Unilever SWOT and PESTLE analysis

Unilever SWOT and PESTLE analysis Company background and mission statement Unilever is a global company that can trace its origins to 1929, when a merger between a Dutch margarine manufacturer and a British soap maker was negotiated (Jones, 2002). Given the distinct sectors in which the two organisations were located, the merger was considered somewhat of a ‘curiosity’ (Jones, 2002, online), but it set the stage for a multinational corporation producing a wide portfolio of goods. Some of the world’s most recognised brands are produced by the company, including Surf, Lipton, Dove, Lynx, Magnum and Hellmann’s. Today, Unilever is one of Europe’s largest companies, and in terms of sales, it is the third-largest consumer goods firm in the world, after Nestle and Procter and Gamble (Thain and Bradley, 2014). The company has been floated twice, and is a constituent of the FTSE 100 Index and the AEX Index. The stated aim of the company is to â€Å"provide people the world over with products that are good for them and good for others† (Unilever, 2014, online). Strategic Audit A strategic audit comprises a systematic and comprehensive evaluation of a company’s business environment and internal assets. There are two key elements to the audit: the external environment and the internal environment. The external environment identifies issues concerned with customers and competition, and examines the social, economic, technological, environmental political and legal elements impacting the business. A typical tool used at this stage is the PESTLE analysis. The internal analysis focuses on the resources the company possesses, such as the product distribution, product portfolio, sales and profit margins. A typical tool used at this stage is the SWOT analysis, in which the strengths and weaknesses, and the advantages and disadvantages of a company compared to its competitors are listed. Below, these tools are in turn applied to Unilever. The External Environment PESTLE analysis The PESTLE framework below analyses the political, economic, social, technological, legal and environmental dynamics of the environment in which Unilever operates. Political Unilever is co-headquartered in London and Amsterdam. Both the Dutch and the British political systems are in a time of flux. The British government currently comprises the first coalition government in the post-war period, with another expected after the General Election in 2015 (Taylor-Gooby and Stoker, 2011), while in the Netherlands, coalitions are standard. Such governmental frameworks have important implications for the conduct of business, for there tend to be policy ebbs and flows over short periods of time. For instance, in the Netherlands, the rate of Value Added Tax (VAT) for businesses has changed three times since 2010 (Wolf, 2014). Both the United Kingdom and the Netherlands are original members of the European Union (EU) which facilitates trade among member states by the harmonisation of certain rules relating to business and the removal of trade barriers. There is some political impetus in both countries, however to leave the EU. For instance, in 2012, the prime minister of the Netherlands, Mark Rutte, threatened to pull the country out of the Eurozone as a means of easing the local Dutch economy (Dutch News, 2014), while in the UK there is a lobby for a referendum on EU membership. Exiting the EU would have massive implications for a co-headquartered business like Unilever. For this reason, Unilever has been vocal about its preference for both countries to remain in the Union (The Guardian, 2014). There is growing political unrest in the Middle East, and while Unilever does not currently operate there, 53 per cent of its business comes from developing markets (Unilever, 2014), and globalisation means that it may not be shielded from the effects of conflict and instability overseas. For example, in 2012, oil prices reached unprecedented levels (Smith, 2014). This is a matter of concern for the company because it directly impacts on transportation costs. Economic Shoppers in Europe are still suffering from the effects of the longest and deepest recession in the post-war period. Data from Eurostat shows that household consumption fell drastically across Europe following the recession, and while there has been some recovery in recent years, household consumption is still not back to its pre-2008 level (Gerstberger and Yaneva, 2013). In addition, unemployment has risen and wages have stagnated in several of the economies in which Unilever supplies consumers. Low household consumption, high unemployment and falling wages bring about drops in consumer demand which adversely affect manufacturers like Unilever. During recessions, households tend to cut back on non-essentials, which might impact some parts of the companys product portfolio. While the West has suffered from the financial crisis, economies in other areas, such as Latin America and China, are booming, providing considerable opportunities for the company. For instance, in 2013, sales of the companys products to emerging markets grew by 8.7 per cent (The Guardian, 2014). Social Life expectancy has been increasing over time in wealthy nations. For instance, in the UK in 1980, life expectancy stood at 70.4 years for men and 79.8 for women. By 2010, it had increased to 79.3 years and 83.6 years, respectively for men and women (Blossfeld, Buchholz, and Kurz, 2011). At the same time, the fertility rate has been falling over time. The increase in life expectancy and a below replacement fertility rate coupled with the ageing of the so-called ‘baby boom’ generation (those born between 1946 and 1965) are accelerating population ageing. The UK government has estimated that the proportion of the population aged 30 and under is set to fall, while the proportion aged 60 and above will increase. By 2034, it is estimated that 23 per cent of the British population will be aged 65, while just 18 per cent will be aged 16 or below (Office for National Statistics, 2009). There are important ramifications of the ageing population for businesses like Unilever. Firstly, there are likely to be changes in the structure of demand in future. Older people have