The role of financial services in society | KPMG | ZA

The role of financial services in society

The role of financial services in society

Scandals in recent years exposed a number of weaknesses in our financial system. From poorly designed incentive systems to illegal or unethical activities from some market participants, these slights have come with an enormous cost to society.

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Financial Services

Scandals in recent years exposed a number of weaknesses in our financial system. From poorly designed incentive systems to illegal or unethical activities from some market participants, these slights have come with an enormous cost to society.

Naturally, this has resulted in significant loss of public trust in financial services as a whole. Taking inspiration from a 2013 thought-piece, published by the World Economic Forum (W.E.F) in collaboration with OliverWyman, we consider what the role of financial services should be and the evolution that is required to gain back this confidence from society at large.

The sub-Saharan imperative for a well-structured financial system is more urgent still. The Chairman and CEO of Visa Inc., Joseph W. Saunders in "Special to Roll Call" of 23 September 2009, highlighted the asymmetry in the global economy with less than half the world’s population not having access to basic financial services. The Banking Association of South Africa, put Financial Inclusion in context, explaining that in South Africa, 12 million people are considered as financially excluded with 9% informally served. They estimated that the R12 billion that is currently kept "under mattresses" does nothing for the promotion of pro-poor growth or poverty alleviation.

Focusing on the insurance sector there are several ways in which insurance services contribute to economic development (USAID, 2006), by:

 

  1. Promoting financial stability for both households and firms
  2. Mobilizing and channeling savings
  3. Supporting trade, commerce, entrepreneurial activity and social programmes
  4. Encouraging the accumulation of new capital and fostering a more efficient allocation

 

A World Bank study, conducted by Vittas (1998), concluded that insurance companies and pension funds can provide a strong stimulus to the development of securities markets. This relationship occurs because life insurers and pension funds can accumulate large amounts of savings in countries, which, in turn, are invested in businesses through equities and bonds. The result is that as life insurers grow, they channel large amounts of medium to long-term funds through capital markets, deepening the country’s financial sector.

Non-life insurance supports the achievement of sustainable development though the pricing of various types of environmental risk to help pay for environmental damage. The important contributions to individual and social welfare from effective risk management cannot be understated.

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