New Challenges for Future Sustainability and Wellbeing 9781800439696, 9781800439689, 9781800439702
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Copyright © 2021. Emerald Publishing Limited. All rights reserved.
New Challenges for Future Sustainability and Wellbeing
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
EMERALD STUDIES IN FINANCE, INSURANCE, AND RISK MANAGEMENT Ercan Özen, Simon Grima and Rebecca Dalli Gonzi Books in this series collect quantitative and qualitative studies in areas relating to fnance, insurance, and risk management. Subjects of interest may include banking, accounting, auditing, compliance, sustainability, behaviour, management, and business economics. In the disruption of political upheaval, new technologies, climate change, and new regulations, it is more important than ever to understand risk in the fnancial industry. Providing high quality academic research, this book series provides a platform for authors to explore, analyse and discuss current and new fnancial models and theories, and engage with innovative research on an international scale.
Copyright © 2021. Emerald Publishing Limited. All rights reserved.
Previously published: Uncertainty and Challenges in Contemporary Economic Behaviour Ercan Özen and Simon Grima
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
EMERALD STUDIES IN FINANCE INSURANCE AND RISK MANAGEMENT
New Challenges for Future Sustainability and Wellbeing
EDITED BY ERCAN ÖZEN University of Usak, Turkey
SIMON GRIMA University of Malta, Malta
Copyright © 2021. Emerald Publishing Limited. All rights reserved.
AND REBECCA DALLI GONZI University of Malta, Malta
United Kingdom – North America – Japan – India – Malaysia – China
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Emerald Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2021 Copyright © 2021 Emerald Publishing Limited Reprints and permissions service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library
Copyright © 2021. Emerald Publishing Limited. All rights reserved.
ISBN: 978-1-80043-969-6 (Print) ISBN: 978-1-80043-968-9 (Online) ISBN: 978-1-80043-970-2 (Epub)
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Contents
About the Contributors Foreword
Copyright © 2021. Emerald Publishing Limited. All rights reserved.
Chapter 1 Financial Inclusion: A Strong Critique Peterson K. Ozili
ix xvii
1
Chapter 2 The Performance of Pension Funds and Their Impact on Economic Growth in OECD Countries Fisnik Morina and Simon Grima
17
Chapter 3 Effects of Reciprocity on Knowledge Sharing Behavior: The Mediating Role of Organizational Commitment Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi
49
Chapter 4 Accounting and Financial Reporting During a Pandemic Peterson K. Ozili
87
Chapter 5 Investigation of Intercultural Sensitivity Levels of Department Managers Working in Hotel Enterprises According to Some Demographic Features Çağla Aslı Gülduran and Arzu Gürdoğan95 Chapter 6 Relations Between the Great War and Wheat Prices: An Analysis from the Ottoman Empire Perspective Ekrem Tufan, Türker Savaş and Mithat Atabay
119
Chapter 7 The Effect of Traditional Performance Evaluation Criteria on the Market Value Added: Application on Informatics Index (XBLSM) Ilker Calayoğlu133
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
vi Contents
Chapter 8 Social Capital Facing Economic Competition: The Case of Antakya Long Bazaar Özlem Tuna
151
Chapter 9 An Index Proposal for Supply Security Risk in Fossil Energy Imports: The Case of Turkey İbrahim Murat Bicil and Kumru Turkoz179
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Chapter 10 An Alternative to Corporate Social Responsibility Studies: Intellectual Company Murat Güreşci199 Chapter 11 The Interaction Between Perceived Risk, Attitude, and Intention to Use: An Empirical Study on Bitcoin as a Crypto Currency Serdar Ögel and İlkin Yaran Ögel
211
Chapter 12 Instagram Teachings and Relative Poverty Mine Yeniçeri Alemdar
243
Chapter 13 Managing Climate Change Risk: A Responsibility for Politicians not Central Banks Peterson K. Ozili
267
Chapter 14 Determinants of Nonperforming Loans: A Review of Empirical Evidence Aamir Aijaz Syed
277
Chapter 15 Managing Climate Change Risk: The Policy Options for Central Banks Peterson K. Ozili
307
Chapter 16 Symmetric and Asymmetric Infuence of Macroeconomic Variables on Stock Prices Movement: Study of Indian Stock Market Aamir Aijaz Syed
319
Chapter 17 Do Investment Funds Care About the Environment? Evidence from Faith‐based Funds Tehmina Khan and Peterson K. Ozili
341
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Copyright © 2021. Emerald Publishing Limited. All rights reserved.
