In Customers Businesses Find Real Asset

Nov 12 , 2022
By Asseged G. Medhin ( Asseged G.Medhin, deputy CEO of Global Insurance Company. )

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Business professionals are familiar with "credit" and "liability." Those in finance, economics, and engineering are among the few who furnish their performance report using these terms. Even political analysts use the word "liability" often lately.

However, I would like to use these terms from business clients' perspectives, whose feedbacks urge organisations to claim credit from them without liability. Not long ago, to set a strategy that must persevere through the ever-growing chaos, envisioning an opportunity in the market, making an offer, and promoting the proposal to earn a profit was enough.

Unfortunately, life is not that simple. Things perpetually change through time, and the complexity is normalised. We ignored the fact of the craziness that shapes business reality, diminishes opportunity or excessively consumes resources. Being responsive to customers may not be fashionable, but it should not be wrongly perceived and practised for the order of the day. It is inevitable.

I believe that the 21st Century customers are the facilities of business. They are multi-business oriented and seek an interactive, full-service workable system precision with the flexibility to adapt to constant changes.

Today's financial system is more than just the institutions facilitating payments and extending credit. These requirements make business life complex. In this sense, the central nervous system of a market economy demands more advanced credit than ever.

The financial sector contains several separate, though interdependent, components that are essential to its effectiveness. One is the set of intermediaries, such as banks and insurance companies, which act as principals in assuming liabilities and acquiring claims.

The second is the markets in which shares are exchanged. These include equity, fixed-interest securities, exchanges or over-the-counter markets for foreign currencies, commodities and derivative contracts.

The third is the infrastructure necessary for the effective interaction of intermediaries and markets. Infrastructure includes securities, exchanges, payment and settlement systems. But it also consists of the mechanisms that provide contractual certainty and generate and verify the information on which efficient financial intermediation depends. This would include credit ratings, accounting, auditing, financial analysis, and the supervisory and regulatory framework.

The three components are inextricably intertwined.

Through these chains, businesses should ensure that the liability has to be manageable until its effect is negligible. The idea of liability credit without liability is all about the maximum financial engineering used to control exaggerated values of properties held as collateral; house value drops when a single factor is changed.

If intermediaries are supported by a high level of technology and infrastructure, they will bring meaningful change in controlling irregular markets, which is a win-win approach. Markets only function efficiently when strong institutions are available to support liquidity and information providers' efficient price discovery. High-quality information is the raw material for directing resources to business companies, which helps them grant more credit at a controlled liability impact.

In recent decades, as financial markets became more sophisticated and complete, market forces could provide sufficient incentives for financial intermediation to be conducted efficiently and prudently. It is worth examining the reasons.

When financial institutions accept risk on their balance sheets, which is an actual liability, stakeholders' interests, working through corporate governance mechanisms, ought to ensure that risks are undertaken consciously and managed prudently. Shareholders, as owners, should insist on high standards of loan underwriting, robust risk management and controls to maintain franchise values through all phases of the financial cycle.

Prudent risk management by managers of financial institutions would result and would prevent excessive leverage. In addition, power should be constrained by the self-interest of providers of funds. Lenders to financial institutions, whether depositors or debt holders, should penalise intermediaries that run excessive risks and hold too-thin capital cushions.

In securities markets, the mechanisms through which information on financial value is provided should provide incentives for quality maintenance. Behind this is the assumption that the long-term value of reputation exceeds any short-term advantage from exploiting information asymmetries. Similarly, securitisers of asset-backed securities derive value from a reputation for the quality and transparency of the structures they create. Rating agencies, accounting firms, securities analysts and others have a long-term interest in gaining a reputation on which others can rely while making financial judgments.

Any Business opening that understands the value of quality information maximises benefits by those who disregard and register huge disadvantages on their book of account. If not, they phase out eventually. In a value chain system, everyone wants to ensure their obligation is lower than the credit they grant or receive. That is why we say their value is "credit without liability."

In business, customers are the quality assets of a company. Their enquiry is an intangible asset for everyday business transactions.

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PUBLISHED ON Nov 12,2022 [ VOL 23 , NO 1176]

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