Category: Credit

Microcredit is kind of loaning that instigated in Bangladesh in the fiscal 1970s. The process entailed giving out loans to micro-enterprises or small businesses with the objective of assuaging the skyrocketing levels of poverty. In fact, the micro-loans were issued by the Microfinance Institutions that had very high interest rates that were intended to cover the allied high outlays of giving such micro-credits (Pitt & Khandker 1998, p.960). Since the micro-credit was purposely a mechanism to relieve poverty, people who lacked steady employment and those who had low credit scores were able to receive these micro-loans which acted as their capital to start and advance their respective business enterprises.

Microfinance pains and gains

For many years, announcements by organizations that they extend their commitment to microfinance investing substantial amounts of funds have been indications that institutions now take the strategy seriously. Microfinance investment has the capacity to give the fund with a combination of solid growth and attractive returns, relatively different from equity markets in developed economies. Nonetheless, many efforts of individuals in microfinance institutions show a sector on edge with its new position as asset class for global investors. Indeed, many are troubled by the new language of microfinance including return on equity: if an institution is making profits, it is moving into the same mental mindset as loan sharks. The microfinance sector is worried whether both profit and non profit frameworks can coexist. Despite many reservations made by the institutions, the important point is to get institutional capital into third world nations where there is not enough of it. What is apparent is that international investors are increasingly supporting microfinance and the sector is growing rapidly (Wheelan, 2008, p.2).

Competition among microfinance organization is more evident than ever which adds to the gains of the parties on the receiving end. Many of them are now running asset worth billions of dollars, all incorporating overlay. Indeed, running specialty funds like microfinance in the highly competitive area of asset management creates a distinctive brand to some organizations. However, the goal is not financially related: the question is how the social return is managed. Looking at microfinance competition in various countries, one can see the potential problems. The initial public offering by some of the organizations raises overwhelming amounts of funds, but outrages campaigners when it is revealed that such funding institutions charges even up to 70% interests on their loans.

Microfinance contributes to diversification of an investment portfolio. Essentially, larger microfinance projects have even bigger social consequences. It is predicted that the next development in the sector is more consolidation. Institutions will merge and commercial banks will be seeking to be involved. There could also be a move from the traditional group lending to individual lending. The growth of institutions has led to examinations related initiatives such as innovative suit of loan products in the fields of agriculture, food, water and land in developing countries. They are now working with pension funds in these countries and have found the appropriate projects. Institutions are getting economies across what they do because they are in the microfinance sector, meaning that they are constantly looking at various countries and currencies while creating alliances on the ground.

Bangladesh Microcredit

The development of Bangladesh microcredit occurred in a number of distinct stages over the last two decades. The current microfinance model originated from the action-research in the 70s to cope with the rehabilitation and relief needs of post-independence (CDF, 2006). The microcredit was first started by Grameen Bank through a team led by Mohammad Yunus. The model was tested first focusing on group-based credit offering with peer monitoring. As this model developed, others were started by the Bangladesh Bank while collaborating with Swanirvar Bangladesh as well as other pilot projects begun by a number of NGOs.

More microfinance institutions experimented with varying modalities of giving credits to the poor in the 80s. NGOs experimented with varying approaches of delivering credit in early 80s. A significant model experimented was the efficacy of giving loans to groups compared to giving loans to individuals associated with peer monitoring. The individual approach emerged to be more effective because of incentives and joy-rider problems compared with group credit. Hence the model that dominated was that of giving loans to individuals in an effort to target clusters of poor families, with peer monitoring and solid microfinance staff follow-up.

The girl effect, Kiva

Kiva is the first person-to-person website in the globe that focuses on empowering people to lend money directly to distinct entrepreneurs around the world for the sake of lessening poverty. With its origins in the work of Nike Foundation, the girl effect has been combined by NoVo Foundation in a common undertaking to create economic opportunities for girls. Through the initiative, adolescent girls are distinctively able to raise the standards of living in third world countries. Through Kiva, other organizations are able to locate the girls in need especially in countries where information technology has penetrated. They are able to communicate their help initiatives through the websites which alleviates the difficulty of accessing institutional help by the girls in developing countries. The website is also a channel of giving loans by the microfinance institutions (Berthelemy & Varoudakis, 1996). In fact, the major aim of creating a global website was to develop a platform through which microfinance institutions could help the girl child in developing nations.

Contribution to the countries economy

There is a link between the development of microfinance and economic growth of a country. Researches indicate that microfinance contributes to increased investments and growth of capital. Moreover, microfinance builds on financial services that are needed to make investments in physical and human capital, to smooth consumption as well as to overcome unexpected shocks. It has been perceived as a solution on large scale previously excluded poorer groups without access to capital from the conventional financial system (Banco Sol, 2006, p.7).

The financial sector in developing countries is characterized by dual financial systems which are formal and informal. Majority of the low income people are left out in both the sectors especially the informal sector that purports to cater for the low-income and poor in society (Pagano 1993, p.618). The access to the formal sector is primarily due to the lack of collateral that is needed because of risks involved in lending as well as high costs involved in small-scale financing services and weak legal enforcement (Ray 1998, p.214). Therefore, the low incomers find themselves being served by the informal financial intermediaries that possess informational advantage over formal financial intermediaries on these clients.

However, the informal financial intermediaries have insufficient savings facilities coupled with limited funds. Moreover, they incur higher costs in lending for their clients compared with the formal sector. Because of these pitfalls of both informal and formal financial intermediaries, the microfinance comes in to take the informational advantage of the informal sector to increase the availability as well as improve on the financial services for the lower income level (Banco Sol 2006, p.7).

Though previous researches indicate that there is a strong correlation between economic growth and the development of the financial sector, some scholars dispute the directionality of this interrelationship. The argument is whether the economic growth contributes to the development of financial markets or whether financial systems lead to the economic growth (Bencivenga & Smith 1998, p.371). Nevertheless, it fair to make the assumptions that there exist a link between the economic growth and financial sector. At the micro-level, there is a differing effect of the financial system as a result of different institutional build up and policies. Moreover, there are imperfections in the financial markets. Poverty level and development gaps are higher in conditions where both financial systems and economic growth remain at an undesirable equilibrium (Berthemeley & Varoudakis 1996, p.310). In developing countries that normally have stagnated economic growth, there may poor development of financial markets as a result of underdeveloped or inexistent financial markets. In such conditions, microfinance comes in aid of the low income that has little access to the minimal financial services (Berthemeley & Varoudakis 1996, p. 313).

It is now apparent that there are interlinkages between the development of financial systems and economic growth. The development of microfinance is seen as a way of dealing with imperfections in the financial markets, the imperfections that contributes to the drawback of investment opportunities at the lowest levels of income. Moreover, microfinance contributes at the larger scale the income generation as well as the financial sector development (Morduch & Jonathan 2000, p.623). That is, microfinance contributes to the macro-level growth by targeting small scale and micro-level enterprises.

International treaties

The growth of microfinance in the developing countries have led to the need to have a regulatory framework that can be used as a control measure in the behavior of these small scale financial enterprises (Bencivenga & Smith 1998, p. 366). Another important factor is the development of markets. In comparing the performance of microfinance in various regimes and regulatory frameworks that support its development is far much different. Furthermore, there is a big difference regarding the institutions that are serving the poor household and small scale entrepreneurs in various developing countries (Pagano 1993, p.615).

Taking these variations into consideration and taking cognizance of the importance of microfinance in the development of the economy, different developing countries have come together to harmonize the regulatory framework as well as expanding the market for the development of the microfinance (Morduch & Jonathan 2000, p.627). Various international development institutions such as World Bank and United Nations have also contributed hugely in the harmonization of the regulatory framework and have worked closely with many countries in the development of microfinance.

Successful stories about microcredit

Globally, real people have over a period of time given their success stories as regards to microcredit. These are as explained below.

Sri Lanka

Alice Pallewela had to turn to her credit union and candy when she really wanted finance for supporting her family (Microcredit Borrower Stories 2001). The doubtful blend significantly changed the perception of the village with respect to the credit unions and her life was not left unchanged too. Alice and her husband moved to Yodagama, an agricultural colony scheme after their marriage. However, not everybody was deemed a farmer given that other populates were micro-entrepreneurs while others artisans. There, Pallewella knew she had to commence a personal business that could supplement the remuneration the husband got from his employment. Subsequent to making a decision to do business, she had to select the kind of business she wanted. She made a very easy choice of being a candy (Swider, n.d).

She loved sweets and enjoyed the customary sweet preparations that were carried out in the celebratory periods. What inspired her most was the fact that a candy seller who was very close was approximately fifty miles away and this attested to be the correct niche. She collected data for six months and thereafter opted to vend just a few candies which were made via the accessible local raw materials. However, after six months, she really wanted to buy additional equipment and she was granted a loan of $100 that she requested from her credit union. The credit union besides offered Pallewela the necessary credit plus technical advice she wanted to build on her candy business (Microcredit Borrower Stories 2001). At the moment, Pallewela has enough profits from her business which she can regularly save (Swider, n.d). This has actually offered an opportunity for the credit union to provide micro-loans to several other micro-entrepreneurs.

The republic of Dominican

Damian Altagracia initiated a small ceramic business in the republic of Dominican. In 1987 when she instituted her business, she merely possessed sixteen cents. After operating for just a couple years, Altagracia requested a loan from the ADEMI. This micro-finance lending institution offered her $80 that Altagracia used in purchasing glazes and clay (Microcredit Borrower Stories 2001). From the time she received the first micro-loan from ADEMI, Altagracia has opted from more eight micro-loans from the same micro-finance institution. Even though Altagracia does not have fixed remuneration package, she has managed to employ seven workers who assist her in carrying out the business. Altagracia sincerely gives appreciations to ADEMI for the support she was given which helped her to manage the advancing business (Swider, n.d). She has climbed out of the life-threatening poverty and can now manage to pay the school fees for her kids schooling.

The social and cultural impact of micro-credits

The social and cultural impacts of micro-credits are hard to gauge. In fact, practitioners have viewed the practical impacts of micro-loans finance intervention from just the economic and social perspective. However, in the developing countries like Bangladesh and Kenya, the micro-loan movements have alleviated poverty. These two countries are historically poor but have the long standing micro-credit lending history (Pitt & Khandker 1998, p.961). Irrespective of this, most communities have increased their social ties which accrued as a result of the micro-credit finance. Individuals through forming groups that are used by micro-finance institutions to give out micro-loans have come to know and appreciate each other. In this regard, micro-loans have critically reduced the levels of poverty that initially existed in various societies.

However, the supply of micro-loans should not be short run but instead is ought to be long run to increase the capacity of households to permanently create wealth and alleviate poverty (Morduch 1999, p.1571). Given that micro-loans are based on the belief that the underprivileged are eager to pay higher rates of interest to get the micro-loans, the system is anchored on a collateralised social trust. Members in the small groups are the pioneers. Each individual within group gets a loan yet the whole group is held accountable for the micro-loans repayment. Thus, borrowers who fail to accomplish the loan repayment commitment are bound to lose their cultural and social ties and capital.

What might happens when micro-loans are stopped

In the event that micro-loans are stopped, the poor people in the developing world will not be able to effectively run or manage their businesses. Those who lack capital might continue languishing in poverty (Credit and Development Forum 2006). The rate of unemployment will also rise since micro-loans have enabled individuals to be self-employed. Therefore, the rate of growth and development in developing world might decrease if micro-loans are stopped.