unique needs and desires that will need to be met by Unilever. For instance, there is a greater demand for frozen ‘ready meals’ by older people (Ahlgren, Gustafsson and Hall, 2004) which will directly impact Unilever’s ‘Sara Lee’ brand. Secondly, there may be labour shortages in the future. Expanding businesses like Unilever will need to respond to this by encouraging workers to work longer or recruiting migrant workers (Maestas and Zissimopoulos, 2010) As a direct result of some high profile public campaigns, people are becoming more health and ethically conscious. This has led to an increase in demand for ethically produced and healthy products and heightened concern regarding genetically modified goods. This trend has already had a direct impact on Unilever’s product portfolio, with sales of two of its margarine brands (I Can’t Believe its Not Butter and Flora) seemingly in free-fall (The Guardian, 2014) Technological Increasingly, consumers, particularly younger individuals, utilise social media, retailing websites and mobile forms of communication to connect with retailers, to discuss with members of their social networks their purchasing decisions, and to review past purchases (Sashi, 2012). This means that consumables companies like Unilever need to harness the Internet and mobile technologies in accessing these customers. For instance, a growing number of companies now include social networking websites such as Facebook and micro-blogging sites like Twitter in their promotion mix as a means of engaging their current consumer base and recruiting new customers. At the same time, constant connectivity makes the selling environment for consumer products increasingly competitive. The readiness of product price and promotional information, the ability of shoppers to access online stores quickly and the aggregation of online content and offline information all mean that, in the digital age, firms like Unilever must carefully craft their marketing activity (Sashi, 2012). Legal Unilever has a presence in some 190 countries worldwide which means that it must abide by their national laws. The extent of the company’s multinational activity means that it must devote considerable resources to scanning the legal horizon and ensuring that it responds to changes accordingly. There have been significant legislative changes in the area of people management. For instance, across Europe many countries have enacted anti-discrimination laws which companies like Unilever must adhere to. In the United Kingdom, under the provisions of the Equality Act 2010, businesses are not allowed to discriminate against individuals on the basis of factors such as gender, age, disability, religion and ethnicity in their recruitment, selection, training and promotional practices (Hyman, Klarsfeld, Ng, and Haq, 2012). Legal frameworks have also been put in place as a response to the ageing of the population (Maestas and Zissimopoulos, 2010). For instance, the mandatory age of retirement has been removed in both the UK and the Netherlands, which means that Unilever can no longer compel employees to retire once they reach the age of 65. Large companies also must put adequate pension provisions for workers in place under a new British scheme, which has a direct impact on business costs Environmental There is increasing political impetus to respond to environmental degradation, and the onus is on large manufacturers like Unilever to use fewer resources and produce less waste. In Europe, a major development affecting the company is the establishment of the European Union Emissions Trading System (EU ETS), which was set up in 2005 as part of a concerted and collaborative attempt to reduce carbon emissions under the requirements of the Kyoto Protocol. The EU ETS is a system under which polluters emissions are ‘capped’; in order to pollute more, manufacturers must purchase credits from other polluters. Participation in the EU ETS is mandatory for all large factories and plants that produce more than 25 thousand metric tons of carbon dioxide and that use ammonia or petrochemicals (Ellerman, Converey and Perthuis, 2010). The Internal Environment SWOT analysis The second element of a strategic audit is an analysis of the internal mechanisms of the business. This part of the paper uses a SWOT analysis to identify and critically examine the strengths, weaknesses, opportunities and threats facing Unilever Strengths The size of the company is its major strength. Unilever manufactures more than 400 brands which it sells to some 190 countries (Unilever, 2014, the Guardian, 2014). In addition, it employs over 167,000 people and expends 928 million euros on research and development annually (Unilever, 2013). In terms of performance, the company has bucked recent economic trends. In 2013, the company reported profit growth of 9 per cent over the previous year, reporting a net profit of  £4.4 billion. In addition, global sales grew by over 4 per cent that year, with sales to emerging economies growing by 8.7 per cent (the Guardian, 2014). As well as its sheer size, a major source of strength for Unilever is its longevity and brand recognition. The company has been in existence since 1929 and is the world’s oldest multinational enterprise (Thain and Bradley, 2014) Another strength of the company is its geographical spread. Unlike some consumable manufacturers, which are headquartered in just one country and found on just one public index, Unilever has headquarters in two countries, is floated on two indexes and is secondarily floated on the New York Stock Exchange. Another of the company’s strength is its human capital. Human capital is the volume of skills, knowledge, experience and competencies embodied in individuals that staff and run the business. This is important for there is a good deal of empirical research that links high levels of human capital with firm performance (Huselid, Jackson and Schuler, 1997). The company’s chief executive officer, Paul Polman, who held senior positions at both of the companys major competitors, Nestle and Procter and Gamble, has been termed a ‘rainmaker’ that has taken the company from strength to strength (The Telegraph, 2014). On taking the reins in 2009, Polman set out