resulted in the pursuit of development policies that prioritize economic growth over environmental protection. This has led to the destruction of wildlife-rich habitats in order to exploit natural resources, as well as the over-exploitation of water sources in order to fund large-scale projects. In addition, the focus on economic growth has led to the pollution of air and soil, which has greatly impacted human health and food security.
Are the competition and different financing systems between China and US harm the Western financing?
The competition and different financing systems between China and the USA are likely to have a detrimental effect on Western financing. Although through globalization and the rise of emerging markets, Western countries can benefit from increased access to cheaper and better resources, and easier access to funding, due to the competition from China’s well-developed and often state-backed financing sources, Western markets are being negatively impacted.
These disparate financing systems create an uneven playing field, with China’s more advanced financing systems allowing for access to larger pools of money with lower interest rates, allowing Chinese businesses to scale faster, and make competitive investments in technologies that Western companies cannot.
Additionally, many Western countries have seen a decrease in venture capital investment as those resources have been redirected to China’s innovation economy. As a result, many Western companies have been forced to turn to alternative sources of financing such as private equity or debt financing, and venture debt, to get the funding they need to grow. The rise of financial technology or ‘fintech’ in China, such as peer-to-peer lending, has further exacerbated the problems for Western companies as the differences in finance become even starker.
The potential harm to Western financing is clear, due to the competition in financing from China, as well as the large-scale investments made by Chinese investors. The issue is also not limited to being purely economic as increasing Chinese investments are sparking fears of potential security risks for Western countries.
Despite the Western financing system has always been considered a more modern and advanced example of banking and financial service, it may be obsolete when comparing it to some of the more progressive financial practices in China. In recent years, China has made a major push to use innovative IT and Artificial Intelligence technology in its banking and financial services.
These efforts have allowed for more secure, efficient, and accurate financial transactions. Some of the latest developments involve AI being used to help identify credit risk and account holders with fraud-susceptible information that may not be easily recognizable by traditional measures. This helps to greatly reduce any potential risks or losses from fraudulent activity.
Furthermore, the use of AI and IT tools in China has enabled better financial services tailored to the specific needs of the customer, as well as more reliable industry data analysis and portfolio management. These same IT and AI developments, however, are still in their infancy in the Western financing system. If the countries of the Western world want to be able to stay ahead of the competition and keep up with the advances of IT and AI in the financial world, then they need to take a page from China’s book and get on board with these technologies sooner rather than later.
Are there practical solutions for the current Western financing system within the current economic crisis?
As the current economic crisis continues, the modern financial system is becoming more and more flimsy. This reality is in contrast to the complexity of the financial services offered in the Western world. In order to address this concerning trend, there must be a concerted effort to identify and implement practical solutions to the increasingly difficult fiscal landscape.
One realistic solution is to introduce higher levels of public sector investment and subsidies to help ensure the survival of financially distressed Western economies. Governments must also work to limit the growth of certain industries, as they are most likely to suffer during economic downturns. This could include encouraging entrepreneurship through initiatives that provide support to businesses with no clear future outlook. Additionally, public funds could be funneled toward the development of social programs designed to protect citizens from the effects of financial instability.
Second, the creation of rules and regulations that protect the financial system from abuse must be put in place. This could involve monitoring the activity of banks and other financial actors, as well as requiring increased transparency in the form of honest and accurate reporting of financial performance. This would ensure that all elements of the financial system have a clearer understanding of potential risks and provide alert mechanisms in the case of any irresponsible financial practices.
Finally, better financial education must be the charge of governments and financial institutions. This educational effort should be aimed at developing the skills necessary to manage finances, as well as empowering citizens to make informed decisions. This could include investment seminars, presentations, classes, or other forms of financial literacy programs.
Ultimately, practical solutions exist to help address the current troubles in the Western financing system. From increased public investment and regulatory overhauls to educational initiatives, these prospective solutions will help strengthen the foundation of the financial system and empower citizens to be more independent in their financial decisions.
How can FinTech fix global financing’s current problems?
The field of Financial Technology, also known as FinTech, has gained significant prominence in recent years due to its potential to transform the global financing landscape. The current global financial system is plagued with several problems, including inefficiencies, high costs, and limited access for individuals and businesses. However, FinTech holds the promise of addressing these issues and providing solutions that can revolutionize the way finance is conducted worldwide. By leveraging emerging technologies like artificial intelligence, blockchain, and cloud computing, FinTech can enhance financial inclusion, streamline processes, and reduce costs, ultimately fixing the current problems in global financing.