Microfinance and financial aid

In as much as the development of microfinance contributes hugely to the development of developing countries economies, financial aid still forms the backbone through which these enterprises could develop (Pagano 1993, p.620). In other words, aid can be used to develop the micro finance enterprises. In the perspective of helping the poor, the development of microfinance will provide a permanent solution. However, developing countries must develop their financial systems that incorporate the needs of the low-income. In essence, microfinance should be developed to help the poor household instead of depending on the financial aid that is even more costly to the countries economy (Ray 1998, p.367).

References

Banco Sol, S.A. (2006). BancoSol: From Microcredit to Microfinance. Web.

Bencivenga, V. & Smith, B. (1998). Economic development and financial depth in a model with costly financial intermediation. Research in Economics, 52(4), 363-386.

Berthelemy, J. & Varoudakis, A. (1996). Economic growth, convergence clubs, and the role of financial development. Oxford Economic Papers, 48(2), 300-328.

Credit and Development Forum (2006). Bangladesh microfinance country profile. Web.

Microcredit Borrower Stories. (2001). Campaign News. Web.

Morduch, G. & Jonathan, M. (2000). The microfinance schism. World Development, 28(4), 617-629.

Morduch, J. (1999). The microfinance promise. Journal of Economic Literature, 37(4), 1569-1614.

Pagano, M. (1993). Financial markets and growth: An overview. European Economic Review, 37(2-3), 613-622.

Pitt, M. & Khandker, S. (1998). The impact of group-based credit programmes on poor households in Bangladesh: Does the gender of participants matter? Journal of Political Economy, 106 (5), 958-996.

Ray, D. (1998). Development economics. Princeton: Princeton University Press.

Swider, P. (n.d). Microcredit: A green research brief. Web.

Wheelan, H. (2008). SNS asset management: the growing pains and gins of microfinance. Responsible Investor. Web.

Abstract

Debit and credit cards create a network of externalities, which are secure and convenient. In modern society, credit cards are necessities and form a unique consumer culture. The main aim of the study was to investigate the attitudes towards credit/debit among grandparents and children. The literature indicated that attitudes towards credit and debits were influenced by the benefits of convenience. A descriptive research design was used in the study. The sampling design was the simple random in which 90 grandparents and 200 children were included in the study. The mode of data collection was the use of interviews and questionnaires. Various statistical packages such as the SPSS were used to analyze the data collected.

The study findings indicated that there was a positive trend in the use of credit cards among grandparents and children. However, there were reservations and worries in relation to incurring debts. The research provided important information that could be used by financial institutions and businesses to design debit and credit cards that meet the requirements of the two groups

Introduction

The debit and credit cards play a critical role in the field of money and banking sector (Roberts & Jones, 2001). The cards create a network of externalities, which are secure and convenient. In modern society, credit cards are necessities and form a unique consumer culture. For instance, credit and debit cardholders enjoy the convenience of paying for services and goods using the cards. Despite the increased platforms for debit and credit, people have varying attitudes towards credit and debit.

Objective and Significance of the Study

There are many studies conducted to examine the different aspects that relate to debit and credit use. For example, there have been studies to explore the security features and level of acceptance of the debit and credit cards. According to Kumar (2013), attitudes influence the acceptance and usage of credit and debit. Even though there are many studies that have explored the issues of attitude, the main aim of this study was to investigate the attitudes towards credit/debit among grandparents and children. Earlier studies pointed out that the use of credit and debit across the various age groups varies (Kempson, Collard & Taylor, 2002). However, there have been limited studies on the attitudes towards credit and debit use among children and grandparents. The study endeavored to investigate the attitudes in relation to senior citizens and children.

The study findings provided pertinent information related to the two groups. For example, the findings obtained could be crucial for businesses when deciding which group to target in the products they are offering. Finally, the policymakers could use the information to determine what policies need to be formulated to guide issues of debit and credit in relation to the different age groups.

Overview of the Report

The report is organized into various sections. The first section is the introduction, which provides a general overview of the credit and debit cards. The second chapter covers the literature review, which critically analyzes earlier studies. The third section is the methodology. It outlines the study design and the techniques applied to collect and analyze data. Chapter four is the quantitative and qualitative findings of the study, while chapter five is the analysis of the findings and their implications. The final section of the report is the conclusion, which provides a summary of the findings and their implications.

Literature Review

Investigations carried out by previous researchers reveal a number of issues about consumer attitude towards debit/credit. For example, studies conducted by Mansfield, Pinto, and Robb (n.d.) indicated that credit cards stimulate spending behavior. Findings by Ahmed, Amanullah, and Hamid (2009) showed that there is a positive relationship between the income level of a person and the ability to own a credit card. In addition, the profession of the consumer was found to influence the attitudes towards a credit card (Ahmed et al., 2009).

According to Dominy and Kempson (2006), the levels of debt normally rise at the ages between the mid-30s and mid-40s. The majority of people in the middle ages and those actively in employment hold the debit and credit cards. A study conducted by Ron (2008) pointed out that the use of credit and debit cards has significantly risen. The findings relate with a study conducted by Juson and Lin (2012), who established that at the point of sale in various states in the United States, the use of debit and credit cards had greatly increased. Jusoh and Lin (2012) noted that whenever the debit and credit cards are used, there is a subsequent increase in the volume that is purchased. Hayhoe et al. (2010) stated that the increase in the use of credit cards implies a positive attitude towards credit and debit.

In an extensive study to investigate the attitude of consumers towards credit and debit cards and the factors that influence the acceptance of the cards, Kumar (2013) found that the majority of the card users included the people in employment. The majority of consumers preferred debit and credit cards because of their flexibility and convenience. The study contradicted earlier studies that pointed out that consumers have negative attitudes towards credit cards due to the probability of accruing outstanding balances. In yet another study, Chien and Devaney (2001) established that flexibility, ease of use, security, and convenience were the main determining factors that influenced consumers to use credit and debit cards.

The literature review pointed out that the use of credit and debit cards in modern society is influenced by the benefits of convenience and revolvers. The cards are also used as a means of financing. Therefore, the attitudes that relate to credit/debit revolve around the convenience and financial aspects. However, the studies failed to incorporate the aspect of various age groups. This is despite the fact that there have been significant increases in the number of people using credit and debit cards irrespective of age. The literature provided a basis for ascertaining the increase in the use of credit cards and the factors that influence the use of cards. The literature implied that there was a generally positive attitude towards credit and debit cards. Thus, the current study explored the attitudes towards credit and debit cards with a key focus on particular age groups whose attitude and adoption of the credit and debit was not extensively addressed in earlier studies.

Research Methodology

Research Designs

The study design applied was a descriptive research design. According to Mitchel and Jolly (2010), descriptive research design is critical in providing answers that relate to a given societal situation. The study entailed the use of questionnaires and interviews. The questionnaires were designed for the children while the interview was to collect data from the old people. The children included the age groups between 12 and 18 years. The other target group was the older people described as the grandparents; the group included the people aged above 60 years.

Sampling Frame and Sample Size

A sample is usually drawn from the target population. The sampling frame represents the working population that is to be utilized in the study (Kothari, 2005). The age group specifications served as the main inclusion criteria. The sampling technique applied was the simple random sampling procedure. The random sampling gave all the participants in the sample frame an equal chance of representation in the sample. The sample size for the elderly was 90 grandparents. The children included in the study were 200. The questionnaires were sent to all the children via electronic mail.

Data Collection Methods

The data collection methods that were applied included the interviews for grandparents and questionnaires for the children. The interviews were guided discussions, as they were to probe specific information from the respondents. The information collected in the interview process was typed, recorded, and preserved for the analysis. The questionnaires used for the study were clear and succinct and in line with the research objectives.

Data Analysis

The statistical package for social sciences (SPSS) was used to analyze the data obtained from the grandparents. A correlation was computed by the use of the crosstabs and Chi-square tests. The significance of the predictors was tested using multivariate logistics. In addition, a cross-sectional time-series analysis was used in the study. Through the cross-sectional time analysis, the causal relationship between the use and attitude towards credit and debit was easily established.

Findings/Results

The main objective of the study was to investigate the consumer attitude towards credit/debit, with the key target group being the elderly citizens and the children. The children comprised of the age group between 12 and 18 years. The main objective was to identify the perceptions and the knowledge of the two groups towards the debit and credit. The number of people sampled in the two groups was inclusive in terms of gender. In the elderly group, men comprised 46%, while among the children, boys were 57%.

The interviews and the questionnaires were used to interrogate the level of personal attitude on the credit and debit. Furthermore, the methods of data collection sought to establish the reasons behind the attitudes towards credit and debit. The study established that 32% of the grandparents had a negative attitude towards debit and credit. There were 12% of the elderly with a moderate attitude towards the debit and credit cards. The grandparents with a positive attitude towards credit and debit accounted for 56%. In the case of the children, a similar trend was observed with the majority of the children indicating positive attitudes towards the use of the debit cards. However, most of the students did not have adequate knowledge of the credit cards. The children are considered as minors, and thus they do not qualify for credit advancements.

The results showed that in the two age groups, over 50% of the respondents had a positive attitude towards the debit and credit. The results obtained relate to previous studies that have pointed to increased acceptance of the credit and debit across the globe. According to Joo, Grable, and Bagwell (2001), debit and credit cards have revolutionalized customers experience and ignited a new customer culture. Across the gender divide, there was no significant difference in attitudes towards the credit/debit cards. The findings are also in line with Joo et al. (2001) findings that established that gender does not influence the attitudes and perceptions towards credit.

However, the spending in relation to credit/debit varies across the gender divide. The findings consist of Hayhoe et al. (2000) findings that pointed to significant differences in spending based on gender. The respondents cited the positive security features and the convenience that relate to credit and debit as a reason for the inclination towards the usage of the cards. In addition, the increased flexibility associated with credit and the current consumer culture was cited as the main reason for the positive attitude towards credit and debit. As a result, many respondents attested that they possessed a debit or credit card.

The creditworthiness and availability of income influenced the attitude towards the credit card. In relation to the children, the income level affected the attitude towards the debit cards. The findings were in line with findings by Ahmed et al. (2009) that established that there is a positive relationship between the income level of a person and the possibility to own a credit or debit card. Despite the positive attitude towards the use of the credit cards, the grandparents were concerned about the increased risk of incurring debts. For instance, 32%who had a negative attitude towards the credit card were concerned about the future consequences of having a credit or debit card. Factors contributing to the negative attitudes included the possibility of compulsive buying and the constraints of the budget.

Analysis

The findings point to several issues that influence the attitudes towards debit and credit cards. The key to the findings is the changing trend towards acceptance of the credit and debit cards. The study was specific to the elderly and children. According to Kempson et al. (2002), many financial policies and marketing of finance products focus on the middle-aged and the working class. The positive attitude towards the debit and credit cards pointed to new financial inclinations and consumer culture.

For instance, the use of credit has been on the increase among the elderly. The significance of the changing trends is that there is a need for the credit extension facilities and issuers of debit cards to design products that will fit the needs of the elderly and the children. Therefore, financial institutions should come up with policies that address the needs of the two groups and ensure that their financial concerns are solved. The grandparents preferred the convenience that comes with the use of debit or credit for the payment of hospital bills and the purchase of basic products. The implication is that among the elderly, there is a need for customized credit and debit cards that are specific to the customer needs. The customization of the credit and debit cards will increase the uptake, and the positive attitudes are likely to increase.

