While the financial sector in general is growing, indigenous financial institutions are slowly declining in popularity and influence. Traditional banks are becoming less preferable for various financial services as alternative methods are made available for consumers. For instance, many people prefer using mobile money to save, borrow and transact rather than having a bank account for the same purpose. Several traditional banks have failed in the past decade, including Dubai Bank, Imperial Bank, and Chase Bank. Some of the factors leading to the failure of indigenous financial institutions include:
- Corporate Governance: Weak corporate governance practices have led to the collapse of indigenous financial institutions. They lack proper corporate governance structure and transparency standards to prevent corporate failure.
- High Default Rates: Another factor affecting the performance of indigenous financial institutions is non-performing loan or defaulting. Non performing loans are those that have a high risk of default. They cause a financial institution to fail due to losses caused by the default, which means the firm is not able to recover its money.
- Poor Regulatory and Supervisory Systems: Poor regulatory and supervisory systems also give financial institutions the loophole to engage in poor decisions that may cause corporate failures. Weak regulation means that there is no clear way of checking what banks are doing, leading to lack of accountability in the financial sector.
- Insider Trading: This is one of the major causes of the failure of financial institutions. Insider trading refers to the illegal practice of trading in the financial market to one’s own advantage through having access to confidential information.
- Poor Risk Management: Another key factor contributing to the failure of indigenous financial institutions is poor risk management. Some financial institutions are not able to assess their risks effectively. This leads to increased risks of failure.
- Lack of Internal Control: Large corporations require sound internal control systems to ensure that their operations and decisions are in line with the required standards and regulations of the industry. Without internal control, the company may not be able to detect financial fraud or errors that could lead to failure.
- Emergence of New Technologies: The rise of innovative technologies such as mobile and internet banking has led to the loss of popularity of indigenous banks among customers. This leads to loss of revenue and reduced profits, which means that traditional financial institutions will not be able to support its operations as it makes losses. Firms need to adapt to the new realities by developing innovative technologies to provide more services to their customers.
- Increased Competition: High competition is a major factor that has led to the failure of indigenous banks. With emergence of Fintech and other financial institutions, indigenous firms feel the pressure. Those that are not able to adapt to the new competitive forces may collapse.