What about our banks?
South Korea’s financial sector was ranked 80th in national competitiveness at the World Economic Forum (WEF) last year, below Uganda at 81st. This year, it slipped to 87th. But we cannot entirely understand the results. In other WEF scales, Korea ranked 123rd for transparency in policy decisions - on par with Algeria - and 74th in efficiency of legal systems, similar to Cameroon. Korea was even portrayed as a country risky to do business in due to terrorism concerns, ranking 93rd on the level of corporate risk against terrorism.
The evaluation cannot be easily accepted. Financial competitiveness should be rated according to the reasonability of prices, availability of services and integrity of banks. The WEF must be as accurate as possible so that countries can make real reforms. But we find serious flaws in the rating system.
On pricing evaluation, Hong Kong, Singapore and the United States were in the lead. Korea was at 89th, the stated reason being high loan interest rates and commission fees. But this is clearly misleading. Financial institutions in advanced markets like the United States and United Kingdom charge transaction fees 10 times higher than their Korean counterparts. In the United States, long-term mortgage loan rates hover at 4 percent, though the policy rate is near zero percent. In Korea, mortgage rates average in the mid-2 percent range, with the benchmark rate now at 1.5 percent.
In services availability, Korea ranked 99th. But Korea has the highest ratio of people with bank accounts, at 94 percent of the population. Financial access in Korea is so liberal that the country suffered a credit card crisis in 2002 because almost everyone in the country owned a credit card.
The most reliable measurement of the integrity of banks could be credit ratings by global agencies. Standard & Poor’s places ratings on debt issued by Korean banks at investment grade A, five notches higher than Brazil with a sovereign rating of BB+. But on the WEF integrity scale, Brazilian banks were at 27th, while the Korean industry was at 113th, similar to Ethiopia.
We want to get the facts straight so that policy makers do not err by reflecting the wrong diagnosis in their prescriptions for financial sector reform.
Under the evaluation, reform actions should be designed to lower financial service charges and boost access. But our focus should actually be elsewhere. It must be aimed at facilitating financial funding to aid the economy and developing a service sector that creates new jobs and value. Financial institutions must provide customized and step-by-step services for the corporate sector. Before they come seeking loans, banks must have various capital funds available to bolster start-ups and venture companies.
The financial industry should be able to contribute in accelerating the restructuring of ailing companies and creating new industrial and business sectors. They must serve as the incubators for new growth.
Profitability must be upped in order to develop the financial sector into a valued-added service area. Local banks are at the bottom - 83rd - on the global scale for profitability. If banks continue to generate earnings that remain just half of their capital cost, they cannot afford to expand into risky investments like funding start-ups, which will eventually contribute to the economy. They will lack the resiliency to fight external shocks and demand public bailout funds every time they run into trouble.
An enterprise that does not earn cannot become a globally competitive company. Multinational financial institutions have scaled back or withdrawn from the local market due to poor profitability. This is not due to the competitiveness of local institutions. Their pullout lessens jobs and competitiveness. The country must be able to provide a business environment that can attract multinational players and their investment so that the industry can create jobs and aid the economy.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Nov. 13, Page B8
The author is chairman of the Korea Federation of Banks.
by Ha Yung-ku