The elderly raised reservations related to the fear of overspending and impulsive payment as a major restricting factor that affected the use of debit and credit cards. The reservations were very high among the significant 32% elderly with negative attitudes towards the debit and credit cards. According to Roberts and Jones (2001), the majority of credit card users are at a high risk of incurring debts. Neuner, Raab, and Reisch (2005) noted that there is a tendency for the credit and debit cardholders to spend compulsively. In the case of the children, there was also the possibility of overspending to cater to the lifestyles, mainly due to peer influence.

The implication for such a trend is that there is the risk of not meeting the budgetary allocations. The findings necessitate the need for strategies such as financial awareness on the use of debit and credit cards among the general population. The misuse of the credit and debit card cuts across the age groups divided. Mansfield et al. (n.d) noted that unlike the cash, debit, and credit cards provide a high likelihood of unconscious spending.

There was a common concern among the grandparents on the issue of compulsive buying. They pointed out that the possibility of compulsive buying discouraged their use of the credit and debit cards. Despite the reservations, very few elderly attested to being involved in impulsive buying. The credit cards have become an important form of borrowing embraced by the grandparents in cases of emergency. Unlike earlier studies that pointed that the use of the credit cards by other age groups is associated with lifestyle consumption, the elderly were found to be cautious about the credit cards; they used them only when it was essential.

In a qualitative study conducted by Kempson et al. (2002), the attitudes of older people in relation to borrowing were found to be influenced by individual financial factors. As a result, only a few elderly people interviewed were at ease to use credit cards. The unsecured borrowing that is an essential characteristic of the credit cards contributed to the relatively high number of elderly with a negative attitude towards credit. However, the elderly were very positive about the use of credit cards to pay for food and to cover medical bills.

The attitudes towards the use of credit were influenced by different economic and social circumstances. According to Joo et al. (2001), the different experiences between the old and the young influence the attitude towards the credit. The research pointed out that there are generational differences in relation to credit and debit cards. For example, children with debit cards were found to be spent free. The children also noted that though they did not own credit cards, they would prefer to acquire a credit card in their future lives. The reason behind the need to have the credit card was related to spend without restrictions.

This notion pointed to gaps in financial literacy among the young generation. Very few of the interviewed children were aware of the accumulation of debt and its implication on their financial statuses in the future. On the other hand, the older generation aged above 60 years was very cautious about the use of their credit cards. The old people knew about the risks of overspending using credit cards. Thus, they embraced measures that ensured that they did not get into financial difficulties. According to Dominy and Kempson (2006), the trend is due to fears of the fixed income as most grandparents rely on retirement pension. Therefore, the socio-economic differences between the elderly and the children affect the attitudes and perceptions towards the usage of credit and debit in the two age groups.

According to Kempson et al. (2002), attitudes influence credit and debit cards to use. The analysis of the descriptive data collected from the elderly pointed out that they minded the amount they spend or borrow. In a specific interview question to the elderly on how they felt about buying goods on credit, the majority of the elderly believed that it was not a desirable action. The analysis of responses to the question among the children pointed to an overwhelming acceptance that the credit buying was convenient and good.

Though the children did not hold the credit cards, there was a strong indication that they were not aware of financial debts that may arise from uncontrolled credit buying. The findings agreed with findings by Ron (2008) that the psychological wellbeing and financial situations influence the attitudes towards debit or credit. The findings provide the basis for understanding financial literacy.

Studies have shown that levels of consumption are high among consumers who have debit and credit cards. The implication for the trend is a reduction in the saving-investment among the cardholders. The positive attitudes towards the acquisition of the credit cards point to financial attitude change that has contributed to the increasing use of the cards among the different age groups. The use of debit or credit cards increases financial interconnectedness; they have the effect of reducing the bank and the cash balances. Specifically, the grandparents pointed out that the credit cards contributed to increases in debts; hence, the danger of getting financial deficits. On the other hand, though the debit cards did not lead to debts, they increased the possibility of increased impulse buying among young people.

Conclusion

The evidence gained from this report points that there have been changes in the attitude towards the credit and debit cards among the grandmothers. The positive attitudes have resulted in increased usage of credit and debit cards among the elderly. Despite the positive attitudes among the elderly and the usage of the credit, there was great concern about the financial implications of the indebtedness that may result due to the use of credit cards. Among the children, there are also positive attitudes towards credit card use. However, the children do not qualify to have credit cards.

The results present a generational attitude towards credit and debit card use. The data was collected using primary methods of data collection. Therefore, the findings provided an accurate picture and attitudes inherent in the age groups studied. The primary sources of data were critical in the collection of data with high credibility. However, the issue of personal bias could not be ruled out in the data collection from the two target groups.

It is evident that the debit and credit cards have bred a new consumer culture that crosscuts the age divides. With the increase in the number of grandparents and children using credit and debit cards, there is a need for further studies to address pertinent issues that relate to credit and debit cards. Thus, there is a need for further studies on the effects of credit and debit cards on the elderly and the young. The study should examine the management of cash and debt controls in the two groups.

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Roberts, J., & Jones, E. (2001). Money attitudes, credit card use, and compulsive buying among American college students. The Journal of Consumer Affairs, 35 (21), 213-240. Web.

Ron, B., (2008). Consumers use of debit cards; patterns and preferences and price responses. Journal of Money, Credit and Banking, 40 (1), 149- 172. Web.

Definition of sovereign ratings and its importance

A sovereign rating refers to a measure used to assess the level of risk involved in investing in a company or financial institution. In most cases, it is used by investors who want to assess the amount of uncertainty involved before investing in a company. Moreover, a sovereign rating is vital for the assessment of the credit risk of a nation and the companies within its borders. The ratings enable The Bank for International Settlements to determine capital sufficiency.

Role of rating agencies

Rating agencies assign sovereign ratings to foreign- currency by striking a balance between the factors of the constant and those brought about by the theory. It is essential to establish sovereign capability and willingness to handle an external debt.

Role of neural networks in sovereign ratings and ideology of whether to entirely rely on neural network prediction

Artificial neural network ideology originated from the human neuron physiology. A series of neurons pass information to the nucleus using synapses and the information is interpreted as an output. The input of various variables in a credit rating is re-laid out and output obtained. This is termed as a prediction.

Neural networks are used to classify sovereign ratings according to the percentages of correctness in performance. Rating agencies use neural networks as the best models for sovereign rating. The neural networks are very accurate inaccuracy of sovereign ratings and when tested with two models their accuracy ranges to 90 percent.

One can rely entirely on the neural networks since the sample size for obtaining the most suitable had five thousand epochs. The level of correctness and accuracy of predictions will be high. Since the sovereign ratings are essential for the prediction of credit risks in firms and countries, it is vital to have accurate predictions to avoid huge losses of the capital invested by investors. In conclusion, the neural networks will be significant in Sovereign credit ratings.

Conclusion of the outcomes in neural network-based rating prediction experiments

Prediction experiments were long but carefully done to come to the best model. The classification-based neural network is 40.4 percent on average and the regression-based neural network is 34.65percent on average. In one instance, the appropriately categorized ratings were attained at sixty-seven percent and seventy percent cases, while achieving 63.9 percent and sixty percent cases for the cataloging and regression models instantaneously.

Looking at both of the experiments carried out at the first notch, the averages are above 50% correctness for both classification and regression models. If the results for the first notch are as shown, then the percentages for the second and subsequent notches will rise. One notices that the regression model attains a lower percentage of incorrectly classifying ratings than the classified model. These experiments indicate that sovereign credit rating can depend on these models for accurate predictions.

Factors to consider in rating Indias sovereign credit and the applicability of the neural network when credit rating India

The factors considered in credit rating include financial rates, the economic, political, regulatory environment, and industry trends. As a credit analyst for Standard and Poors, I would use the following factors to rate India: its poor economic fundamentals, bankruptcy, and lack of political action.

India stands at a very critical position such that any economic downfall will drive it below the investing level. This will prompt the country to sell its securities to boost investor security to invest within its borders. This indicates that the economy of India is unreliable and contributes significantly to the prediction of high credit risk.

Food inflation in India is the major contributor to poor economic status. If the country cannot feed its citizens using its recourses, then its financial status is low. Therefore, I would rate Indias Sovereign credit as a big risk using its economic status and incapability of its government as my major factors. This is because they dont have enough resources to sustain the country itself, so investors may be faced with a big risk in investing in India. Its government has not come up with a solution to raise its economic status. If the countries own leadership is poor, it will be very hard for the investors to invest in it since they will be foreigners.

Using Artificial neural networks to rate Indias sovereign credit, I would put in different variables of factors, configure them using an algorithm, just like synapses, to pass information to the nucleus. Then come up with the final output which is the prediction. By using the neural networks being able to acquire a prediction with accuracy. This because the variables are well studied and configured before being re-laid. Just like in a human the information given as output in the brain has high accuracy. Therefore, the sovereign rating of credit in India can give a reliable picture of the returns expected by the investors in the domestics companies.

Over the recent years, corporate sponsorship has gained considerable attention among corporations. Empirical studies indicate that corporations have been quick to embrace sponsorships as a vital tool of promotion strategy (Keller, p. 82). Most importantly, sport sponsorship has received much attention among corporations as most of them spend millions to finance sporting activities (Meenaghan, p. 98). Apparently, major sporting events attract large number of spectators, while others watch these events on televisions. Moreover depending on the magnitude, sporting events receive heightened media coverage; thus, making sporting events a vital promotion marketing strategy (Keller, p. 84).

Against this background, major credit companies in the US (Visa, MasterCard and American express) have not been left behind in this euphoria. These companies adopt various strategies to secure sponsorship slots in major sporting events globally. Among the three companies, Visa Card is the market leader in this category whereby it was estimated to have spent $140 million in sport sponsorship in 2007 (sponsorship.com). Visa has defended official sponsor position in Olympic Games for several years. Visa has guarded this position selfishly and it has managed to secure exclusive sponsorship rights in Vancouver 2010 and anticipated London 2012 Olympics (sponsorship.com). Moreover, Visa tops the list of major FIFA world cup events sponsors (Visa.com). Secondly, MasterCard was estimated to have spent $90 million in sport events sponsorship in 2007 (sponsorship.com). MasterCard has a long standing relationship with UEFA Champions League sporting event as the official sponsor. Moreover, the company also sponsors other minor football events such as Copa America and South American Qualifiers (MasterCard.com). Other sporting sponsorship events by MasterCard include Golf PGA tour, Major league baseball events and minor rugby events (MasterCard.com). Concurrently, American Express spent $ 40 million in sporting events during the same year (sponsorship.com). American Express concentrates on major basketball events such as NBA, WNBA and most importantly the USA Basketball leagues (American Express.com).

As epitomized above, sporting sponsorship plays an integral role in marketing. Apparently, the increased adoption has been due the myriad promotional benefits associated with sport sponsorship (Keller, p. 92). Against this backdrop, most of these corporations are motivated by similar marketing objectives. To begin with, by sponsoring major and minor sporting events, credit companies seek to increase consumer awareness of their brands. Sporting events attract larger number of people and corporations bet on creating new customers from this group of people (Keller, p. 94). Moreover, even individuals who follow the sporting proceedings at the comfort of their homes are also treated as potential customers. On the same note, Meenaghan (p. 96) underscores that corporations adopt sport sponsorship as a vital element of marketing mix. Noticeably, marketers adopt sport sponsorship activities to position their brand over and above their competitors.