Contents vii
Chapter 18 Exploring the Internet of Things Within the New Generation Smart Home Systems: A Qualitative Study Burak Demir and Keti Ventura
363
Chapter 19 Financial Inclusion in Nigeria: Determinants, Challenges, and Achievements Peterson K. Ozili
377
Chapter 20 Evaluation of Factors Affecting the Financial Performance of Borsa İstanbul Cement Sector Companies Nida Abdioğlu and Sinan Aytekin
397
Chapter 21 Measuring Financial Inclusion and Financial Exclusion Peterson K. Ozili
411
Chapter 22 Competition Regulation in Kosovo: An Emphasis on Enterprises Concentration G. Asllani, S. Grima and Sh. Citaku
429
Chapter 23 Internal Branding and Brand Citizenship Behavior: The Role of Trust, Commitment, and Organizational Climate Ahmad Aljarah and Pelin Bayram
441
Chapter 24 Integrated Reporting and Combined Assurance: A Qualitative Research on the Awareness in Turkey Seval Kardes Selimoglu and Gul Yesilcelebi
463
Index
483
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
About the Contributors
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Nida Abdioğlu is an Associate Professor with the Department of Business Administration at Bandırma Onyedi Eylul University, Balıkesir, Turkey. She has a BA in Economics (in English) at Istanbul University (2006). She received MSc Finance and PhD Finance degrees from University of Manchester, Manchester Business School in 2008 and 2012, respectively. Her PhD thesis was about investment preferences of institutional investors. Besides institutional investment, her research interests include corporate fnance, corporate governance and fnancial econometrics. She has taught Corporate Finance, Accounting, Capital Markets and Financial Institutions courses. She has published articles in many international journals such as International Business Review and the Journal of international Money and Finance. Mine Yeniçeri Alemdar graduated from Ege University, Faculty of Communication, Department of Public Relations and Publicity in 2005 as writing thesis on “Brand Management in Global Market and Effect of Public Relations.” She became Ph Dr of PR and communication in 2010 in Ege University, Faculty of Communication, Department of PR and Publicity. In 2014, she received the title of Associate Professor. Since 2006, she has been working under Ege University Communication Faculty, Public Relations and Publicity Department, Research Methods Sciaence Area. She lectures on “communication research methods” at undergraduate and graduate levels. She has many published and presented articles about digital communication, brand communication, and social media. She has executive and researcher roles in national and international research projects on digital division and new media literacy. Ahmad Aljarah is an Assistant Professor in the Department of Marketing at Girne American University, TRNC, via Mersin 10, Turkey. His primary research interests include corporate social responsibility, sustainability, branding, and cross-cultural studies. G. Asllani holds MA and PhD in Finance from the University of Pristina, Kosovo. He teaches public fnance, taxation, and competition rights. He is an Associate Professor at University “Haxhi Zeka,” Peja within the Law Faculty. During his 20 years of experience, he has contributed to the creation of the tax system in Kosovo, making tax analysis and expertise, participating in several working groups at international level (IMF, OECD, and Robert Shuman Center for Advance Studies).
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
x About the Contributors Mithat Atabay, PhD, is an Assistant Professor in History Department at Çanakkale Onsekiz Mart University, Çanakkale, His research interest is modern Turkey. He has published 55 books, including the Gallipoli Campaign which is co-authored book, ecchoes from the Deep Wreck of the Dardanelles Campaign (2013), and Anzac Battlefeld: A Gallipoli Landscape of War and Memory (2016). Sinan Aytekin is an Associate Professor with Department of Business Administration at Balıkesir University. He graduated from Dokuz Eylül University, Faculty of Economics and Administration Sciences in 2003. He earned an MSc in 2006 after completing the Master’s Degree Program in the Accounting and Finance of the Graduate School of Social Sciences, Department of Business Administration and a PhD in 2010 after completing the Doctorate Program in the Department of Business Administration in Dokuz Eylül University. He started his academic career as a Lecturer in 2009 at Balıkesir University. His main research felds are corporate fnance, fnancial markets and institutions, portfolio theory, and fnancing of health services.
