1. Introduction
1.1 Background of the Study
The impact of finance companies in an economy includes the areas of both micro economics and macroeconomics. This is because the finance company benefits firms and individuals as well as the entire economy. Microeconomics is generally the study of individuals and business decisions and macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast. Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms. Macro economics
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Therefore to achieve organizational goals of the financial institutes it s important to identify the impacts of macroeconomic variables on their loans. It is because the loan interest is one of major income sources for a finance company and there is a direct effect to their profitability from loan interests. Financial companies provide consumers and commercial institutes a wide range of loans according to the customers’ financial needs. Some customers are failure to promptly pay interest or principal when due because of various financial troubles and its affect to the entire profitability of the finance companies. Even banks will collapse due to loan default and the banking crisis will happen due to this issue. The inability of borrower’s to service their loans also has a negative impact on banks, financial companies and for the entire economy. It will generate the widespread financial instability and it may arise large swings in economic activities for the country in short term as well as in the long term.
(Betti et
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Governments are using set of policy tools to control financial institutes such as interest change, public expenditure, subsidies, taxations, public expenditure etc. As part of the broad levels of policy, macroeconomic policy impacts the various part of the country’s economy such as employment, investments, consumptions, and economic growth. Identifying the factors affecting to loans are important to the future of finance companies, governments, indiciduals and investors. Because, The effects of these factors are not only for the short run, but rather changes that span multiple decades (Bassett et al. 2010).
1.6 objectives
1.6.1 Primary Objective
• To identify the factors affecting to the loans of finance Companies in Sri Lanka
1.6.2secondary objectives
• To identify the macro and micro economic variables over five years
• To analyze the impact of default loans for a finance company and economic as a whole
• To identify the factors affecting for customers to neglect the loan payments
• To plan how to overcome the negative impacts from default loans for finance
Diamond and Rajan (2009) found that investment misallocation is the proximate cause of the credit crisis. In response to the crisis, corporations, governments, and households reduced on investment and decreased consumption. Federal Reserve provides an adaptable monetary policy to guarantee that the world did not suffer in deep recession. The low interest rates increase a large of demand of housing. House pricing become more value for sale and rent in many countries. Credit crisis is initially occurred in U.S because the financial invocation of U.S. Hence, there is more marginal-credit-quality buyer into the market.
Credit risk is an aspect where the bank borrower may fail to fulfill its obligations in regards to the underline terms. In most banks loans are the most and largest sources of risks. Therefore banks have to draw some measures to reduce the coverage of credit risks. Banks ought to have great awareness in need to control, identify, measure and monitor credit risk and also make sure that they have enough capital in relations to these risks and they sufficiently cater for the risk incurred.
Student loan debt makes up a large portion of the debt in this country today. Many defaulted loans are the demise of high interest rates, poor resources to students in educating them on other avenues and corruption in the governmental departments that oversee education and financing. There are many contributing factors that lead to the inability to pay off student loans which need government reform to protect the borrower’s best interests.
Under policy one both STEM AND non-STEM borrowers would break even. To arrive at this conclusion one must add good economic conditions repayments and bad economic conditions repayments. Then one must divide them to see if the repayment surpasses 50,000. If the lender gained it would be above $50,000 and if it went under the lender lose money. Under policy three the lender would lose money in STEM and non-STEM borrowers, as well as policy two non-STEM borrowers, cause the lender to lose money. When factoring both STEM AND non-STEM borrowers, policy one, policy two and policy three the lender has the potential to lose money.After analyzing the lender 's and students benefit I arrive at the a conclusion for each
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
Additionally, macroeconomics looks at the economy in an extensive perception and deals with components affecting the national, regional, or global economy as a whole whereas microeconomics examines the economy on a smaller scale and deals with specific realities like businesses, households and individuals. All in all, macroeconomics and microeconomics has a wide array of underlying hypothesis, and it is the subject of a great deal of writings in a vast field of study (Peregrine Academic Services: Global Educational Support,
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
Many have heard the phrase "Money makes the world go round", but where does money come from? The United States, like most other countries today, has a fractional reserve banking system in which only a fraction of the total money supply is held in reserve as currency. Early traders began to use gold in making transactions; they soon realized that it was both unsafe and inconvenient to carry gold and to have it weighed every time they negotiated a transaction. By the late sixteenth century, they had begun to deposit their gold with goldsmiths, who would store it in vaults for a fee. On receiving a gold deposit, the goldsmith would issue a receipt to the depositor. Soon people were paying for goods with goldsmiths' receipts, which served as the first kind of paper money. On receiving a gold deposit, the goldsmith would issue a receipt to the depositor. Soon people were paying for goods with goldsmiths' receipts, which served as the first kind of paper money. The goldsmiths observed that the amount of gold being deposited with them in any week or month was likely to exceed the amount that was being withdrawn. Someone came up with the idea that paper receipts could be issued in excess of the amount of gold held. Goldsmiths would put these receipts, which were redeemable in gold, into circulation by making interest-earning loans to merchants, producers, and consumers. Borrowers were willing to accept loans in the form of gold receipts because the receipts were accepted as a medium of exchange in the marketplace. This was the beginning of the fractional reserve system of banking, in which reserves in bank vaults are a fraction of the total money supply. The fractional reserve has two significant characteristics: money creation and reserve which is defined as Banks can create money through lending, and bank panics and regulation: Banks that operate on the basis of fractional reserves are vulnerable to "panics" or "runs" (McConnell & Brue 2005).