Secondly, the credit card corporations seek to build a positive image in the mind of existing and potential consumers (Keller, p. 92). As more and more people become attached to particular sports, corporations are hoping to tap into this fanaticism to build their brand image. The idea reasoning behind brand image concept is that consumers are likely to be loyal to brand that support their sporting interests (Keller, p. 92). This same reason has increased competition among credit card companies as each seek a bigger share in sporting events in the hope of building brand image and equity. According to Meenaghan (p. 96), strategic sport sponsorship yields positive brand reputation than any other marketing mix strategy.

Thirdly, by sponsoring sporting events credit card companies hope to increase card usage among existing and potential consumers (Meenaghan (p. 96). The marketing objective behind such a strategy is to increase sales during the events and afterwards. The uptake of credit cards has been sluggish and credit card marketers are willing to go at any length to achieve their target sales (Keller, p. 92). For instance, it is not uncommon to find that tickets for particular events are only issued through the credit card company with exclusive sponsorship rights. Meenaghan (p. 101) accentuates that if properly executed, sport sponsorship can earn corporations a sustainable competitive edge since such encounters solidify relationships between the company and target consumer. As a result, the companies involved can count on this positive relationship to increase sales and usage.

Consequently, Credit Card Corporations adopt various strategies to activate their sponsorship programs. Most of these programs are geared towards encouraging credit card usage instead of cash transactions. Depending on whether a company has exclusive sponsorship rights, marketers can decide that all ticket sales will be paid via credit card instead of cash. For instance, Visa has made it clear that sport fans will only access tickets to the London 2012 Olympic Games through the use of credit cards (Visa.com). The decision seeks to encourage sport fans to utilize credit or debit card, but since Visa has exclusive sponsorship rights, fans are restricted to use credit/debit from this company. This strategy is very common among credit card companies whereas MasterCard also adopts a similar restriction during the PGA TOUR/Champions Tour golf tournaments, major baseball leagues and selected rugby leagues (MasterCard.com). Similarly, American Express enforces restrictions during sporting events that the company has exclusive rights (American Express.com). Moreover, companies may decide to sponsor a team instead of funding the entire event.

In a nutshell, it is evident that corporations are slowly adopting sport sponsorship as part of their marketing mix strategies. On the same note, the three major credit card companies (Visa, MasterCard and American express) in US had not been left behind in this euphoria. These companies have been spending considerable amount of their revenues towards sports sponsorships in order to increase brand awareness, create brand loyalty/equity and encourage credit card usage among consumers.

Works Cited

1. American Express. Entertainment access: Thousands of events offered up daily, 2011.
2. Crosdale, Caroline. Smart, Efficient, Sponsorship Is in, 2009.
3. Keller, Kevin. Strategic Brand Management: Building, Measuring, and Managing Brand Equity (2^nd ed.). Prentice Hall: New Jersey, 2003. Print.
4. Mastercard Worldiwde. Current sponsorships, 2011.
5. Meenaghan, Tony. (2001). Understanding Sponsorship Effects. Psychology & Marketing, 18.2, 2001, 95-122.
6. Visa. Supporting excellence in sport. Visa, 2011.

Introduction

Using credit cards has become quite a common practice for past few decades.

By 2015 the number of Visa credit cards circulating in the world including the U.S. is 850 million (Visa Inc., 2015, para. 6); the average number of credit cards adopted by cardholders in 2009 was 3.7 (Foster, 2011, p. 13). The reasons for popularity, principles of operation, as well as advantages and disadvantages of credit cards, are to be discussed in the report.

Definition and types of credit cards

The definition of credit card provided by OSullivan and Sheffrin (2000) is a card entitling its holder to buy goods and services based on the holders promise to pay for these goods and services (p. 261). It means that not a customer, but the bank pays for the goods at the moment of purchasing, thus providing the customer with a loan, but later the customer has to pay the bill sent by the bank that includes both the price of the goods and the interest  a price for the borrowed money. Interest is a payment to a bank for providing a customer with a loan service. Nowadays banks issue a vast majority of credit card types, providing clients with a broad specter of opportunities. The most common are standard credit cards that have revolving credit lines; reward cards, that provide the customer with perks like cash, discounts or points; secured credit cards, that are used to reestablish credit; and specialty credit cards that are typically applied while sharing partnership between organizations or associations. Before issuing a credit card, the bank learns customers credit history that can be achieved from one of the three credit bureaus  Equifax, Experian and TransUnion (Yuille, n.d., para. 2). They also review the FICO credit score that is customers credit rating.

Advantages and Disadvantages of Credit Cards

Credit cards provide a customer with several advantages. The confidence of purchases allows not carrying large amounts of cash. The protection of costs spent is suitable when a customer needs to proof the act of buying something or receiving a certain service. In that case, the record can always be outdrawn from the bank. Low-cost loans and a possibility of getting instant cash in the times of urgent need is also an important advantage. The perks provided by reward cards can save costs when buying plane tickets, technics, automobiles, etc. Secured credit cards can help a client to build positive credit thus improving his or her credit history. The application in a case of emergency, if the car is broken, and you urgently need costs to rent another one, or in case of sudden illness, is also an important benefit credit cards provide.

Together with certain benefits, using credit cards has several disadvantages as well. A client can easily spend beyond his or her means. Regular checking of papers and another bank documentation is strongly recommended, it is a good way to ensure that you havent been overcharged (360 Degrees of Financial Literacy, n.d., para. 2). There is a high possibility to pay high-cost fees in case of missing a payment of carrying a balance. Moreover, the interest rates, as well as the annual fees, paid to a bank, can be higher than the client would like them to be. According to the data of 2015, the average APR on a credit card that is a numerical representation of banks interest rate was 13.49% (Federal Reserve Statistical Release, 2015, para. 2). A client also has to be careful paying attention to low introductory rates, as they are often limited in time and one day can raise unexpectedly.

The popularity of credit cards is easily explained by a relative easiness of their achievement, and availability of money when one needs it. That definitely is a serious advantage. Nevertheless, a customer also has to know how to manage his or her costs as well as to search for the better service conditions and lower fees the bank can provide. Otherwise, he or she can find himself or herself in a difficult situation having large debts.

References

360 Degrees of Financial Literacy. American Institute of CPAs. (n.d.). Advantages and Disadvantages of Credit Cards. Web.

Federal Reserve Statistical Release. (2015). Web.

Foster, K., Meijer, E., Schuh, S., & Zabek., M. (2011). The 2009 Survey of Consumer Payment Choice. Web.

OSullivan, A., & Sheffrin, S. M. (2000). Economics: Principles in Action. Upper Saddle River, NJ: Prentice-Hall Incorporated.

Visa Inc. Fiscal First Quarter 2015 Financial Results. (2015). Web.

Yuille, B. (n.d.) Credit Cards: Types Of Credit Cards. Web.

In the world today, people obtain goods and services by buying them for cash, credit or by borrowing from their friends. Different countries in the world can obtain goods and services from other countries through offering them credit facilities then later on demanding for their repayment after a specified period of time. Credit refers to the money that is borrowed from the financial institutions or from friends so as that the purchaser of the goods and services may obtain them and later on pay back all the money that has been borrowed at a given period of time. A person is said to have a good credit history when he can honor credit repayment agreements as per the agreements that have been made.

A contemporary economy addresses the economic problems that affect the operations of an organization that are in various parts of the world through using the following methods such as the theoretical and empirical perspectives. The economic policies and reform are implemented within an organization so as to solve the economic problems that may occur within an organization.Incase there is increased usage of the international currencies by the countries when carrying out their transactions then economic policies can be implemented so as to prevent the problems from happening in the future.

On the other hand financial crises that can affect the good governance of an organization and its macroeconomic discipline that result to its instability in the global and systematic world should be addressed so that they can be solved through implementing the economies policies within this organizations that are geared towards ensuring that the operations of an organizations are implemented effectively.

The link of the international credit to the money market and credit market

Money market refers to the market that deals with the short term debt instruments that are highly liquid and mature after a period of one year. Some examples of the money market instruments are certificate of deposit, commercial papers and the bankers overdraft. The persons who use these instruments incurs some risks that are known as default risk that hinder the operations within an organization to take place effectively. Credit markets are the markets that are associated with financial instruments that incur credit risks that emanate from the uncreditworthiness of the borrowers of finances.

The link between international credits to the money market is that the investors can access and be in a position to purchase goods and services from other international countries since they can access credit facilities from the money market that can allow them to make transactions within the stipulated period of time. The credit markets are important markets since they enable the management to evaluate their customers creditworthiness so as to avoid incurring of risks that involve the default of the customers to honor their obligations as they arise.

The investors that carry out trade with the international organization can easily carry out their transactions since the money markets have instruments that mature for only one year therefore transaction activities can take place within the organizations within the stipulated period of time.

Trading partners may come from different countries therefore they use different currencies to conduct their affairs.The money market thus facilitates quicker clearing of credit facilities so that a common currency denomination can ease transaction processes between trading partners.Where are there increased uncertainties about the markets in the economy the investors may fail to supply international credit facilities to the customers and this may result slow development process within a country ( Aizenman ,J. and Marion, N. 2008).

Origins of international credit

International credit arise due to the fact that people from all walks of life keep on travelling from one place to another so that they can obtain goods and services that they do not produce. They therefore exchange their money into currencies that suit their trading partners. In order for the investors to can carry out those activities they should have a credit history that indicates whether they can be in a position to meet their obligations as they arise.

The American patriot Mr. Robert Morris from the United states of America was the first person to understand the usefulness of credit since he knew English and how the securities markets worked in the economy.Lydians were the first people in history to mint,gold,silver,electrum that is the mixture of gold and silver while the early coin designers of gold and silver who were known as germ carvers used the furnace to melt metal until one could be in a position to weigh coins and mint that were made of anvil and die piers.

Credit cards were first invented in the year 1800s where one would pick an item that was commensurate with their needs and desires and by the year 1858 consumer debt had increased by $1.5 billion in the United States and after a period of 32 years it had increased by $11 trillion. During that time account numbers were not been used this is because credit cards and tokens were been used to serve the purpose of paying up the debts owed.

Mr. John Biggins of the Flash bush National Bank of Brooklyn New York was the first person to invent the credit cards. The merchants deposited their sales slips in the bank and later on gave the customers the bill to settle their obligations through using the charge it programs.

The British Mr. Banker Lawrence Childs was recognized as the first person to develop the first printed checks that assisted in developing and elaborate system for routing, account numbers, watermarks and other identifiers that facilitated quicker delivery of services to the customers.Another document that was invented was that of the modern word check that was used to examine and to check the bill of exchange of customers who had bank accounts that enabled them to meet all cash and debt obligations of their customers at specified periods of time.

Prerequisites of the rise of the international credit

It was recorded that in order for a person to obtain international credit they had to have a good credit history so, as to make any transactions within the country that they had migrated into. In United States a credit card was issued on the basis of customers credit history since the government had considered it to be a compulsory requirement that had to be fulfilled by all people who lived in that state. It was noted that most of the residents of the country did not own assets since their credit history was not known therefore could not access financial facilities as they could not borrow money that could be used to develop themselves.