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Pelin Bayram holds a BA degree in Faculty of Communication & Media Studies from Eastern Mediterranean University, MBA degree in Business Administration from Istanbul Bilgi University, and PhD degree in Marketing from Girne American University. She is currently the Head of Business Management and IACBE & ECBE Accreditation Coordinator for Faculty of Business and Economics at Girne American University since 2008. She has worked for various multinational companies in the logistics sector such as, Scan Global Logistic in Istanbul TR as Marketing Manager and Ecu-Line International NVOCC in Istanbul TR as Sales & Marketing Executive. İbrahim Murat Bicil received his undergraduate degree in Economics from Akdeniz University in 2007. In 2009, he completed his master’s degree at Akdeniz University Institute of Social Sciences, Department of Economics. In 2015, he received his PhD degree from Balıkesir University Institute of Social Sciences, Department of Economics. In 2009, he started to work as a Lecturer in Balıkesir University Sındırgı Vocational School Foreign Trade program. In 2015, he was appointed as an Assistant Professor at Balıkesir University Faculty of Economics and Administrative Sciences, Department of Economics. He is currently working at the same department at Balıkesir University. His research interests include economic theory, environmental and natural resources economics, and energy economics. He continues his studies on energy markets, energy effciency, environment and energy policies. Ilker Calayoğlu is a Doctor in the Istanbul University Accounting and Auditing Department. He started his career in the feld of tourism. He received his high school and undergraduate education in the feld of tourism. Later he gave up the feld of Tourism and started to receive education in the feld of Accounting. He completed his master and doctorate education in the feld of Accounting. Doctorate thesis subject is software accounting. Moreover, this subject is the frst person working in Turkey. His past work experience includes
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
About the Contributors xi working in food and beverage service units at various hotels, working in the international airline ticketing unit in the travel agency and working in the accounting department at Okan Holding. He teaches undergraduate and graduate courses at Istanbul Okan University. The courses include: Financial accounting, cost accounting, management accounting, international fnancial reporting standards, accounting package programs, accounting information systems, advanced Excel. He is married and has a daughter. Sh. Citaku works as a legal advisor (fnancial matters) and also holds MA in Financial Law. She is about to gain her PhD degree at the University of Prishtina. She also worked as Lecturer at the University of Prizren. The expertise and analyses she performed in the feld of fnancial law was a great accomplishment for her academic and professional development.
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Burak Demir is a PhD student in Marketing at Ege University in İzmir, Turkey. He completed his master’s degree in Business Administration at İzmir Kâtip Çelebi University in 2017. He completed his undergraduate education in Business Administration at Girne American University in Cyprus in 2013. He is closely interested in technological themes such as Artifcial Intelligence, Internet of Things, Virtual Reality, Omnichannel, Sharing Economy, Blockchain, Big Data and E-Marketing. Recently, he has been dealing with customer experience and emotions in both Covid19 process and Retailing. He is single and lives in Izmir with his beloved family. Rebecca Emily Dalli Gonzi, PhD (Glasg), MSc (Edin), B.E. & A. (Melit) (Hons), A. & C.E., A.L.C.M. (Lond), is an architect, project co-ordinator and lecturer. She is a registered and certifed civil engineer by the Chamber of Architects, Malta. She has worked in the private and public sector, both in Malta and in Scotland. She is a resident academic at the University of Malta lecturing project management in the Department of Construction and Property Management and within the Department of Insurance, lecturing on Geopolitical and Environmental Risk and Business continuity Management. She also lectures Project Development at the Institute for Sustainable Energy. She has founded The DALI Model, which is a tool used for organizational risk assessment particularly when frms undergo rapid change. This model has been presented as an empirically tested proactive model in a specifc environment for managing organizational risk for companies to arrive at their objectives with minimal setbacks. Her book titled ‘Change and continuity management in the public sector’ which presents the underlying research for this model, reinforces the idea that decisions for good governance should always strive to bring country performance to the forefront. Her current research focuses on innovative engineering techniques, decision-making models and strategic project management. Rebecca has been a reviewer of journals, has chaired conferences and continues to publish. Simon Grima, PhD (Melit.), MSc (Lond), MSc (BCU), B.Com (Hons) (Melit.), FFA, FAIA (Acad), is an Associate professor at the University of Malta, Faculty of Economics, Management and Accountancy and the Head of Department of Insurance which he set up in 2015 and started and coordinates the MA and MSc
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
xii About the Contributors Insurance and Risk Management degrees together with the Undergrad degree in Insurance. He served as the President of the Malta Association of Risk Management (MARM) and President of the Malta Association of Compliance Offcers (MACO) between 2013 and 2015, and between 2016 and 2018, respectively. Moreover, he is the Chairman of the Scientifc Education Committee of the Public Risk Management Organization (PRIMO). His research focus is on Governance, Regulations and Internal Controls and has over 30 years of experience varied between Financial Services, academia and public entities. He has acted as co-chair and is a member of the scientifc program committee on some international conferences and is a chief editor, editor, and review editor of some Journals and Book Series. He has been awarded outstanding reviewer for the Journal of Financial Regulation and Compliance in the 2017 Emerald Literati Awards.