a plan to double the size of the business, to double sales to  £80 billion and to boost efforts at environmentalism and sustainability. Weaknesses Some analysts have argued that the companys broad product portfolio is a source of weakness (the Guardian, 2014). The firm produces goods in four broad product categories – cleaning agents, food, personal care products and beverages. It is argued that such a broad portfolio can prevent the business from focusing its marketing efforts appropriately (Putsis and Bayus, 2001). Thus, in order to consolidate its activities, the company may need to divest some brands or product ranges in the future. Indeed, the company already seems to be taking steps in this regard, selling popular brands Peparami, Slim-Fast, Ragu and Bertolli in 2014 (The Telegraph, 2014). In addition, most of brands produced by the company are multinational brands which may prevent them from being tailored to the needs of local markets. A further weakness of the product line concerns the prices offered to consumers. The prices of Unilever brands are generally higher than those of its competitors (Thain and Bradley, 2014). The company has explained that prices are high to represent the quality of the goods, while analysts have attributed the high prices to the enormous amount the company spends on research and development and its massive marketing budget (Thain and Bradley, 2014). In 2010 alone, Unilever spent 6 billion euros on advertising, and today, the company is one of the world’s largest purchasers of advertising media (The Telegraph, 2011). Threats The company is facing a number of threats, particularly from competitors, the market and consumers. Firstly, while Unilever’s broad product portfolio might be conceived as unusual, it is not unique in this respect. Procter and Gamble and Nestle have very similar business models and product lines (Thain and Bradley, 2014). Indeed, in terms of sales, Unilever is outperformed by both of these competitors. A large proportion of Unilever’s products are premium brands aimed at consumers with relatively high levels of disposable income. This might be considered a threat in the context of the current economic downturn. Increased financial uncertainty might lead households to move away from these brands to own-brand and lower value products, negatively affecting both net sales and sales margins. Food prices have risen substantially worldwide (Headey and Fan, 2008). This represents a significant threat to the company because it must pass the cost of food inflation to customers in order to maintain current profit margins. This might explain why the firm’s CEO is starting to consider refocusing the company strategy on alternative product lines, such as sundries or hard lines (The Guardian, 2014) Although the company has a stated aim to double its sales levels, analysts have noted that the company is still far short of accomplishing that aim. As the Telegraph (2014, online) notes, â€Å"the acquisitions of TRESemmà © shampoo maker Alberto Culver and Radox bath foam have added almost â‚ ¬3bn in turnover†¦However, these deals have hardly moved the needle and Unilever is still sitting on a big pile of cash. With growth slowing in emerging markets where 60pc of the group’s sales are generated, investors may start pushing for Unilever’s leader to be a bit bolder if he is to reach his ambitious â‚ ¬80bn sales goal†. In the context of the recent economic downturn, there have been some demergers and sell-offs in some of the sectors in which Unilever operates. While in some cases this has proven to be an opportunity for the company (for instance, the firm has recently been able to purchase top hair care brand TRESemmà ©), it also poses a threat should any of these product lines fall into the hands of its competitors. For instance, the 2008 purchase of shaving brand Gillette by Procter and Gamble immediately made it the biggest company in men’s personal care (The Telegraph, 2014) An increased social ethic and concern for the environment among consumers should also be considered a threat to the company. In Japan, Thailand and particularly in India, Unilever has attracted heavy criticism for the manufacture of so-called ‘fairness’ products. These are products that are typically aimed at women and used for lightening the skin. While such brands are a major source of income for the company allegedly, one skin lightening agent produced by the company, Fair and Lovely, is used by 80 per cent of the population of Bangladesh (Unilever Bangladesh, 2014) – the company has also come under fire for promoting Westernised standards of beauty. In Thailand, an advert for one of the company’s fairness creams was withdrawn from media outlets after widespread censure because it correlated white skin and high levels of intelligence (The Guardian, 2014). Opportunities Social media offers considerable opportunities to Unilever, particularly given its aim to reduce its advertising expenditure (The Telegraph, 2014). Social media sites are increasingly used by companies to update consumers on new products, to offer discounts and special promotions, and to invite consumers to special events that are either held online or physically (Sashi, 2012). Unilever may be able to capitalise on this trend either through corporate accounts or through brand accounts. There are considerable opportunities to the company through its extensive research and development efforts. Unilever has research facilities in England, Shanghai, Bangalore, New Jersey and Connecticut, which are working continually to develop new product lines and refine existing ones. Through this investment the company is able to regularly introducing new brands or reintroduce redesigned brands to the market. Conclusion Unilever is a unique company. The firm is dual listed, co-headquartered in two of Europe’s wealthiest cities and it offers the market a vast and very broad range of products. This strategic audit has shown that while the company is operating in a turbulent business environment, it is managing to perform well, both in terms of sales and growth. Despite the company’s strengths, there are some external threats posed by market developments, customer attitudes and the actions of its key