1. Clear you intentions: The bearer must inform the lending club about the situational crisis and the reason for the delay. A workable and empathetic option can be charted only if the bearer is able to prove his intentions to repay. Most banks are empathetic if the bearer genuinely ascertains their willingness to pay. Subsequently, the bank will also make provisions to aid the bearer and will with hold the issuance of any such statement in their
McLaney, E., 2003. Business Finance: Theory and Practice. 6th ed. Harlow England: Pearson Education Limited.
A financial crisis can be described as a specific situation in which a company, business or production firm loses the value of its assets rapidly and enormously leading to low cost of the assets. In addition, during a financial crisis the value of financial institutions also becomes relatively low in such a way that they cannot efficiently carry out their financial roles within an economy. As a result, financial crisis is usually concomitant to a panic or a run on the available banks so as to salvage the few assets that might not be affected by the financial crisis. Moreover, in an event of a financial crisis, the supply of money often overwhelms the demand thus creating a huge deficit in the money market.
The Interest Rate (IR) is considered as one of the most important economic factors affecting every household, firm and government all over the world. It is, as described by Parkin et al (2005), the opportunity cost of holding money, that is, the price of borrower are willing to pay for the use of the loan. On the other hand, it is also the compensation to the risk that lenders take in lending the money. (investopedia.com, n.a. 2003) By lenders and borrowers, it refers to individuals, businesses, financial instruments and governments. IR can be also categorised into nominal IR that is the stated one on financial market and real IR that implies the return of investment in terms of value. IR is said to be an indicator of economy situation and reflection of government policy as well. Therefore fluctuations of IR would have great impact on different areas in the economy and it is crucial to understand what determines it and how it would affect the world.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
A variable for measuring financial deepening is credit to the financial sector. There are burgeoning empirical evidence to support the positive relationship between financial deepening and economic growth. However, McKinnon-Shaw school of thought identified policy implications that may hamper financial development and by extension economic growth to include government restrictions in the banking system through interest rate ceilings, high reserve requirements and directed sectoral credit programme. Arguing in favour of an efficient allocation of capital within an economy to foster economic growth, Levine (1997) observed that since the early 1990s, there has been growing recognition for the positive impact of financial intermediation on the economy. In a study conducted on financial development and economic growth in 77 countries, King and Levine (1993) found that banking sector development can spur economic growth in the long run and there exists a positive and statistically significant impact of growth rate in per capita real money balances on real per capita gross domestic product growth. Discussing on the role of banks in promoting economic growth, Beck (2003) says that banks play diverse roles in fostering economic development and fulfill the crucial role of mobilization
Macroeconomics presents the educational function to help students become the future economics specialist, forming a critical thinking about the complex functioning of the contemporary economy. Thus, the field of study of Macroeconomics has evolved over time, through a long process of confrontation of various theories of thinking and economic application. Moreover, Macroeconomia investigates the economy at a national level as a whole, targeting the aggregation of individual economic behaviors across the economy as well as the resulting global effects: unemployment, inflation, cyclical development, imbalance in external economic exchanges, external economic relations.