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Çağla Aslı Gülduran born in the Kocaeli, completed her primary and secondary education in the Kocaeli/Derince High School; undergraduate education in Mustafa Kemal University; and Tourism and Hotel Management in 2010. During her undergraduate education, she was Erasmus Exchange Student in Universita degli Studi Del Sannio/Italy, Department of Tourism Economics, 2008–2009. She completed her master graduate education in Nevşehir Hacı Bektaş Veli University in 2018, Department of Tourism Management. Currently, she is a doctoral student in Muğla Sitki Koçman University in Tourism Management. She is married and has two children. Arzu Gürdoğan, born in the Bodrum, completed her primary and secondary education in the Bodrum High School; high school education was completed with Bodrum Anatolian Tourism Vocational High School; undergraduate education in Adnan Menderes University School of Tourism and Hotel Management School has done. She completed her graduate education with Dokuz Eylül University, Department of Tourism; doctorate with the Department of Tourism, Adnan Menderes University during 1999–2008 in Tourism Management. She worked as a Research Assistant in the School of Hotel Management. She received her doctoral degree in 2010. Since 2012, she has been working with the Ortaca Vocational High School in Mugla Sıtkı Kocman University, School of Travel and Tourism and Leisure Services Department. She is married and has two children. Murat Güreşci works as a Member of the Public Relations Department of Tirebolu Faculty of Communication, Giresun University. His research interests include public relations, persuasion, and corporate social responsibility. Tehmina Khan, PhD, has been in academia for 20 years so far. Her research areas include sustainability accounting and accountability and Internet technologies. She has published widely in internationally recognized and highly ranked journals including the Journal of Cleaner Production, the Accounting, Auditing and Accountability Journal, and Business Strategy and the Environment. She supervises Higher Degree by Research students in undertaking sustainability accounting and accountability research projects. She co-ordinates and teaches Business Advisory Services at RMIT University. She is an active and engaged researcher
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
About the Contributors xiii who believes in applied research to provide practical solutions for urgent and pressing sustainability related real life problems. Muhammad Raheel Matloob is the Head of the Department of Management Sciences at Pakistan Military Academy Abbottabad for the last two years and have been attached with the Military Educational Institutions in different Capacities. He holds a MBA (HR) degree from NUML, MS (HR) from IIUI and Diploma in Management from Hazara university. He is an experienced educationist and served as Grade II offcer at HRD Directorate Rawalpindi. He remain affliated with different institutions like NUST and JLA Shinkiari. He is perusing his PhD at COMSAT University, Abbottabad. Fisnik Morina, PhD, is an Assistant Professor at the University "Haxhi Zeka" in Peja, Kosovo. In 2019, he has started post-doctoral studies at the University of Malta, FEMA in Malta in the feld of fnancial institutions and risk management. He completed his doctoral studies in 2019 at the South East European University, Faculty of Business and Economics in the Republic of North Macedonia and gained the qualifcation of Doctor of Economic Sciences - Economics. He has an international experience in the feld of scientifc research and has been a participant in many international scientifc conferences.