competitors. The company leadership will need to monitor these aspects if Unilever is to meet its objective to become the largest consumables multinational company in the world. References Ahlgren, M., Gustafsson, I. B., Hall, G. (2004). Attitudes and beliefs directed towards ready-meal consumption. Food Service Technology, 4(4), 159-169. Blossfeld, H. P., Buchholz, S., Kurz, K. (Eds.). (2011). Aging populations, globalization and the labor market: Comparing late working life and retirement in modern societies. Cheltenham, UK/Northampton, MA: Edward Elgar. Dutch News (2014). Opposition MPs call on premier to explain quit the euro claims. Retrieved from http://www.dutchnews.nl/elections/election_news/opposition_mps_call_on_premier.php on 11 October 2014 Ellerman, A. D., Convery, F. J., De Perthuis, C. (2010). Pricing carbon: The European union emissions trading scheme. Cambridge: Cambridge University Press Gerstberger, C. and Yaneva, D. (2013). Household consumption expenditure national accounts. Retrieved from http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Household_consumption_expenditure_-_national_accounts on 09 October 2014 The Guardian (2014). EU exit could see Unilever cut investment in UK. Retrieved from http://www.theguardian.com/business/2014/jan/21/unilever-warning-uk-withdrawal-european-union on 09 October 2014 Headey, D., Fan, S. (2008). Anatomy of a crisis: the causes and consequences of surging food prices. Agricultural Economics, 39(1), 375-391. Huselid, M. A., Jackson, S. E., Schuler, R. S. (1997). Technical and strategic human resources management effectiveness as determinants of firm performance. Academy of Management journal, 40(1), 171-188. Hyman, R., Klarsfeld, A., Ng, E., Haq, R. (2012). Introduction: Social regulation of diversity and equality. European Journal of Industrial Relations, 18(4), 279-292. Jones, G. (2002). Unilever – a case study. Business History Review 32(12). Retrieved from http://hbswk.hbs.edu/item/3212.html on 09 October 2014 Maestas, N. Zissimopoulos, J. (2010) How longer work lives ease the crunch of population aging. Journal of Economic Perspectives. 24(1) pp. 139-160. Office for National Statistics, (2009), Health: ‘Life expectancy continues to rise’. Retrieved from http://connection.ebscohost.com/c/articles/58499152/life-expectancy-continues-rise on 09 October 2014 Putsis Jr, W. P., Bayus, B. L. (2001). An empirical analysis of firms’ product line decisions. Journal of Marketing Research, 38(1), 110-118. The Telegraph (2011). Unilever to shake up  £5.1bn global advertising spend. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/8954352/Unilever-to-shake-up-5.1bn-global-advertising-spend.html on 09 October 2014 Sashi, C. M. (2012). Customer engagement, buyer-seller relationships, and social media. Management decision, 50(2), pp. 253-272 Smith, D. (2014). The State of the Middle East: An Atlas of Conflict and Resolution. London: Routledge. Taylor-Gooby, P., Stoker, G. (2011). The coalition programme: a new vision for Britain or politics as usual?. The Political Quarterly, 82(1), 4-15. Thain, G, and Bradley, J. (2014). FMCG: The Power of Fast-Moving Consumer Goods. London: Design Publications Unilever (2014). About us. Retrieved from http://www.unilever.co.uk/aboutus/ on 09 October 2014 Unilever Bangladesh (2014). Our brands. Retrieved from http://www.unilever.com.bd/our-brands/detail/Fair-and-Lovely/366071/ on 09 October 2014 Wolf, R. (2014). Dutch Turnover Tax or EU VAT? On the Permeation of EU VAT Rules in the Dutch Turnover Tax Practise. Intertax, 42(8), 525-537.

Speech: Dealing with Change -- essays research papers

The bombing of the two towers, September 11th, 2001. 2 749 reported deaths. The bombing of Hiroshima, August 6th and August 9th, 1945. 120 000 reported deaths. The battle for Gallipoli, from February 1915 to January 1916, a total of 505 000 recorded deaths, 28 150 of these were Australian. The Trojan War, 400 B.C. Total annihilation of Troy. Good morning friends, classmates and teachers. On any of these given days, thousands of people died. These acts of war were inspired by passion, greed and revenge. No one really wanted for their people to die – but they did. And this is something that no one can, or ever will be able to change. People have however, taken steps to address these wrongs. Some by retaliation, or being retaliated upon, others by an act of peace. It is not up to me to decide for these nations which of these developments are better, but I do see it as my duty to think, to wonder and to acknowledge. Lives were lost. Was it for nothing? How would the world differ today if none of these events had occurred? Would we have had a more peaceful place to grow up in? Or would a human’s basic instinct still win out, therefore creating more turmoil then there ever has been? Though as much as we should think and wonder about this, there is also nothing that we ever could have done, nor is there an answer to any of these questions. That said, these questions are important, not only to acknowledge the lives that were lost, but also so that we may stop and think next time before we act, instead of after. Before any of us do or say something that may effect and invoke change, because nothing can ever make things go back to the way they were. Depending on how things have been affected and altered, this can either be a goo... ...ecause we will always carry those through our lives, remembering the people who were there, and who cared enough to make sure that we opened our eyes to notice the world that surrounded us. When our time comes to stand up and be counted we will remember those who taught us that we are all different. We will remember the time when we realized that we are all the same. We will know that it will not matter in life who we were friends with or what clubs we belonged to. It will not matter what our grades were, or what kind of clothes we wore. It will not matter what kind of cars our parents drove. It will not matter what our dreams were, but what dreams we accomplish. Agathon was right when he said that â€Å"God cannot change the past†, and I for one am glad for that, but we must remember that while not even God can change the past, but it is our job to change the future.