Prerequisites of the rise of the international credit are; Customers were usually instructed to fill in applications for credit from various banks in they were shareholders, store or the credit card companies that contained international credit information that was later on forwarded to the credit bureaus. The role of the credit bureaus was to match the names, addresses, and other identifying information of the applicant and their information that would be kept in the bureaus files for future references. The information was usually kept properly in order to assist the lenders of money to determine the creditworthiness of the individual or companies that want to borrow money from those institutions.

The credit worthiness of the customers is evaluated by taking into account how the customers honored the past payments that had been issued to them by the lenders who preferred to have their debts paid on a monthly basis or the specified periods of time. Income of the companies and individual borrowers was used to determine whether they were legible to be obtaining credit from the bank, if a customer had a higher income he or she was legible to obtain more credit from the bank. Bankers or the lenders made the final decision on whether to extend credit or give credit to the customers through considering factors such as their ability to repay the debts and their past history credit history report of paying up their credit on time.

The consumer credit report was a very useful document that was used to show details of the applicants credit. It was also used to show the public reports such as civil rights judgements, bankrupticies, tax liens and collection accounts that were applied within a country although they varied from one country to another since they differed due to the structure of the countries companies. International business credit report was used to show information that was similar to that of consumer report as it focused on business and ownership. It showed how a company would handle its financial affairs and how to scrutinize the creditors who were in the overseas in order to enable obtain resources that were necessary to carry out their activities effectively.

Nature and necessity of international credit

The necessity of the international credit can be to enhance effective business practices between parties in various parts of the world that produce different kinds of goods and services and to facilitate effective delivery of services to the customers. It is also used to enhance the ease of clearing balances that occur due to the fact that different banks trade together therefore facilitates effective recording of books of accounts among the banks.

Forms of international credit

It was reported that most banks in the world carried out their payment transactions using the documentary credit. Documentary credit refers to the way a bank honors its obligation of paying the buyer a definite sum of money within a stipulated period of time after a transaction has taken place. Its also used to depict the way nominated banks makes payments in case of timely presentation of the appropriate documents that certify shipment of cargo and fulfillment of their terms of credit.

It was applied in the international trade relations transactions since it was considered to be a safe payment method therefore could be used by the exporter and importer while they were providing shorter financing to their customers. The documentary credit is applied in the domestic and foreign economies relations so as to facilitate quicker delivery of services to the customers (Zambakhidze, T 2002).

Transferable credit is the credit facility that would be used by the beneficiary to request the nominated bank to supply credit to be made available to another beneficiary so that it can assist them in accomplishing the tasks that have been assigned to them.

The debit card is a plastic card that is used to allow a person to purchase goods and services and then later on to make payments instead of using cash. It is used to deduct the customers savings balance so that they can meet their expenses when they arise. If a person has a good credit history then it is ease for him to obtain credit card from the countrys they have migrated into, therefore they can purchase houses, conduct businesses, or even rent an apartment hence be in a position to improve on their living standards.

It was also reported that the financial institutions in United States and Canada did not allow they non-residents to access funds due to the fact that most of them credit history was not known since they did not have documents that would act as prove that they were financially stable. The effects of not having a credit history led to their financial difficulties and also the local economy was affected since most of its residents did not participate in productive activities that could generate income to the economy of those countries they were living in (American Metro Bank, 2004).

Credit cards are the plastic cards that are issued to the customers so that they can make purchases instead of using cash to make the transactions. It enables the customer to obtain credit from their banks that later on demands them to pay money they have borrowed at specified interest rates and principal amount.

The Credit history or report is also used to determine whether the individuals or the company in their previous years were committed in paying money that they had borrowed from the financial institutions and also contains information about whether there were the late payments that were made by the borrower that could have hindered them from been given other kinds of credit facilities. The information concerning the borrower helps the lenders to understand and evaluate whether they should offer the services to their customers, if a customer does not meet the requirements that have been assigned to them then they cannot be offered the credit facilities by the financial institutions (James, B.2003).

Relative significances of each form

Documentary credit is useful to due to the fact that it diverse and it enables parties to take into account the circumstance that determine the payment process in the international market, therefore the user can be in a position to select the factor that are relevant that can lead effective service delivery within the organization.

The advantages of the transferable credit are that it enables the exporter to make payments to the suppliers directly through sending out money that should be received as credit although it doesnt consist of any additional expenses information that may affect the transactions to take place effectively (Howell, N. and Hughes, J. 2005).

Functions of each form of international credit

Documentary credit is used to serve as the function of payment since it acts as an instrument that is used to ensure that the payment obligations that are fulfilled within the stipulated period of time.

Economic agents and institutions that participate in international credit markets

Sound financial markets are used by the management of organizations to foster economic development not only for mobilizing savings to finance investment, but also for their contribution to economic efficiency through selecting and monitoring the investment projects of an organization that can facilitate their growth and development. Financial institutions such as the world bank and the International Monetary Fund (IMF) contributes to the economic development of a country by providing finances to the customers so they can be in a position to run their operations effectively.

The qualities of the international monetary trade are that they improve on the capacity and statistics of the organization since they provide the required resources to the countries that require financial assistance. For instance countries that experience huge debts and poor infrastructure due to political instability they get help from the international bodies.

The Non-Governmental organization group together with the World Bank share diverse views, approaches and motivations about how to improve on their performances and they regularly meet with the bank directors, administration so that they could address the issues that would be related to institutions socio-economic and financial policies that enhance effective service delivery for their customers(Campbell S. 2008)..

Impact of international credit on the domestic economies

The impact of the international credit on the domestic economies is that it provides a good environment in which trade can be carried since it offers the necessary services to the customers that require them.

United States currency is used a standard currency in which various countries in the world base their performance on. It was reported that United States faced devaluation of it currency due to political instability that led to financial difficulties to most countries in the world. It was reported in Russia that its residents faced pressure from the domestic stock market that was as a result of capital flight of the real economy due to the tightened credit condition.

In the Russian manufacturing industry there was rapid slowdown thee was as a result of an internal demand that slowed down development. Inflation was also experienced due to the fact that there was cost competitiveness of the imported products that were replaced by the home produced products. If the international credit was not properly managed then the performance of a country was adversely affected.

International credit crunch and business fluctuations

Credit crunch refers to the period whereby there is reduction in the finances from the banks and financial institutions particularly for the small busineses.It usually occurs when there is recession or tough economic periods. It is experienced when the banks lending policies are impracticable such that they can be affected by financial duress that leads to reduced profitability for an organization. It was reported that the monetary policy could not be used to solve the problem of the credit crunch within an organization, although the application of flexible loan regulations could have been applied within the country so as to solve the problem of the credit crunch (Campbell S. 2008).

It was noted that the financial institutions and the industry leaders were not in a position to eliminate poverty due to United States problems such as the sub-prime loans fiasco that were coupled by currency fluctuations ,ever increasing oil prices that sent shock waves across the international markets. There were some credit crunch causalities in the global market such as the United States business class airline Eos that became bankrupt in the year 2008 and also a Silver jet United Kingdom all business airline that operated its flights in between London Luton and Newark Liberty International Airport in the United States and Dubai International airport that was in the United Arabs Emirates businesses that collapsed at that time due to financial difficulties.

The reasons why the credit crunch occurred was because of the increased perception of risk that the lenders had , imposition of credit controls and the sharp restriction imposed when supplying to the economy. The other reason was that the risk perception was high due to the credit crunch since the lenders could not easily establish whether borrower were creditworthy enough to be trusted to repay back their loans on time. (Shailaja and Manoj, K. 2007).

The reasons why the lenders may doubt the creditworthiness of their lenders is that they may not be certain whether they can get back their money within a stipulated period of time.For instance the subprime mortgages in the United states were fearful since their lenders were not sure whether borrowers would honor their obligations, later on banks stated that they experienced the worst credit crunch in the inter-bank markets. Credit crunch not only affected the borrower and lenders of money , but also the financial markets and the economy since there was slow implementation of new investment policies that could generate income for the country organizations therefore the needs and desires of the consumer could not be easily fulfilled within the stipulated period of time (Campbell S. 2008).

International credit regulation

These are the International relations that are usually regulated by the normative acts of certain states such as the Custom and the practices in the business dealings. The Uniform Customs and Practice is used to serve as the relevant and recognized national legislation that most countries in the world use so as to facilitate quick credit payment process. The international relations define what is credit and also determines the type, run, and means of its application, obligation and the liabilities of the banks that offer services to the customers.

Uniform Customs Practice shows the documents that are presented in form of credit as well as the rules of their presentation that are important when carrying out business transactions. If a bank applies it then its considered to be following the provisions that have been stipulated by the bankers and the clients.

Consumer credit regulations was implemented due to the fact that there was increased demand for consumer credit since the number of the credit producers and credit products were increasing in the market.It was noted that its growth was continuing rapidly and this posed a great challenge to the policymakers, industry participants and the consumer organization to implement it so as to meet the demands of the customers. The biggest challenges that the organization faced was that of ensuring that the legislative and regulatory frameworks were supplied with the relevant information and were adequate to run the operations of the organizations effectively (Howell, N. and Hughes, J. 2005).

The temporary foreign tax credit regulation was issued on the basis of a structured passive investment arrangement, regulations compulsory for the payment of foreign taxes and for treating taxes as been attributable to certain highly structures arrangements that are not compulsory. The temporary foreign tax credit regulations do not allow the entities that are owned 80% by the United States Corporation, citizens or the resident aliens to apply for the transactions, but they allow transaction that have existed between entities and those that are related by sharing ownership or those owned by the foreign persons or for parties that were related to applied by the concerned parties.

It is important for organization to carry out extensive research concerning the best international credit practices that should be applied within an organization so the companies can generate the revenue that can enhance its growth and development.

References

Aizenman ,J. and Marion, N. 2008-Reserve Uncertainty and the Supply of International Credit. Web.

American Metro Bank, 2004, Remarks by Man VIen. Presented at the Federal Reserve Bank of Chicagos Financial Access for Immigrants Conference.

Campbell S. (2008). The Credit Crunch and Me 1: Is it going to hit events in the Gulf? 0 Comment(s) +0100 GMT star full star full star half star blank star blank.

CIE (Centre for International Economics), (2000). Scoping the business of SDI Development. Department of Trade and Industry, Competition and Consumer

Policy Directorate (2003) Comparative Study on Consumer Policy Regimes: UK. Web.

Credit Crunch in a Model of Financial Intermediation and Occupational Choice.

International Credit History Products & Services International Credit History. Web.

James, B.2003, 3,000 Reasons A Day Why Immigrants Pose Opportunity. American Banker 168:147.

Howell, N. and Hughes, J. (2005) Centre for Credit and Consumer Law Consumer credit Regulation: an international overview Background Paper. Web.

Shailaja and Manoj, K. 2007. Ask Mint | what causes credit crunch in financial markets? Credit crunch is a situation in which the wheel of lending gets jammed leading to A sudden decline in lending, that is, credit Real Simple |. Singhted: 12:27 AM IST

Zambakhidze, T. (2002). Georgian Law Review 5-1Documentary Credit  An Advantageous Form of International Payment. Web.

Holcombe, R.l G (2000).. Public Finance. New York: Academic Press.

