The Effect of Finance as It Relates to Banking in Our Society

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Table of Contents

Abstract
Introduction
The need for finance
The benefits of Finance to individuals
Benefits of Finance to Companies
The negative Impacts to Individuals and Organizations
Conclusion
Works Cited

Abstract

This paper analyzes the effects of finance as it relates to banking in the Cayman Islands. Finance as a field of economics has grown to be an integral part of any countrys economy. As such most of businesses revolve around finance. All industries in a given economy have an element of finance which makes it an indispensable field of any economic undertaking.

The different fields in finance are banking, investment, capitals and money markets, goods market and so on. Of all the components of finance, banking is the most integral. The relationship arises in that banks are financial institution and exist for the sole purpose of financial intermediation between the money lenders and money borrowers. The paper will therefore analyze the benefits of finance on individuals and companies, as well as the negative impacts to them. The main area of study will be the Cayman Islands though references will be made to other countries in Europe and America for the purposes of fulfilling the requirements of International finance.

Introduction

Finance is defined as the branch of economics that concerns with the management of funds. Management of funds in broad sense means the act of sourcing, marketing and investing of funds so as to bring increase in wealth of the stakeholders (Wendy and Mayer 216). The modern day finance has broadened its tentacles to include the money and capital markets. The money markets involve trading of financial instruments both short term and long term and the management and trading of monies and near monies whereas the capital markets relate to trade in the companies equity through stock markets (Don, Richard and Steve 256).

Financial institutions therefore exist to intermediate between the money borrowers and money lenders. The various financial products available in the modern day finance industry include deposit accounts, specialized loans, mortgages, investment, etc. International finance has additional products such as the foreign exchange markets, off-shore banking and so on (Wendy and Mayer 230). Since this paper will relate to the effects of finance as it relates to banking in the Cayman Islands, off-shore banking will be the main feature.

The need for finance

Since finance is a technical field, financial experts are needed so as to be able to analyze the different sources of funds, the best marketing practices and most importantly the best investment options available (Wendy and Mayer 12). The reason of investing funds is basically the need to increase in wealth. This coupled with the time value of money compels the finance managers to choose the course of action that brings the highest returns on the invested funds (Wendy and Mayer 219).

Banks are the most common financial institutions since they directly deal with the money lenders and the money borrowers. Money lenders may be individuals or institutions such as companies, partnerships, and other organizations. These persons also act as money borrowers. Persons who have idle cash have two options with regard to their cash. They could choose to invest the cash in projects which will generate return on investment or save them in banks and earn interest on savings.

The benefits of Finance to individuals

Finance therefore entails the sourcing and optimal allocation of funds among the competing needs. To effectively achieve the optimal allocation, finance managers use the different financial project appraisal methods such as the net present value, the internal rate of return, profitability index and so on. These methods help to indicate the most viable projects where money could be invested to bring the highest returns to investors.

Most projects require large outlays of cash and since individuals may lack adequate funds to invest in these projects, they may need to pool their funds so as to attain the minimum threshold required to invest (Wendy and Mayer 230). Finance is therefore beneficial to individuals since it helps indicate the appropriate amounts of money needed for certain projects and if need be the returns associated with these projects.

A look at the Cayman Islands indicates numerous benefits to individuals. The Cayman Island is a British territory that has grown to be the hub of offshore banking (Alan 6). It is currently the worlds sixth largest international banking center. This is because of the financial institutions that manage both the total assets and liabilities held. The presence of international banks such as the HSBC helps Individuals to have their funds safely secured in off-shore accounts.

The importance of offshore accounts is that most of them trade in the major currencies and trade in fixed exchange rates (Michael 6). This is a desirable feature in the financial field bearing in mind the current day volatility in the financial markets. Off-shore banking also offers less risk in terms of political stability. The other benefit of banking in the Island is that there are not taxes imposed to foreigners. This makes it a desirable place to save money. This factor coupled with the availability of multi-currency account management makes the Island a leading off-shore finance hub.

Benefits of Finance to Companies

Most companies usually have idle cash. This results from their effective working capital management. Availability of idle cash presents an opportunity to earn extra income from interests on savings and/ or returns on short term investments. The finance managers of companies come up with effective cash management policies that ensure optimal use of the available cash as well as proper and sound planning for future receivables.

Investing in short-term financial instruments such as treasury bills, certificates of deposits, commercial papers etc. The benefit of these financial instruments is that companies are able to purchase them and gain returns within one year. The main intermediaries which deal with these financial instruments are the banks. Banks therefore play a critical role in ensuring that the financial instruments are bought and sold to the different persons.

The Cayman Islands is an important financial hub in the world. The benefits to the companies range from investment advisory, fund management, asset management, and asset protection (Michael 40). With no taxes charged to foreigners, Cayman Islands has thrived in the banking industry and with the enactment of effective financial regulations companies derive a lot of benefits from the opportunities available in the Cayman Islands off-shore banking.

The negative Impacts to Individuals and Organizations

The rapid rise in importance in finance industry has brought about several negative impacts both to individuals and to organizations. This has translated to undesirable societal effects. Banks act as deposit takers and money lenders to the various clients they serve. They do so by safe guarding the money held by their clients and investing the money in areas where maximum returns is expected.

The commercialization of finance industry has led to a neglect of the important projects that would bring about the welfare of individuals. As a result, money has become a driving force in the financial sector. This has caused other important drivers such as individual and societal welfare to be neglected. This has resulted in moral erosion and such vices as money laundering have become common in the finance industry. Though countries and authorities have continued to enact laws against such vices, it continues to be practiced by many individuals and organizations.

The other negative impact of the finance industry is the uncontrollable rapid growth in the industry that has resulted in the global financial crisis (Allen and Gregory 239). This has caused huge losses and some countries have had to enact austerity programs to help them recover from the negative impacts of financial crisis. Individuals and organizations have lost their funds through collapsing banks and this has resulted in a financial crisis in many countries, Cayman Islands not an exception.

Conclusion

Finance has grown to be an integral part of the modern day business and non-business environment. The advancement in technology has also ensured that the world becomes a global village. As such international finance has rapidly grown over the recent past to become a vital aspect of modern day business field. Off-shore banking has brought a lot of benefits both financial and non-financial to the players.

Emergence of islands such as the Caymans Islands has made international finance more so off-shore banking a much needed financial product in the modern day world. This has resulted in enhanced security and a more stable market for financial trading in international markets. Banking has therefore proved to be inseparable from finance since banks are the most important types of financial institutions. Off-shore banking will continue to thrive and as the technology continues to advance, Islands such as the Cayman Islands will continue to grow in to become great contributors in the international finance.

Works Cited

Alan, Markoff. The evolution of Cayman banking. Cayman Financial Review (2012): 3-19. Print.

Allen, N. Berger and F. Udell Gregory. The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in The Financial Growth Cycle. Journal of Banking & Finance (2011): 236-49. Print.

Beck, Thorsten. Financial Development and International Trade. Is There a Link? Journal of International Economics, (2002): 107-31. Print.

Don, Dayananda, et al. Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge: Cambridge University Press, 2002.

Michael, Klein. Dodd Frank: Cayman banks must remain flexible. The Cayman Islands Journal (2012): 1-6. Print.

Wendy, Carlin and Colin Mayer. Finance, Investment and Growth. Journal of Financial Economics (2003): 101-326. Print.

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