Macbeth and Jane Eyre Essay

Macbeth by Shakespeare and Jane Eyre by Charlotte Bronte have a similar theme. In both the novel and play, there is a contender edging somebody else on. In Macbeth, Lady Macbeth edges Macbeth on to first killing King Duncan and other people. In Jane Eyre, Jane pushes Rochester not to be scared and to let go of the safety nets and trust in others. In Macbeth, Macbeth turns from having a pure heart to a black and evil heart, while Rochester changes from having a closed heart to an open and trusting heart. At the beginning of the play, Macbeth is seen as a courageous soldier who is loyal to the King but is corrupted from the witches’ prophecies and by his and Lady Macbeth’s ambition. This is because of the weakness of Macbeth’s character and the strong power of Lady Macbeth and how she is easily able to influence him. Her strength motivates him at the start but after, he realizes what he has done, but still decides to continue to go down his murderous, bloody path. At the beginning of the play Lady Macbeth appears as a kind wife of Macbeth’s but underneath lays a scheming and treacherous woman. She watered his seed and started the never-ending growth of the beanstalk from Jack and the Bean Stalk. Macbeth however was his own sunlight and let the plant just keep on growing higher with more and more thorns. The first time she waters the seed is when they first hear that King Duncan is sleeping over their house that night. Lady Macbeth asks her husband when the King would leave. Macbeth answers that the king would leave the following day. Lady Macbeth tells him otherwise however. â€Å"O, never shall sun that morrow see†¦ Your hand, your tongue: look like th’ innocent flower, but be the serpent under’t.† She tells him that she has to kill the king and nobody would expect it because he is being hospitable and letting the king stay at his house. To the King Duncan and the rest of the people, Lady Macbeth seems to be a nice sweet lady. However, she is really tricky and conniving. At First, Macbeth tries to back out last minute. He says, â€Å"We will proceed no further in this business: he hath honored me of late, and I have bought golden opinions from all sorts of people, which would be worn now in their newest gloss, not cast aside so soon.† He says that the king has only been nice to him and is a wise man and does not want to get rid of him so soon. Lady Macbeth shrewdly answers that he is a coward for not  wanting to go through with it and that he is not a man unless he does. Macbeth is convinced by her argument and decides to go through with it. Later that night while the king was fast asleep, Macbeth killed him. After the murder, Macbeth got paranoid and started to kill people left and right in order to make sure nobody would find out about the assassination he commit against King Duncan. That is an example of how Lady Macbeth stated the seed to sprout, but once it would come out of its shell, Macbeth could not put it back and instead would make it keep on growing until it would kill him. Jane Eyre and Edward Rochester are soul mates. When two people are meant for each other, they feed off of each other. In this particular case, Mr. Rochester feeds off of Jane more then the other way around. When they first meet at Thornfield, Rochester is cold and bitter while Jane is trying to be as nice and warm as she can be. When he falls off of his horse, he sprained his ankle. When she sees him fall, she runs to him and asks, â€Å"Are you injured, sir?† before even finding who he is or where he comes from. Her primary focus is to make sure that he is all right. He keeps telling her to go home but she insists on helping him. Later in the conversation, he realizes who she is but still has no idea who he is. Only later she learns who is the man she helped. That is the first time he meets someone who is nice to him without having secret intentions behind it to get a reward or just to get on his good side. From that moment on Jane and Rochester feed off each other to grow to become happy people. A few weeks after Rochester fell off his horse, somebody tried to kill Rochester by putting his room on fire during his sleep. It is suspected to be Bertha, his crazy wife. Jane sees smoke come out of Rochester’s room. She runs to his room and puts out the fire and saves his life. He feels indebted to her and invites Jane to have dinner with him. They both think the other one is not so physically attracted. After speaking during dinner however, they start to like each other’s personalities. He later throws a party where a beautiful lady by the name of Blanche Ingram attends. Rochester and her are suppose to get married but Jane gets in the way. Rochester realized that he could not marry Ingram because he realizes that he is in love with Jane. After many incidents and complications to get married, Jane runs away. While she is away, Bertha  Mason, a crazy woman who is Rochester’s first wife, burns down the house and kills herself and at the same time blinding Rochester. Jane hears Rochester screams her name about a year after she leaves. She magically hears it somehow and is able to tell that the person shouting is Rochester. She goes back to Thornfield and they marry. While he is blinded, he trusts her with his life and lets her guide him everywhere without being scared. A few months after they get married, thanks to her love for him and his love for her, he is able to see again. Shakespeare’s Macbeth and Charlotte Bronte’s Jane Eyre are two great stories that share a theme. Although the outcomes are complete opposite, they both have someone affecting the other person in a positive or negative way. In Macbeth, unfortunately, the evil seed grew inside Macbeth’s body and caused him to go on a murder rampage. In Jane Eyre, fortunately, Jane is there to kill the sprout of the bad plant and implant a kind-hearted, lively, and firm maple tree.