Education plays a significant role in widening individuals abilities to engage in productive work and develop their countries. However, students are not able to pay school fees since the education costs have gone beyond their payment abilities. This has necessitated governments and other organizations to help students complete their studies. Consequently, students carry loans on their backs, which accumulate as they continue looking for viable employment. This hinders their chances of becoming regular employees in various organizations. However, students can raise their credit scores in various ways and increase their chances of getting permanent jobs.

As the human resource manager, I will first explain to intern students the meaning of a credit score that refers to an individuals ability to pay loans and maintain a stable and flexible financial record with various institutions. This score enables them to know their abilities to acquire loans and other financial services from banks and other institutions. Employees with high credit scores have high abilities to repay their loans; therefore, they have few loans and higher abilities to access other loans from banks. I will advise them to check their credit scores using FICO Company services. This company calculates individuals abilities to repay loans and base their analysis on their incomes, expenses, and past credit records.

However, I will discourage them from misconceptions regarding their credit scores that make them reluctant to apply for loans or request new credit cards. As the human resource manager of a regional bank, I will inform intern students that a majority of the population has a poor credit history due to their inabilities to pay school fees. Without government loans, they will not undertake their courses. Therefore, after graduation, they already have deficits in their accounts. However, all institutions have information regarding students loans, and this should not threaten them. This offers them the advantage of having a loan history. This means the government and other banking institutions have hopes these students will repay their loans after graduating and securing a well-paying job.

As the human resource manager, I will advise intern students to know that their initial credit scores will only affect them if they do not work hard to improve them. This is an essential key that determines their credit scores since it shows they are working hard to repay their debts. Therefore, they should not fear that their poor credit scores will affect their entire financial lives. Instead, they should struggle to repay their loans to show effort in improving their scores. Most institutions do not lay much emphasis on how fast an individual pays debts, but rather on their abilities and efforts to pay their past loans. I will inform them that most institutions consider peoples recent financial abilities when evaluating their credit scores. It does not mean that if they have loans they have poor credit scores.

Additionally, a low score is not a premise for denying students access to other financial services. A person can have a low score yet high abilities to access other monetary services like credit cards and bank loans. Credit scores base their results on recent credit records and present incomes, expenses and investments. Therefore, I will advise them that having a students loan does not hinder their access to other financial services. I will encourage them to engage in other activities that can help improve their credit scores while at school and after completion.

I will advise them to avoid applying for multiple credit cards since this may be perceived as a state of desperation. In most cases, people experiencing high financial risks tend to have multiple credit cards to cover their risks. Secondly, I will advise them to participate in part time activities that will earn them income while studying. They will lower their dependency on education loans as well as increase their incomes. Students have less than four class-time hours every day and thus should use their free time on seeking evening and part time employments. I will advise them against discriminating jobs since most of them ignore casual and part time jobs without knowing that their loans are accumulating interests.

However, I will advise students to take jobs at their disposals to realize that the little income generated reduces their loans and thus become key steps in improving their credit scores. By the time, they land on their dream jobs they have a reputable repayment record as well as an improved credit score. On the other hand, this increases their work experience and offers them higher permanent employment chances.

A credit score is an index used to determine an individuals financial position within a period. For that reason, it keeps changing depending on peoples efforts to acquire more assets and income increments. Eventually, they discover they have few years to complete paying their loans. Students should focus on getting employments after graduating and start paying their loans to improve their credit scores as well as increase their employment chances.

Introduction

The business environment is characterised by various risks that may handicap an organization. Organizations extending credit to its clients expose themselves to credit risks. Such clients (especially the first timers) may not make the necessary repayments and this would count as losses to the company.

Therefore, organizations need to have information about the ability of their clients to make repayments. AIG saw the opportunity to provide insurance services by covering for credit risks, identity theft and other risks (Oz, 2008).

Overview

The American International Group, Inc. (AIG) saw an opportunity to make business by providing companies with the opportunity to minimize credit risks. The company understood the risks involved in extending credit to clients. Clients who use the companys services for the first time are strangers to the company.

Therefore, these companies may not be certain that the clients would make repayments after seeking service. Therefore, AIG decided to provide insurance and financial services to organizations that were seeking to reduce the risks involved in doing business.

With its website, one can receive real-time financial information about companies seeking to purchase commodities and services from the organizations subscribers. The companys clients only need to log in and follow up on potential customers. They may monitor their purchase power and repayment capabilities in order to make wise decisions while doing business with them.

This way, the clients covered by AIG can be aware of the financial standing of various corporations around the world. Clients of AIG also get additional services in that they can assess risk variables as they relate to specific countries. Each country has specific and unique risk factors.

One example includes the constitutional changes that may alter trade laws. This may affect the sustainability of certain companies. Another factor includes political instability, which may greatly affect the financial standing of businesses.

AIGs system was initially made in-house. However, it later proved expensive and time-consuming since various changes had to be made as soon as algorithms changed. Programmers spent a lot of time making these changes in order to adapt to the different countries since each country had different parameters.

One of the managers of the company, Paul Narayanan, saw the need for a solution to this issue in order to help reduce the hassle involved while making these important changes. Therefore, the company resorted to purchasing a financial risk DSS from an external firm. The DSS was referred to as Blaze Advisor. This system proved more effective and did not require the intervention of programmers.

Problem Definition

The business environment is very unpredictable for companies. Companies that need to extend credit to their customers may not be certain of whether the customers would make repayments. This is especially riskiest if the clients involved have not done business with the company in the past.

Not having previous experience with a client is risky since the company would not be guaranteed of payment. This, in turn, exposes the company to unforeseen losses and possibility of being bankrupt.

Other large corporations that attempt to make their own risk assessment using experts and other external consultants do this using many of their resources. Outsourcing such procedures to consultants may be very costly to the company. This explain why medium-sized corporations find it difficult assessing the risk involved in growing their business at a global range.

Therefore, a solution for reducing exposure to credit risk, identity theft, internet security threats and various other risks is required by such companies.

In addition to this, the cost of assessing risk should be reasonable enough for the business since businesses are there to make profits and make business sustainable. Organizations usually like to know their customers and understand their ability to pay for the commodities and services provided.

Recommendations

Fabozzi (2010) argued that companies and investors face various types of risks. One of the major risks mentioned was credit risk. One of the forms of these risks was whereby the clients failed to oblige with respect to the making repayments in time. Therefore, financial companies relied on the clients credit ratings while gauging their potentials.

According to Fabozzi, rating agencies (such as AIG) were responsible for providing credit default risk. These are the risks that are faced when investing in a particular venture of debt security. Other forms of this risk, as proposed by Fabozzi, include the downgrade risks and credit spread risks.

Fabozzi suggested that organizations should assess the creditworthiness of borrowers (clients). This could be done by assessing the quality of the borrowers and their ability to make the necessary repayments. One way of doing this is by analyzing the clients financial statement.

AIG did exactly this by providing information about the payment history of the company involved. Shimko (2008) also explained the importance of using credit insurance and other forms of financial protection agencies to receive financial risk mitigation.

Conclusion

In an attempt to minimize credit risks, companies have resorted to insurance companies such as AIG. They seek to understand their clients more so that they may be able to venture in the global arena as they grow their businesses.

AIG provides information about the customers payment histories and financial standing so that its client may make wise business decisions. AIGs services are helpful and have been endorsed by the U.S. Chambers of Commerce (Oz, 2008).

References

Fabozzi, F. (2010). Minimizing credit risk. QFINANCE, 1-5.

Oz, E. (2008). Management Information Systems (6th ed.). New York: Course Technology Ptr.

Shimko, D. (2008). Managing counterparty credit risk. QFINANCE, 1-5.

Credit Risk enables banks and bondholders to recover some portion of their bond value when there is a default. Different seniority bonds are issued by the asset value, for example, secured bonds are issued on the value of the land or building, and in case they are not paid, the bondholder can claim security ownership, however, in the event of typical bankruptcy unsecured bonds uphold the highest priority.

The more senior the bondholder, the more serious would be the recovery. Recovery in terms of credit requires several years liquidation before a full payout to bondholders and bank lenders. Restructuring takes some time to recover therefore recovery values are measured first from the market price of a bond after a default. However measuring recovery risk this way is not always accurate for the lesser liquid bonds and bank loans are, the lesser would be the risk of default market.

Credit bonds are secured through credit ratings which companies like Moodys, Standard and Poors, and Fitch-IBCA perform by evaluating the financial strength of the borrower. Different ratings like BBB, Baa, Ba, and BB determine the ratings for which the bonds are issued differentiate between higher and lower ratings. On the other hand, banks secure their loans through internal ratings which vary from numeric rate 5 to 20. Credit rating agencies issue external ratings which are not adjustable unless and until there is a permanent amelioration in terms of financial stability of the company, whereas banks internal ratings are easily adjustable to detect and demonstrate default over the period.

Credit Risk concerning Interests and Bonds

Bank assets are dependant upon the market interest rates and are affected by the hedging interest rates, for which to measure we must analyze the relationship between interest rate and securities. Bonds interest rates are measured through coupon rate, yield to maturity rate, and zero-coupon yield method. A coupon rate is used whenever there is a need to signify the relationship between interest payment and the bonds face value. Though unable to find bond value based on the market rate, the market interest rate evaluates the face value of the bond. Credit risk is measured through rating transactions by which a bond is rated by migrating from one class to another. Interest rate risk is usually measured through duration analysis, interest rate gap analysis, and value-at-risk (VAR).

Duration Analysis in context with Scenario Analysis

Duration changes whenever there is some risk factor in interest rates fluctuation. Risk management is best measured by sensitivity tools as such tools or measures allow a portfolio manager to analyze any upcoming scenario in terms of interest rates fluctuations. For example the impact of the rise or fall of interest rate on an individuals portfolio and so on. For this reason, risk managers keep a close eye even on minor rises and falls of interest rates and chose such scenarios for interest rates that are easier to detect changes in fixed portfolios.

The goal of investors is to maximize the expected return on wealth and minimize wealth risk. To achieve this goal, it is useful to consider that the expected return on wealth is a linear function of the expected returns on the individual assets in the investors portfolio, the goal of maximizing expected returns on wealth can be achieved by investing in assets with high expected returns. The standard deviation of return on wealth is not, however, a linear function of the standard deviations of the returns on the assets in the portfolio.

Instead, the standard deviation of wealth is less than the average standard deviation of the assets in which the wealth is invested, as long as the returns on all the investments held are not perfectly positively correlated with one another; i.e., as long as the return on at least one asset is not always proportional to that of all the other assets. Investment into more than one asset whose returns are not perfectly correlated with the returns on other assets held is called diversification.

Value-at-risk Analysis

While using the VAR equation to determine the amount to put into the risky portfolio still leaves a 0.1% chance of losing more than H% of an investors wealth. However, to put the possibility of such an unlikely disaster in perspective, it can be noted that the likelihood of a far worse disaster of dying in an auto accident in the next 5 years in the U.S. is about as high. Statistics can also be used to develop confidence intervals for returns under different distributional assumptions.

For instance, in a 1997 study, Fong and Vasicek developed a model for determining the maximum amount that can be lost (under specified confidence intervals) for a portfolio with a skewed distribution. Models that attempt to measure the maximum feasible loss to a portfolio are widely referred to as estimating value at risk (VAR). Since even very complex assumptions on the distribution of asset returns cannot fully characterize all the future possible events that can occur, many advocates that VAR analysis should be supplemented by stress tests that simulate the prices of assets or entire portfolios under various extreme conditions. Only thereby can the complete risk of a portfolio be evaluated.