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Serdar Ögel is an Assistant Professor at Afyon Kocatepe University, Faculty of Economics and Administrative Sciences, Division of Business Administration, Turkey. He received his undergraduate degree in Public Finance from Anadolu University in 2000. He holds a MA degree in Finance from Anadolu University and PhD degree in Business Administration from Afyon Kocatepe University. His primary research areas include risk management, fnancial markets and investment tools. İlkin YARAN ÖGEL, PhD, is a Research Assistant at Afyon Kocatepe University, Faculty of Economics and Administrative Sciences, Division of Business Administration in English, Turkey. She holds a BA degree in Business Administration in Faculty of Business from Dokuz Eylül University, MBA degree in Business Administration from Middle East Technical University and PhD degree in Business Administration from Dokuz Eylül University. Her main research interests are brand management, consumer behaviors and brand culture. Peterson K. Ozili is an Economist, affliated with the Central Bank of Nigeria. He works extensively in academia and policy making. He has experience in economic policy, fnancial inclusion, fnancial stability, fnancial innovation, banking regulation and supervision. His areas of specialization are: fnancial economics, international development, accounting, development fnance, the economics of fnancial markets, banking, and fnancial reporting. He has published extensively in many accounting and fnance journals such as the British Accounting Review, Journal of Applied Accounting Research, Journal of Accounting in Emerging Economies, International Journal of Managerial Finance, European Journal of Finance, Research in International Business and Finance, etc.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
xiv About the Contributors Syed Tahir Hussain Rizvi, PhD, is a Senior Educationist with more than 20 years of teaching and professional experience. He has been serving IIUI for about 12 years in different capacities like QEC Team Member, Coordinator Higher Studies and Research (MS/PhD Program) at FMS and HOD of Department of Management. Currently, he is Director Quality Enhancement Cell (QEC) at International Islamic University, Islamabad, Pakistan. He holds an MSc in Economics from IIUI, MBAHRM and PhD in Human Resource Management from CUST Islamabad with an extended research supervision at State University New York (SUNY) Oswego, NY, USA, under HEC’s IRSIP program. His areas of research interests are Performance Appraisal System, Organizational Justice, Positive Organizational Behavior and Happiness. Along with other publications, he has published a collaborative research with Dr Barry Friedman -a Presidential Award winner for Highest Publications and senior researcher at SUNY, Oswego, NY, USA. He has the honor to work and teach in an international environment. He has been teaching, as a visiting faculty, Managerial Economics and OB in SUNY - an AACSB accredited Business School. He also has American Management Association (AMA) certifcation on “How to Train Your Employees.” He has international affliations with AMA and AACTE (American Association of Colleges for Teacher Education).
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Türker Savaş obtained his bachelor’s degree (1990) in Agricultural Engineering (Animal Science) and MSc in Animal Science (1993) from the Trakya University. He did his PhD in Animal Breeding and Genetics (1999) from Kiel Christian Albrechts University (Germany). He is a Professor in Animal Science (Agricultural Faculty) at Çanakkale Onsekiz Mart University. He is studying on animal production systems, animal breeding and genetics as well as animal behaviour. Seval Kardes Selımoglu was born in Eskişehir in 1962. After completing her primary and secondary education in Eskişehir, she graduated from Anadolu University, the School of Economics and Administrative Sciences, Faculty of Business in 1984. She started his academic career in 1986 as an Research Associate in Anadolu University, the School of Economics and Administrative Sciences, Faculty of Business, Department of Accounting and Finance. She completed her master’s degree in Anadolu University, Institute of Social Sciences, Department of Accounting, in 1987. She obtained International MBA (IMBA) degree in the United States (OHIO-Cleveland) in Baldwin-Wallace University in 1990. She completed her doctorate degree in Anadolu University, Institute of Social Sciences, Department of Accounting, in 1995. Her doctoral dissertation in the feld of audit has been published as a book in 1996 by Capital Market’s Board. She has received the title of Assistant Professor Doctor in the feld of AccountingFinance in 1995, Associate Professor Doctor in 2002, and Professor in 2007. Her main academic studies are in the felds of International Independent Audit and Assurance Standards, Independent Audit, Ethics, Accounting Fraud, Corruption, Internal audit, Financial Statements Analysis and Accounting. She has lots of books, articles, assertions and studies on EU projects published nationally and internationally. She served in various commissions established in corporations such as TÜRMOB/TESMER, KGK. She is serving as a member of The
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
About the Contributors xv Governmental Accounting Standards Board. She also has the titles of Certifed Public Accountant (Sworn in CPA) and Independent Auditor and serves as expert in courts relate to her area of specialization. She is married. Aamir Aijaz Syed obtained B.Com, M.Com, and PGDM from the University of Lucknow, India. He has completed his PhD from Motilal Nehru National Institute of Technology, Allahabad, India. He is currently working as an Assistant professor at Shri Ramswaroop Memorial University, Lucknow. He is having fve years of teaching and research experience with eminent institutes like the Indian Institute of Management, Lucknow, He has published various papers in renowned national and international journals together with chapters contribution. He is also on the editorial board of several reputed journals. His area of expertise is Finance, International Economics, and Corporate Accounting.