Determinants Of Development Of Banking Sector - Free Essay Example

Sample details Pages: 8 Words: 2342 Downloads: 10 Date added: 2017/06/26 Category Statistics Essay Did you like this example? ABSTRACT The objective of this paper is to examine the determinants of development of banking sector from the perspective of Real GDP, Discount rate, Trade openness and Financial Liberalization by using annual data from 1970 to 2007. In this study, Liquid Liabilities, Private sector credit and Domestic credit are used as indicator of banking sector development. The finding of this research shows negative relationship between Trade openness and development of banking sector development. Don’t waste time! Our writers will create an original "Determinants Of Development Of Banking Sector" essay for you Create order Discount rate is having a significant impact on banking sector development when Private sector credit and Domestic credit is used as the indicator while Real GDP is found significant when Liquid Liabilities and Domestic credit is used as indicator of Banking sector Development. Generalized form of data has been used in this study. Keywords: Banking Sector development, Real GDP, Trade openness, Discount Rate, Financial Liberalization INTRODUCTION The financial sector of Pakistan has shown a substantial growth in past few years, however there is still need for continuous development. The financial sector of Pakistan consists of a variety of specialized financial institutions à ¢Ã¢â€š ¬Ã¢â‚¬Å" commercial banks, DFIs, NBFCs, micro finance banks, Islamic banks, Modarbas, Stock Exchange and Insurance companies. Thus the whole financial sector of Pakistan offers a wide range of products and services to its customers. (Zaidi, 2005) states that growth of financial sector is significantly related with economic growth therefore, country needs well developed financial sector in order to fully utilize the financial resources. Banking system has a significant importance in financial market. Banking Sector of Pakistan is an important financial intermediary and responsible for the economic growth in the country. In 1990, Denationalization of Government owned banks have changed the overall scenario of the banking sector of Pakistan. After the amendments in banking companiesà ¢Ã¢â€š ¬Ã¢â€ž ¢ ordinance, Muslim Commercial Bank (MCB) and Allied bank Limited (ABL) were denationalized in 1991 and 1993 respectively. The process of denationalization remains suspended for numbers of years and was restarted in early 2000s, when United Bank Limited (UBL) was privatized. In 2004, Habib Bank Limited (HBL) was also denationalized and due to which, the asset share of public sector banks was reduced to 25% at that time. In the last decade, state bank of Pakistan has made several efforts in promoting the Islamic modes of financing. In 2002, the first Islamic bank was established under the name of Meezan bank. Since then, the number of Islamic banks has been opened. Various traditional ban ks are now opening Islamic specialized branches. At the end of 2009, total assets of the Islamic banking have reached to 366.3 billions and the deposits in Islamic banks have reached to 282.6 billions[1]. At the end of calendar year 2009, there are 9522 total branches of banks in Pakistan which shows an increase of 376 branches in banking sector from the 3rd quarter of 2009. Moreover, the asset base of banking sector has shown a growth of 7 percent over the last quarter. (Yasmin, Jehan, Chaudhary, 2006) explains that after independence in 1947, Pakistan avoided trade openness because of weak industrial structure. In 1960à ¢Ã¢â€š ¬Ã¢â€ž ¢s, industrial base was laid and manufacturing industry expanded widely in Pakistan. However, industrial expansion face setback in 1970à ¢Ã¢â€š ¬Ã¢â€ž ¢s due to nationalization of industries. In 1980à ¢Ã¢â€š ¬Ã¢â€ž ¢s, IMF and World Bank provided facilities to the Pakistan in order to initiate the financial restructuring in country. A loan of $150 million and $200 Million was provided for this purpose under à ¢Ã¢â€š ¬Ã…“Financial sector adjustment loanà ¢Ã¢â€š ¬? in 1989 and 1997 respectively. Another project named as financial sector deepening and Intermediation project was initiated in 1995. The estimated worth of that project was $216 million. (Hanif, 2002) Despite of the remarkable performance since last two decades, the banking sector of Pakistan is less developed and remains small in relation to the economy, when it is compared to the other banking sectors of the world. This shows that a number of financial and banking needs are still ignored and that much of the economic potential of Pakistan is not achieved yet. Highlights of banking sector of Pakistan Following is the highlight of banking sector of Pakistan from 2005 to 2009. (Rs. Billion) 2005 2006 2007 2008 2009 Total Assets 3,660 4,353 5,172 5,672 6,529 Net Investment 800 833 1,276 1,080 1,753 Net Advances 1,991 2,428 2,688 3,183 3,428 Deposits 2,832 3,255 3,854 4,217 4,787 Equity 292 402 544 563 662 Profit after tax 63 84 73 43 54 Source: State Bank of Pakistan LITERATURE REVIEW (Christopoulos Tsionas, 2004) states there is no one opinion of economist on the issue of financial development and growth of economy. (Pagano, 1993) describes that savings are mobilized towards the productive investment due to financial deepening which helps in improving corporate governance. (Khan Qayyum, 2007) says there are three major channels through which financial development can affect economic growth (i) marginal productivity of capital can be increased (ii) savings are directed towards the investment (iii) level of private saving rate can be increased. The relationship of economic growth and financial development was first