One significant problem facing the global financial system is the limited access to financial services and the exclusion of large segments of the population, particularly in developing countries. Traditional banks often hesitate to serve individuals and businesses with low credit scores or limited collateral, leading to financial exclusion. FinTech platforms, on the other hand, have the potential to bridge this gap by leveraging alternative data sources and employing analytics powered by artificial intelligence. By analyzing non-traditional data such as mobile phone usage, online shopping behavior, and social media interactions, FinTech platforms can enable more accurate assessments of creditworthiness and provide financial services to individuals and businesses that were previously excluded.
Additionally, the global financial system suffers from inefficiencies and high transaction costs, particularly in cross-border transactions. Banks and other intermediaries involved in these transactions often impose high fees, lengthy processing times, and inconsistent exchange rates, leading to significant delays and financial losses. FinTech solutions based on blockchain technology have the potential to address these issues by streamlining cross-border transactions. By using decentralized ledger technology and smart contracts, FinTech platforms can eliminate intermediaries, facilitate faster and more secure transactions, and reduce costs significantly. Additionally, blockchain-based solutions provide transparency and traceability, minimizing fraud and ensuring trust among parties involved.
Is crowdfunding also a solution to financing problems?
Crowdfunding is a revolutionary idea that is being embraced in many industries today. It provides a different way of financing projects that would not otherwise be possible due to a lack of traditional investor funding. Crowdfunding is the practice of investing in a project, venture, or campaign by raising small amounts of money
from a large number of people. Through a platform, a person or a business can create a fundraiser with a clear mission statement and financial goal. The funds are provided by the public, mostly in small increments, to those seeking the money.
The idea is to bring projects to life, social causes to the forefront, and artists to success. In the past, crowdfunding has been mainly used for creative, technological, and social projects. However, it has now grown into a powerful tool with the potential to finance projects of any size, from small business startups to bigger initiatives from well-known companies.
This has brought a new source of funds to the table for those who seek to finance their projects. It is not only a great source of early-stage money, but some companies have developed to specifically help small business owners access cheaper capital through crowdfunding. Crowdfunding through social media has raised even more opportunities with platforms such as Kickstarter and GoFundMe that have become an effective source of alternative financing for projects of any size. Many aspiring entrepreneurs and
Small business owners look up to crowdfunding as it provides a way of financing their projects even if they cannot access traditional financing from banks or investors. Also, crowdfunding gives them the opportunity to reach a broader audience, promoting their ideas and showcasing the development process of the project.
Thus, it is safe to say that crowdfunding is becoming an increasingly attractive solution for many people seeking a way to finance their projects. It provides a platform for those who have innovative ideas but lack the traditional monetary resources to bring them to fruition. Crowdfunding also gives them the chance to rally their friends, family, and the public for the support necessary to pursue their dreams without any major financial commitment.
Can Islamic financing replace traditional Western one?
Islamic financing has been an important source of capital for businesses in the Islamic world since the inception of Islamic banking in the late 20th century. It is based on the Islamic law of Sharia, which prohibits interest payments on loans and investment returns that are not based on performance. To apply Islamic finance
principles, lenders provide borrowers with a contract of sale or services that exchange risk for a predetermined return. This arrangement is known as (Murabahah).
Two main advantages of Islamic finance principles are that they support economic development without involving usury, and they create a framework for productive investment with ethical implications. Islamic financing is rapidly becoming an increasingly significant force in the world of financing and banking. While its main function remains to provide capital for businesses in the Islamic world, Islamic financing is steadily growing and gaining influence in the West’s banking and investment landscape.
As a growing number of Western companies have begun including Islamic finance options and both private and institutional investors are explicitly looking for investments that are Shari’a-compliant, the capital market has responded with an array of unique investment opportunities and financial products compliant with Islamic principles.
Given its increasing presence, Islamic financing can certainly replace traditional Western financing. Not only does it offer similar advantages, such as asset-backed structures for mitigating risk, but it also provides incentives for ethical investments which give Muslims assurances that their investments are made in a socially
responsible manner. Some of the general advantages of Islamic financing include high liquidity and a low-risk structure, which offers stable returns and positive effects on local and regional economies. Islamic financing may also positively influence other contemporary economic challenges, such as unemployment, poverty, and environmental sustainability.
Conclusions
One of the most pressing problems with the Western finance and credit system is the lack of financial education and the difficulty in getting access to financial services. It is imperative that individuals, especially those in lower income brackets, are given adequate information and resources on financial literacy, financial protection, and access to services. Without this education, it can create an environment where more vulnerable people are taken advantage of by creditors and financial institutions.
The Western financing system has both advantages and disadvantages and it is clear that a number of measures must be taken to ensure that it remains fair and efficient. By introducing greater transparency, encouraging alternative forms of financing, and introducing incentives for responsible investments, it is possible to ensure that the system works for everyone in the West. This will in turn lead to an economy that is more inclusive and equitable, while also promoting economic growth and innovation.
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