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Özlem Tuna is a lecturer in Afyonkarahisar Health Sciences University, Department of Health Management. She has a doctorate degree in the business administration. She formalized in her PhD (2014) on corporate sustainability. Tuna has managerial experience in the private sector between 1997 and 2002, she has been working in university since 2002. Her research focuses on the feld of corporate sustainability, other strategic management issues and organizational behavior. Tuna, which has many papers and articles in related felds, is sensitive to environmental and social issues and actively takes part in projects in this direction. Kumru Turkoz received her undergraduate degree in Economics from Dokuz Eylül University in 2011. In 2015, she completed her master’s degree at Balıkesir University Institute of Social Sciences, Department of Economics. In 2020, she received her PhD degree from Dokuz Eylül University Institute of Social Sciences, Department of Economics. In 2013, she started to work as a Research Assistant in Balıkesir University Faculty of Economics and Administrative Sciences, Department of Economics. She is currently working at the same department at Balıkesir University. Her research interests include economic theory, environmental and natural resources economics, and energy economics (especially in the felds of energy effciency, energy policies, and energy security). Ekrem Tufan obtained his bachelor’s degree (1991) in Business Administration, MBA in Financial Management (1995) and PhD in Financial Management (1999) from Anadolu University. He is a Professor in Finance and working for Çanakkale Onsekiz Mart University. He is studying on Behavioral Finance and Behavioral Economics. Keti Ventura has been working in Ege University, Faculty of Economics and Administrative Sciences, Department of Business, since September 1999. Acquiring her PhD in Business in April 2008, she was nominated as an Assistant Professor to the Department of Production Management and Marketing in December 2008 and as an Associate Professor in April 2014. She is studying Marketing, CRM, and E-Marketing felds at the same faculty.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
xvi About the Contributors
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Gul Yesilcelebi is an Assistant Professor in the Academy of Applied Sciences, Department of Aviation Management at Gumushane University, Turkey. Her research activities lie in the areas of independent audit, fnancial accounting, corporate sustainability, and integrated reporting. She graduated in Business Administration in English within the Faculty of Economics and Administrative Sciences, and, afterward, she obtained a master’s degree in Accounting. She received her PhD with the Department of Accounting from the Anadolu University, Turkey. She wrote her thesis on integrated reporting and combined assurance. She has published a series of papers on her research interests and she has presented papers in various conferences. She currently teaches fnancial accounting, corporate accounting, cost accounting, managerial accounting, and fnancial statement analysis, in undergraduate degrees at Gumushane University. And also, she teaches independent auditing standards in master’s degrees at Gumushane University.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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Foreword
The Emerald book series: Emerald Studies In Finance, Insurance, and Risk Management includes studies on New Challenges for Future Sustainability and Wellbeing contributed mainly by authors invited from participants in the 5th International Applied Social Science Congress (C-IASOS2019) held in Çeşme, İzmir, Turkey, between April 04–06, 2020 and the University of Malta - Department of Insurance. A collection of 24 chapters/studies about sustainability and challenges related to topics such as income, fnance, wealth, politics, social aspects, the environment, education, and regional equality that infuence the pace of economic development and deteriorates well-being of people and organizations all over the world. The objective is to provide a platform/opportunity for scholars, researchers and professionals from different disciplinary backgrounds to discuss, highlight and exchange ideas on these challenges and prospects for economic and business development. The great challenge of our time is to create a sustainable and desirable future – one that achieves sustainable development goals (SDGs). In today’s “anthropocene” world, human impacts on ecological life support systems are increasingly complex and far-reaching. At the same time, there are increased demands on the planet’s life support functions to maintain living standards in developed nations and to reduce poverty in developing nations. In this “full” world, the emphasis in research, education, and policy needs to shift from addressing problems in isolation to studying whole, complex, interconnected systems and the dynamic interactions between the parts. Several scholars have focused on how the concepts of vulnerability and resilience may be employed in the analysis of and to ensure future sustainability and wellbeing. Various approaches have been proposed, concerning different felds of application spreading from environmental to fnancial settings. While much of the existing literature on vulnerability and resilience is sector or country specifc, in this volume we are proposing a more holistic approach that allows the sustainability of human well-being to be analyzed as a whole. Our understanding is that well-being equals sustainability, where several domains are interlinked. Moreover, while the majority of studies consider the vulnerability and resilience as aspects of the sustainability of a “system”, that is a society, a country, an organization or even the whole planet, this volume focus is on interrelated dimension of well-being, considering the exposure to risk and the ability to manage these. We look out for the use of both objective and subjective indicators of well-being, case studies, theory and practice.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