discussed by (Goldsmith, 1969), (McKinnon, 1973) and (Shaw, 1973). Their study shows that there is a positive relationship between financial development and the level of output i.e. when the financial market will increase the credit level, the investment will increase thus, showing that real income and real interest rate is a positive function of financial development. (Yu Gan, 2010) study shows that due to positive real interest rate, the mobilization of savings of banks increases and it also increases the growth with the increase in volume and productivity of capital. (Yanikkaya, 2003) argues that trade openness has a significant impact on the GDP share. In developing countries, trade openness creates new opportunities to increase the growth process and hence the unemployment level decrease. (Jin, 2000) states that trade openness facilitates in establishing the development process. Moreover, local technology and production process can be improved through trade liberalization. One school of thoughts is of view that the financial liberalization is also a major contributor towards the financial development in developing countries. à ¢Ã¢â€š ¬Ã…“Financial liberalization means the deregulation of domestic financial markets and liberalization of the capital account.à ¢Ã¢â€š ¬? (Attaullah, Cockerill, Le, 2004) empirically shows that the effectiveness of banking sector is improved following the financial liberalization. (Bekaert, Harvey, Lundblad, 2005) Suggests that there is a significant relationship between financial liberalization and economic growth. However, (Stiglitz, 2000) argues that increase in financial liberalization enhances the macro economic vulnerability of nations and chances of crises becomes significant. The study of (Gong, Lee, Chen, 2004) supported the fact that increase in financial liberalization can cause crisis. (Wyplosz, 2001) suggested that financial liberalization is effective if the objective is to increase the competition and d ecrease the monopoly powers. However, financial liberalization is quite risky for developing countries. Many developing countries in Asia and Europe have grown faster even with strong financial restraints. MODEL SPECIFICATION Based on the above literature, we can propose that in Pakistan, banking sector development is a function of real Gross Domestic Products (RGDP), Discount date (DR) and Trade openness (TO) and Financial Liberalization (FL). This can also be shown as BSD Pak = f (RGDP, RI, TO, FL) Where, BSD Pak = Banking Sector Development of Pakistan In this study, we have used following models which are estimated by using least square techniques. In model 1, we will use Liquid liabilities as the indicator of banking sector development. In model 2, Private Sector Credit will be used as the indicator of banking sector development where as in model 3, domestic credit will be used as the indicator of banking sector development. (Yu Gan, 2010) ln LL= ÃŽÂ ²o+ÃŽÂ ²1ln RGDP+ ÃŽÂ ²2 DR + ÃŽÂ ²3TO+ ÃŽÂ ²4FL + e ln PRI= ÃŽÂ ²o+ ÃŽÂ ²1ln RGDP+ ÃŽÂ ²2 DR + ÃŽÂ ²3 TO+ ÃŽÂ ²4FL+ e ln DC= ÃŽÂ ²o+ÃŽÂ ²1ln RGDP+ ÃŽÂ ²2 DR + ÃŽÂ ²3 TO+ ÃŽÂ ²4FL+ e where, ln LL= Natural logarithm of liquid liabilities ln PRI= Natural logarithm of Private sector Credit ln DC= Natural logarithm of Domestic Credit Data source: We have used annual data from 1970 to 2007 in this study. The data is obtained from the World Bank database and international financial statistics. However, Financial Liberalization Index of Pakistan, constructed by (Waliullah, 2010) is used in this study. Real GDP (RGDP) is calculated by using following formula EMPIRICAL METHODOLOGY In this study, Ordinary Least Square (OLS) technique has been used. In order to run the OLS model, order of integration of every variable is determined. There are two methods to examine the order of integration i.e. Augmented Dickey-Fuller (ADF) test and Phillps-Perron test. In this study, we will use ADF test for examining weather the data is stationary or non-stationary. We will run co-integration test when all variables becomes stationary at same level. The generalized form of data has been used in this study. Empirical Results of Model 1 à ¢Ã¢â€š ¬Ã¢â‚¬Å" Liquid Liabilities Table 1. OLS Results of Model 1 Dependent Variable: LL Method: Least Squares Date: 01/24/11 Time: 16:07 Sample: 1970 2007 Included observations: 38 Variable Coefficient Std. Error t-Statistic Prob. RGDP 2.390212 0.071527 33.41707 0.0000 TO -0.246367 0.046986 -5.243445 0.0000 DR 0.030429 0.104158 0.292144 0.7720 FL 0.035323 0.009594 3.681828 0.0008 C -0.000353 0.000128 -2.758942 0.0094 R-squared 0.998745 Mean dependent var -0.000415 Adjusted R-squared 0.998593 S.D. dependent var 0.020655 S.E. of regression 0.000775 Akaike info criterion -11.36561 Sum squared resid 1.98E-05 Schwarz criterion -11.15014 Log likelihood 220.9465 F-statistic 6564.172 Durbin-Watson stat 1.489120 Prob(F-statistic) 0.000000 In model 1, liquid liabilities have been used as an indicator of banking sector development. Table 1 show that Real GDP, Financial Liberalization and Trade openness are statistically significant and Discount rate is not statistically significant to the development of banking sector in Pakistan. However, Trade openness is inversely related with liquid liabilities which means that increase in trade openness will eventually affects the development of banking sector. While, Real GDP and Financial liberalization have a significant impact on the banking sector development i.e. higher Real GDP and Financial Liberalization in Pakistan will leads towards development of banking sector. R square is (.99) which shows substantial explanation of independent variables in dependent variables. Table 2. OLS Results of Model 2 (Private