Because investors often have more complex, multiperiod financial problems than a 1-period VAR can solve, more involved financial solutions must frequently be found for determining the optimal amount of leverage. Although statistical concepts similar to those used in the previous subsection may be applied to such problems, the multiperiod complexity typically necessitates computerization. An example of computerized multiperiod portfolio analysis is the SIA software that not only evaluates multiperiod portfolio situations but also values individual assets in the portfolio.

Long-term multi-period analysis of portfolios must take into consideration one very important statistical property. In particular, over the long term, higher expected returns sometimes more than offset higher standard deviations when returns are compounded over long periods. As a result, portfolios with higher expected returns are sometimes less risky long-term despite having higher volatility over short horizons. The reason is that a volatile portfolio with a higher mean expected return can have a range of feasible returns that are higher under virtually all cases than for a stable portfolio with lower expected returns (i.e., the difference in the means of the return distributions can be so high as to exceed a feasible number of large standard deviations away from the mean). When the returns on one portfolio are greater or equal to the returns on another portfolio in all feasible scenarios, the superior portfolio is said to exhibit stochastic dominance.

Portfolios Risk and Return

Portfolios  the combination of two or more securities or assets is different from single investments which are held in isolation. Investors rarely place their entire wealth into a single asset or investment and prefer to construct a portfolio or group of investments. Portfolios return and risk are measured through a weighted average of the expected returns of the securities that comprise that portfolio and whose weights are equal to the proportion of total funds invested in each security.

Portfolio risk can be minimized by combining various securities that are not necessarily correlated. The process continues as portfolio risk stocks combine to form equally weighted portfolios and with a single stock the portfolio risk acts as the standard deviation of that one stock. As soon as the randomly selected stocks held in the portfolio increase, the total risk of the portfolio reduces.

A portfolio asset allocation that emphasizes money market securities is most desirable when both common stock and long-term bond prices are falling as most of the investors do not want to be in common stocks or long-term bonds in later stages of portfolio assets. Both securities lose value at their most rapid rate in these periods of the economic/stock price cycle. Money market securities offer the only positive return to be acquired over this relatively short span in the cycle where such securities do not lose value and still have a positive return. Whereas other common stocks and long-term bonds have negative returns.

The lower interest rates reflect slowing and/or declining economic activity, higher Fed money supply, lower consumer and business demand for money, and less inflation. Lower-quality bonds may not feel the upward price pressure, therefore the higher-default lower quality risk bonds are viewed with apprehension. The default risk of such lower quality risk bonds is often underappreciated by investors during the economic expansion of the Initial Stages in the economic/stock price cycle. Their default risk is often overappreciated with the prices of lower-quality bonds continue to decline even after the incipient earnings recovery and despite lower interest rates. Bond investors remain fearful these issuers may not revive in time, if at all, to meet looming debt service as the price reaction of lower-quality bonds varies directly with the severity of their default risk (Bolten, 2000, p. 55).

Interest Rate Gap Analysis

As commercial banks are mostly concerned by cash flows and not by the standard tools like Value-at-Risk, therefore the impact of interest rate changes on the bank is based on accrual income. For this reason, interest rate analysis is used after measuring the sensitivity of financial-based institution measures annually, quarterly and monthly income statements according to changes in interest rates. The banking interest rate in contrast to the efficient markets theory is risky and therefore limited. The interest rate gap model relies on the availability of close substitutes of income statements for securities whose price is potentially affected by noise trading.

Interest Rate Gap Analysis Consideration

The gap analysis in context with commercial banks considers the following:

1. The effect of point rise on the interest rate by net interest income after a specific period.
2. Interest rate scenario and its usage in gap analysis.
3. Scenarios where interest rates are below market rates.
4. Credit card receivables that not always move along with the market rates.
5. Portfolios on fixed-rate mortgages and equity holdings.

Example

In the early 1990s, ECA along with the U.S. Eximbank adopted a new method of assessing risks in the corporate bond sector and establishing reserves, called the market yield approach. Based upon the risk evaluation of foreign countries by private capital markets, this method provided the opportunity of analyzing various yields of non-payment probabilities (Gianturco, 2001, p. 143). Eximbank looks specifically at the yields on different sovereign country bonds and how Moodys and Standard & Poor (S&P) rate those bonds. Some of Eximbanks categories had no counterpart in Moodys and S&P because they were very risky markets where international bond issues are not usually possible (Gianturco, 2001, p. 143).

The main factor behind quantifying such risks starts with the time and credibility issues which are addressed through pre-commitments and graduated responses with the possibility of overrides. In this case, many financial analysts believe that general policy like Structured Early Intervention and Resolution Programs makes a difference in pre-determining interventions. However, there is no sign of placing a particular framework through which banks or financial institutions may categorize them as magical capital ratio. On the other hand, there is a threat of increasing potential danger as the capital ratio declines.

Financials like Goldstein and Turner (1996) argued that there is always a threat to commercial banks from that of private bondholders that they are likely to impose on banks in the absence of government insurance or guarantees (Brealey et al, 2001, p. 130).

Hedging against Interest Rate Risk

Low-cost hedging financial risks necessarily impose a restriction on the integrands of the time integrals and stochastic integrals which says that although they can vary randomly, they can do so only by depending at each point in time on information that is available at that time. Virtually all of the processes of hedging, including price processes, interest rate processes, and trading strategies, have to satisfy this restriction. So it is necessary to model the information available in the economy at each point which in the real world causes interest rates to take only positive values, although in some models they follow processes that can take negative values.

In the language of Interest, outstanding is a stock variable displaying the state of affairs at a moment, while issuance and trading are flow variables displaying activity during a period. These variables are larger than that of the underlying banking world as it is customary to give global exports as a yardstick. It was $6.3tr in 2000, a mere 6.3 percent of the financial assets and still less of equity trading, not to speak of major interbank payments flows, roughly $1,400tr in 1999, or the $1.2tr of daily foreign exchange trading in April 2001.

The scale of such activity based upon hedging easily raises negative comments about a financial economy that fears the destabilizing potential of financial markets. The professional bankers are well aware of most of the activity that originates from portfolio trimming by institutional investors and the balancing of books by bankers (Laulajainen, 2003, p. 93).

Bankers, therefore, follow safety rules set by regulators and the accounting community, on the other hand, institutional investors also have guidelines to follow, to beat an equity index or outperform peers, for example. The financials consider it risky to wait for the stabilization of constantly changing markets, and expensive to implement large corrections when they have become necessary.

In this context it is much better to adjust the portfolio continuously, this escorts to very large trading figures. The hedging element takes place not in situations where trading originates from trimming but a hedging element is there where there is a desire to insulate core activity from market oscillation. To achieve such risk minimization through hedging, counterparts are needed where speculators who have the insight and courage to take an opposite view of the markets development and shoulder the risk against a fee.

Works Cited

Bolten E. Steven, (2000) Stock Market Cycles: A Practical Explanation: Quorum Books: Westport, CT.

Brealey A. Richard, Alastair Clark, Charles Goodhart, Juliette Healey, Glenn Hoggarth, David T. Llewellyn, Chang Shu, Peter Sinclair & Farouk Soussa. (2001) Financial Stability and Central Banks: A Global Perspective: Routledge: London.

Gianturco E. Delio, (2001) Export Credit Agencies: The Unsung Giants of International Trade and Finance: Quorum Books: Westport, CT.

Laulajainen Risto, (2003) Financial Geography: A Bankers View: Routledge: New York.

Murphy Austin, (2000) Scientific Investment Analysis: Quorum Books: Westport, CT.

Yago Glenn & Susanne Trimbath, (2003) Beyond Junk Bonds: Expanding High Yield Markets: Oxford University Press: New York.

Executive Summary

The use of credit by consumers necessitates the use of an approval process by banks to vet suitable candidates to avert lending risks. The major risks a bank deals with when forwarding credit facilities is fraud and default. Banks use credit rating as the first line of defence against credit and fraud associated risks. The risks arise out of information accuracy and procedural challenges.

The use of decision support systems reduces the risks associated with lending. They rely on various disciplines to predict human behaviour and tendencies. Making them web-based expands the scope of the database from a location unit to a global pool. Different Artificial Intelligence (AI) techniques provide the tools required to improve the credit approval process. They include Bayesian Networks, Case-Based Reasoning, Rule-Based Reasoning, and Artificial Neural Networks.

Each of them provides different modes of data acquisition and processing making their input unique to the credit approval process. Bayesian systems provide the best means of background screening to check whether a data set conforms to a certain pattern. Case-Based Reasoning and Rule-Based Reasoning have learning abilities making them useful for trend analysis. Artificial Neural Networks can compare large data sets making them useful for massive fraud detection.

The use of hybrid intelligent systems makes available the best opportunity for alleviating lending risks faced by banks.

Introduction

Many consumers take advantage of credit facilities offered by banks to meet their objectives. To access credit, each prospective borrower goes through a credit approval process. Credit approval is the process a business or an individual undergoes to become eligible for a loan or to pay for goods and services over an extended period of time (Leotta, 2011). Banks use various techniques to screen applicants before they allow them to utilize their credit facilities. The efficacy of the tools and techniques used to screen applicants constitute a significant risk to the banks.

Businesses and individuals that are not creditworthy may receive the nod to utilize credit. This is the source of major problems for banks leading to bad debt, default on payments, and high cost of litigation. Information technology has the potential of enhancing the effectiveness of the credit approval process to reduce the risks associated with the provision of credit. As Hill Associates (2002) state, telecommunications technology perhaps more than any other technology continually shapes the very fabric of our global society.

Problem Identification and Analysis

Banks are major providers of credit. This exposes them to various risks associated with lending. These risks culminate in default on loan repayments and fraud-related losses. To mitigate the risks, banks use certain procedures for credit approval, meant to detect fraudulent applications and to foresee the possibility of default. The procedures vary from institution to institution and from product to product, because of the diverse nature of borrowers and the products they require. Normally, the procedures revolve around the applicants background and their credit history.

Banks rely on credit scores provided by credit rating agencies as a basic form of screening. Evans (2011) feels that a persons basic credit score tell them very little and is, therefore, useless. The procedures reveal factual inconsistencies in the application form when compared with data from other sources such as the credit reference bureaus. They also use credit history and compare an applicants creditworthiness against their current ability to repay. In light of developments in the information technology sector, banks have the potential of improving their credit approval process by using web-based decision support systems.

There are two areas where there are problems in the credit rating process. They are the quality and accuracy of the information availed and procedural challenges. Information related problems arise from the multi-agency nature of data collection for the determination of creditworthiness, and erroneous information provided fraudulently or involuntarily. The information banks use in the credit approval process comes from many sources. They include; the applicant, credit rating agencies, pools of shared information from other banks and lenders, and internally generated sources.

Banks increasingly use data mining to analyze great quantities of information, to get a feel of trends on potential new customers and fraud patterns (Leotta, 2011). This shows that there is a strong drive towards computerization of the credit approval process. Credit approval has its basis on trust, which a computer cannot measure. Computerised systems rely on ratios and other documented patterns such as default rate on past loans to establishing a credit history. In the UK, banks rely on several sources to determine client credit scores.