xviii Foreword
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Our current economic systems have become addicted to “growth at all costs,” as measured by Gross Domestic Product (GDP). They assume that GDP growth is synonymous with increased wellbeing and prosperity. However, this approach has led to growing inequality, an escalating climate crisis, and the depletion of natural and social capital. We are no longer generating genuine progress. Our approach to economics and development needs to be fundamentally transformed.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Chapter 1
Financial Inclusion: A Strong Critique Peterson K. Ozili Abstract Purpose: This chapter presents criticisms of fnancial inclusion. Methodology: This chapter uses critical discourse analysis to critique the modern fnancial inclusion agenda. Findings: The fndings reveal that (i) fnancial inclusion is an invitation to live by fnance and leads to the fnancialization of poverty; (ii) some of the benefts of fnancial inclusion disappear after a few years; (iii) fnancial inclusion ignores how poverty affects fnancial decision-making; (iv) it promotes digital money which is diffcult to understand; (v) fnancial inclusion promotes the use of transaction accounts; (vi) digital money is diffcult to understand; and that (vii) some fnancial inclusion efforts bear a resemblance to a campaign against having cash-in-hand.
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Implication: This study will help policymakers in their assessment of the economic, social, political, and cultural factors that hinder fnancial inclusion as well as the consequence of fnancial inclusion for society. For academics, this study will provide a critical perspective to on-going fnancial inclusion debates in the large positivist literature on fnancial inclusion. Originality: Currently, there are no studies that use critical discourse analysis to analyze the broader concept of fnancial inclusion. This chapter is the frst study that uses critical discourse analysis to critique some aspects of the modern fnancial inclusion agenda. Keywords: Financial inclusion; criticism; poverty; digital money; digital fnance; fnancial literacy; fnancial education JEL Codes: E44; G15; G18; G20; G21; G28
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2 Peterson K. Ozili
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1. Introduction Financial inclusion is the sustainable provision of affordable fnancial services that bring the poor into the formal economy (United Nations, 2016). Financial inclusion may be defned as the use of formal fnancial services by poor people (Beck, Demirgu¨c-Kunt, & Levine, 2007; Ozili, 2018). Financial inclusion is the process that ensures the availability and ease of access to the formal fnancial sector (Ozili, 2020a; Sarma, 2012). Another defnition refers to fnancial inclusion as the process of ensuring access to appropriate fnancial products and services needed by all sections of the society in general, and vulnerable groups such as weaker sections and low-income groups in particular, at an affordable cost in a fair and transparent manner by regulated mainstream institutional players (Chakrabarty, 2011). These defnitions emphasize that fnancial inclusion is achieved when there is access to fnance to all or some members of the population. The benefts of fnancial inclusion are enormous. Having a formal account is the frst step toward fnancial inclusion because it can provide a convenient way to save money and pay bills and to meet emergency needs. Financial inclusion can introduce a savings culture which individuals can take advantage of to manage their cash infows and outfows and to save any excess money (Ozili, 2020a). Financial inclusion can open up a wide range of opportunities and a variety of fnancial products for people (Mohan, 2006). Financial inclusion will grant access to credit to small businesses which can increase the level of local economic activities. Financial inclusion will also allow fnancial markets to be within the reach of all citizens that want to engage in economic activities (Cull, Ehrbeck, & Holle, 2014, Ozili, 2020a). Financial inclusion is indeed a great idea but this chapter critiques some aspects of the global fnancial inclusion agenda. While the author is not a critic of fnancial inclusion, the author identifes several aspects of the fnancial inclusion agenda that may come back to hurt the citizens and the State in the future of a fnancially inclusive society. Anyone with a keen interest in the fnancial inclusion literature will observe that most studies that investigate fnancial inclusion implicitly considers fnancial inclusion to be a good thing, and a large number of such studies can be found in the policy literature on fnancial inclusion. History has taught us that too much of a good thing is bad. The dot.com bubble of the early 2000s and the 2008 fnancial crisis