Sector Credit) Dependent Variable: PRI Method: Least Squares Date: 01/24/11 Time: 16:16 Sample: 1970 2007 Included observations: 38 Variable Coefficient Std. Error t-Statistic Prob. RGDP -7.684614 5.715274 -1.344575 0.1879 TO -7.525119 3.603842 -2.088082 0.0446 DR 25.87713 9.222809 2.805775 0.0084 FL -0.204028 1.108112 -0.184122 0.8550 C 0.033118 0.090551 0.365739 0.7169 R-squared 0.343149 Mean dependent var 0.041883 Adjusted R-squared 0.263531 S.D. dependent var 0.648747 S.E. of regression 0.556741 Akaike info criterion 1.788644 Sum squared resid 10.22868 Schwarz criterion 2.004116 Log likelihood -28.98424 F-statistic 4.309923 Durbin-Watson stat 1.880175 Prob(F-statistic) 0.006483 In model 2, we have used Private sector credit as an indicator of development of banking sector in Pakistan. Results of table 2 indicate that discount rate and trade openness have significant impact on the development of banking sector. However, Trade openness is inversely related to the banking sector development. Financial liberalization and Real GDP are not found statistically significant. R square of model 2 is (.34) which shows that independent variables are explaining 34 % of the dependent variable. OLS Results of Model 3 (Domestic Credit) Dependent Variable: DC Method: Least Squares Date: 01/24/11 Time: 16:20 Sample: 1970 2007 Included observations: 38 Variable Coefficient Std. Error t-Statistic Prob. RGDP 0.289400 0.002316 124.9755 0.0000 TO -0.007190 0.001983 -3.626526 0.0010 DR 0.014020 0.005240 2.675496 0.0115 FL 0.001211 0.000307 3.938439 0.0004 C -6.23E-06 4.61E-06 -1.351692 0.1857 R-squared 0.999939 Mean dependent var -1.15E-05 Adjusted R-squared 0.999931 S.D. dependent var 0.003380 S.E. of regression 2.80E-05 Akaike info criterion -18.00387 Sum squared resid 2.59E-08 Schwarz criterion -17.78840 Log likelihood 347.0735 F-statistic 134392.7 Durbin-Watson stat 1.559156 Prob(F-statistic) 0.000000 In model 3, we have used domestic credit as an indicator of banking sector development. Results of table 3 indicate that all variables are statistically significant to the development of banking sector of Pakistan. R square of model 3 is (.99) which shows that independent variables have a significant impact on the dependent variable. (Goldsmith, 1969) As mentioned above, generalized form of data has been used in this study and numbers of tests have been applied on these three models and there is no serial correlation, heteroscedasticity. CONCLUSION AND DISCUSSION The results of this study shows that Trade openness is inversely related to the development of banking sector in Pakistan in all three models which validates the findings of (Siddiqui Iqbal, 2005) that Trade openness negatively affects the economic growth of a country. However these results are not according to the findings of (Miller Upadhyay, 2000) which states that trade openness leads to the development of financial sector. Moreover this study also does not support the findings of (Yu Gan, 2010) which states that trade openness have no impact on the development of banking sector. In case of Liquid liabilities as indicator of banking sector development, it is clear that Real GDP and Financial liberalization have the significant impact on the development of banking sector of Pakistan. This result is according to the findings of (Yu Gan, 2010) and (Attaullah et al, 2004) which show that Real GDP and Financial Liberalization significantly impact the banking sector development. It means that increase in Real GDP and Financial Liberalization will lead the banking sector of Pakistan towards prosperity. In case of Private sector credit as the indicator of banking sector development, it is found that discount rate is statistically significant to the banking sector development. It means that increase in discount rate will lead towards increase in private sector credit which will eventually results in financial sector development. However, financial liberalization was found inversely related to the banking sector development and Real GDP was not found significant which is against the findings of (Yu Gan, 2010) which identifies that Real GDP has a significant impact on the development of financial sector of Pakistan when Private sector credit is taken as indicator of banking sector development. In case of Domestic credit as indicator of development of banking sector, results shows that all four variables are statistically significant to the financial sector development which are according to the findings of (Rajan Zingales, 1998), (Cetorelli Gambera, 2001) which states that Financial Liberalization and Real GDP significantly impact the development of financial sector. PRACTICAL IMPLEMENTATIONS FOR BANKING SECTOR On the basis of the findings of this study, we can conclude that trade openness is having inverse relationship with the banking sector development. As a result of Trade openness, the less developed banking sector of Pakistan faces tough competition from the developed financial sector of other countries. Moreover, increase in trade openness increases the countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s exposure to international shocks i.e. if any economy faces will suffer a crisis, there will be more chance of transferring crisis in Pakistan. Discount rate is also found significant in this study when Private sector credit and Domestic credit was used as an indicator of banking sector development. When the discount rate will be high, financial institutions will be encouraged to get loan from state bank of Pakistan. Banks usually uses discount rate as benchmark interest rate when they further lend the money to borrowers. So increasing the discount rate will eventually lead the banking sector to development.