They include the application form a client fills, personal history with the bank and files obtained from at least one of the three credit rating agencies. These agencies compile data obtained from the electoral roll containing details of residence, records from courts, records other lenders have based on past applications to them, fraud reports, and data from accounts held by other banks, utility providers, and other organizations. The interagency nature of the information used makes it easier to arrive at a consistent view of a creditor. However, it presents reliability problems whenever any of the agencies involved have erroneous information in its database.

Leotta (2011) states, information provided by credit bureaus is often incorrect. In a National Association of Independent Credit Reporting Agencies survey conducted in 1994, nineteen per cent of credit reports were found to contain outdated information, and forty-four per cent were found to lack information regarding current balances and payments on existing loans (Leotta, 2011).

The second major challenge is fraud and dormant information. This challenge in the credit approval process arises from the feeding of wrong information into the system. Fraud misleads banks into providing credit facilities for undeserving entities. While fraud is voluntary, dormant contracts such as mobile phone contracts that are no longer in use, but still listed as active, cause involuntary misinformation to credit officers. They present the borrower as more credit laden than they are. Credit agreements no longer in use contribute to a borrowers credit history, so long as they are active. This is why Evans (2011) advises lenders to close down any credit agreements no longer in use.

At the procedural stage, credit officers use the information provided to calculate the credit score of the applicant. If the score is satisfactory, they forward the credit facility. At first, it may seem like a straightforward process. It is more complicated than that because there is no standardized format for determining credit ratings. Lewis (2010) states, Scoring systems are never published, and differ from lender-to-lender and product-to-product.

The Oesterreichische Nationalbank (2004) identifies substantive errors and procedural errors as the two types of errors incumbent on the credit approval process. Substantive errors occur when there is an erroneous credit assessment despite full disclosure. Procedural errors, on the other hand, come about because of a lapse in the procedure, usually by the credit officers. Reasons for this type of error include incompetence, incorrect application of the credit approval process and negligent or intentional misconduct by officers.

One additional problem with credit approvals is what Lewis (2010) calls the rejection spiral. Here, an applicant gets a series of rejections on credit applications, and after a few of them, the rest of the institutions simply reject the application based on the applicants rejection history. The basis for the initial rejection may be valid. It could be an unresolved error. This means that banks lose on good business while lenders who need the credit and maybe qualified loose on the opportunity to get credit. This does not benefit any party.

The credit approval process is a decision making process. Therefore, problems associated with the credit approval process are decision-making problems. The basic problem of the credit approval process is gathering accurate information, and processing that information as effectively as possible to determine the credit risk associated with each application. The solution to this problem lies in decision support systems.

The problem of the collection of accurate information spans the agencies involved in collecting it in the first place, and then all the people and processes involved in processing the information. A solution to it will aim at more accurate data collection and more accurate data processing procedures. Stated more succinctly, The quality of credit approval depends on two factors, i.e. a transparent comprehensive presentation of the risks when granting loan on the one hand, and an adequate assessment of these risks on the other (Oesterreichische Nationalbank, 2004)].

Theoretical and Conceptual Framework for Web-Based Decision Support

Decision support systems are interactive, conversational computer systems supporting decision makers (Jarvis, 1976). A web-based decision support system utilizes internet capabilities to provide a platform for decision making from any location on earth provided there is someone who can provide the information required for its operation and issue instructions necessary for the system to perform its functions. This is because decision support systems rely heavily on human intuition, judgment, and experience as an integral part of the decision process (Jarvis, 1976).

All decision support systems rely on management science, computer science, and behavioural science as fundamental knowledge areas for the development of solution frameworks. What a decision support system does is that it retrieves information from a large data warehouse, analyzes it by user specifications, then publishes the results in a format that users can readily understand and use (Zopounidis & Doumpos, 2011). Using the internet as the platform promises worldwide access to different pools of information.

This is exactly what banks need to improve their decision-making process when conducting credit evaluations. Currently, banks, because of relying on credit rating agencies for background checks, do not have any information relating to parking tickets, criminal record, child support information, previously declined applications, defaults and missed payments that are more than six years old. This extra pool of information is accessible from internet sources and may serve to improve the quality of information that banks use in the credit approval process. After all, decision support systems rely on the accuracy of information to provide useful results.

The form a typical decision support system take includes, the database, the model base, and the user interface (Zopounidis & Doumpos, 2011). For a web-based decision support system, the database in use exceeds a single computer or even a Local Area Network (LAN). It is a worldwide database accessed through many servers in diverse locations. The model base includes the methods and techniques applied to execute the functions of the decision support system. It is responsible for, performing all tasks that are related to model management, such as model development, updates, storage, and retrieval (Zopounidis & Doumpos, 2011). The user interface completes the connection between the database and the model base, by giving the user a platform from which to take advantage of the systems capabilities.

The most common AI tools used for decision support are Bayesian Networks, Artificial Neural Networks, Case-Based Reasoning, and Rule-Based Systems (Burnside & Kahn, 2004). Bayesian Networks consist of a structure, probabilities, and an inference logarithm as the basis for its operations. The structure consists of a set of nodes that represents the relationships between data sets. The determination of the probabilities involves the use of expert opinion and takes time to develop. Once determined, an inference algorithm based on the data set provided forms with the basis of the network.

The developed system can handle fresh data very quickly giving inferences on what the data means, but cannot handle new variables such as emerging trends. This makes Bayesian systems suitable for well-established products with established trends patterns. It is good at inference as an AI system, but cannot learn. Artificial Neural Networks (ANN) provides another framework for the development of a web-based decision support system for use in credit approval. They use neural networks and they are very useful for deriving relationships between various data sets. They would be invaluable for fraud detection because they can quickly show the relationships between different applicants and application forms, which can escape the human eye.

They also provide a means of discovering emerging patterns in the credit market. The third artificial intelligence technique available for consideration is Case-Based Reasoning (CBR). Case-Based Reasoning uses stored data to analyze input data by comparing the features of the new input with what the database holds. The database is the source of learning for the system. This technique provides a way of checking whether a new application form has elements of risk or opportunity that the bank has dealt with before. The major attraction in the Case-Based Reasoning system is that it can learn by the addition of new data to the old database.

The final artificial intelligence technique available for use in a web-based decision support system is the Rule-Based System. This system consists of a knowledge base in the form of production (IF_THEN) rules, an inference engine (an algorithm used to apply those rules), and an explanation method that allows the user to interact with the knowledge base (Burnside & Kahn, 2004). It uses forward chaining, which starts from facts and works towards an inference, and back chaining, that moves from an inferred position to generate the causative facts.

This system is ideal for determining which initial conditions such as application information will result in a successful credit relationship. Through back chaining, the system can infer the desired starting conditions for the outcome a bank desires. Such information feeds the marketing effort. The rules require expert development based on the experience of people who understand the workings of the credit market.

After the development of the system, the rest of the infrastructure remains standard for internet support. They include servers, ports, routers, IPs, gateways, and pathways.

Relevant Decision Making Support and AI Techniques

We have outlined two general classes of problems. One class is those associated with data collection. They have to do with comprehensiveness and accuracy. The second class is the procedural issues in handling applications, based on the information collected. The solution proposed encompasses a large data acquisition and processing capacity on one hand, and an enhanced information processing system using AI decision support systems for the credit officers.

The internet houses loads of data on individuals. It is possible to gather information on a potential client, using search engines. Using similar algorithms, banks, either alone or in tandem with others have the opportunity of developing their search engines to provide them with information on all aspects of a clients application. What they miss from credit rating agencies, they can acquire on their own. The essential characteristics include an algorithmic arrangement that filters information retaining what the banks need to develop an opinion on someones credit habits. There are certain problems though such as people with multiple names, fake online identities, or simply, online absence. Essential background information such as crime data is easier to find because third parties generate them. While not entirely reliable, this type of information will provide an additional layer of security checks and will provide a basis for raising red flags on certain persons.

The second element of the proposed solution is the development of a robust decision support system for use by credit officers. No doubt, they already utilize decision support systems but they can do with improvements. The proposed system reduces human error in deciding to forward credit by detecting inconsistencies between a decision made and earlier ones, with the gap showing a possible deviation from the norm. Such a system would rely on Case-Based Reasoning, which does a good job at detecting deviation from logged experiences.

Combined with Artificial Neural Networks, the power to detect fraudulent applications will increase tremendously. While Case-Based Reasoning systems provide a comparison between specific cases against previous ones, Artificial Neural Networks provides comparisons with whole data sets, thereby making it possible to detect massive fraud targeted at the institution. The systems primary contribution would be to screen new applications against the past application to determine similarities with fraudulent applications discovered in the past.

The third desirable element is the capacity to predict the possibility of a good credit relationship based on preferred initial conditions. Rule-Based Systems have this capacity. They will use the ruleset to compare an applicants credentials with those that match ideal credit clients. This makes the banks better equipped to decide whether the business promised is worth the risk. This proposed system promises to reduce human errors in the credit approval process and providing decision-makers with different comparisons to aid their decision.

The fourth element of the system is an online component that allows for counterchecking with other online sources. This will provide banks with much more power than presently possible by only relying on credit rating agencies. Bayesian systems will best fit as frontline defences while conducting background searches on clients. They best capture standard issues and will provide the best means for prequalification as a first stage in determining which applications to process.

A hybrid system incorporating the four elements above will improve the screening process using Artificial intelligence techniques and will reduce the risks associated with lending. As Servigny and Renault (2004) attest, tools and techniques for managing credit risk have become both increasingly sophisticated and more readily available. The system will provide banks with greater autonomy when deciding on potential clients and will improve the accuracy of the information they have at their disposal. It allows banks to develop their standards relating to who qualifies to be a lender, not necessarily based on the opinion of the credit rating agencies.

It reduces the errors that a credit officer may make, thereby increasing the confidence in decisions made by them. This risk reduction promises better business for the banks and better service for potential customers including alleviating frustrating eventualities such as the rejection spiral. The process will also free banks from the traditional fixation on stability characterized by ownership of fixed telephone lines rather than mobile lines, long-term employment history, staying in one place for long preferably in an owned house and a long-term relationship with a single bank. (Evans, 2011). People are increasingly mobile, yet their presence on the internet makes them static.

Recommendations and Conclusions

For banks to solve their credit rating approval problems, they have the opportunity of utilizing AI tools and techniques.

1. To solve application form and information quality-related problems, the use of Bayesian systems running on a web-based platform holds the best promise. Information required for decision-making must be, accurate relevant and complete (Power, 2002).
2. The identification of trends for fraud prevention Rule-Based reasoning and Case-Based reasoning provides the best opportunities for flagging risky applicants and risky trends.
3. Also, Artificial Neural networks provide the opportunity for banks to detect large-scale fraud in the applications they receive.

A hybrid system is the best way to go since some of the techniques provide information relating to large data sets while others explore individual data sets to provide information on risky accounts.

Reference List

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Lewis, M., 2010. Credit Rating: How it Works and How to Improve it.. Web.

Oesterreichische Nationalbank, 2004. Guidelines on Credit Risk Management: Credit Approval Process and Credit Risk Management. Vienna: OeNB Printing Office.

Power, D.J., 2002. Decision Support Systems: Concepts and Resources for Managers. Westport CT: Greenwood Publishing Group.

Servigny, A. & Renault, O., 2004. Measuring and Managing Credit Risk. Illustrated ed. New York, NY: McGraw-Hill Professional.

Zopounidis, C. & Doumpos, M., 2011. Decision Support Systems. Web.