are examples of this. The dot.com bubble (or the technology bubble) of the 2000s was replete with corporate governance scandals in many technology frms, and the 2008 global fnancial crisis where credit derivatives and subprime mortgages were pushed too far by investment banks that wanted to make much proft at the expense of subprime borrowers and unsophisticated investors. These two examples remind us that too much of a good thing can become a bad thing. Similarly, it is possible that too much fnancial inclusion may become undesirable. Think of a world where everybody is fnancially included, a world where everyone owns a basic bank account, and everyone can do whatever it takes to improve their economic welfare. In this kind of world, can anything really go wrong? Will people make fnancial decisions and transactions that improve their welfare? Is there a likelihood that people will make fnancial mistakes or make fnancial
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Financial Inclusion: A Strong Critique 3 decisions that are welfare-destructing as they now have unlimited access to bank accounts? It will be naïve to think that people, if left to themselves, will always make welfare-improving fnancial transactions and decisions. This is because unrestricted access to fnance can make it easier for vulnerable people, most of whom are poor, to make poor fnancial decisions and choices that would not be possible if unrestricted access to fnance was not granted. Financial inclusion is also linked to inequality. Financial inclusion can exacerbate inequality if there is a signifcant increase in the use of fnancial services by a smaller share of the population which is often the case in developing countries. Financial inclusion can reduce inequality if a larger share of the population, particularly women and poor people, increasingly use fnancial services. Interestingly, there is evidence that unequal fnancial access between men and women is signifcantly related to greater income inequality in countries (Aslan, Deléchat, Newiak, & Yang, 2017), which suggest that the uneven distribution of fnancial access in the population both for men and women increases income inequality, whereas policies that reduce the gender gap in fnancial access can help in promoting greater gender and income equality. But gender and income inequality is only one aspect of inequality that fnancial inclusion addresses. Other dimensions of inequality cannot be mitigated by fnancial inclusion such as technological inequality and social inequality. By examining the critical dimensions of fnancial inclusion, this chapter contributes to the following strands of the literature. First, it contributes to the literature that contests the modern fnancial inclusion agenda. This literature argues that achieving fnancial inclusion through corporate industrialists, such as fnancial inclusion, is not in the best interest of the excluded population (Berry, 2015; Mader, 2015, 2018; Prabhakar, 2019). Second, it contributes to the fnance and inequality literature that assess the impact of fnancial inclusion on income inequality and gender inequality as well as the effect of gender equality on the macroeconomy (Allen, Demirguc-Kunt, Klapper, & Peria, 2016; Aslan et al., 2017; Demirguc-Kunt, Klapper, & Singer, 2013; Gonzales, Jain-Chandra, Kochhar, Newiak, & Zeinullayev, 2015; Hakura, Hussain, Newiak, Thakoor, & Yang, 2016). Third, it contributes to the literature that identifes some challenges to achieving fnancial inclusion. Much of the existing studies point to fnancial illiteracy and lack of access to a bank as the main challenges to fnancial inclusion (Collard, 2007; Dev, 2006; Khan, 2012; Ozili, 2018, 2020b; Subbarao, 2009), but the author identifes that there are no studies that use critical discourse analysis to analyze the broader concept of fnancial inclusion. This chapter is the frst study that uses critical discourse analysis to critique some aspects of the modern fnancial inclusion agenda. The remainder of this chapter is structured in the following way. Section 2 discusses the theoretical perspectives. Section 3 discusses the criticisms of fnancial inclusion. Section 4 concludes.
2. Theoretical Perspectives The term inclusion is a civil rights concept which advocates that all individuals deserve equal access and equal opportunity. Proponents of inclusion, those who
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4 Peterson K. Ozili support inclusion, argue that inclusion will enhance social interaction at all levels of human interaction, and these kind of interactions allow people to understand diversity which leads to an open-minded society (Clark, Dyson, Millward, & Robson, 1999; Mallory & New, 1994). Inclusion will allow individuals to encounter individuals and groups who do not think or act as they do, and they will need to learn how to work and interact with these individuals and groups. Social constructivist theory helps to understand inclusion, and then, fnancial inclusion. Social constructivist theory argues that reality is constructed through biological forces and the use of language in interactions with others which is primarily infuenced by biological traits, history, society, and culture (Berger, Luckmann, & Zifonun, 1967; Teater, 2015). It emphasizes that people’s reality is constructed by both societal and biological factors, in other words, reality construction is infuenced by both nature and nurture (Teater, 2015). The social constructivist theory has implications for inclusion which is that an individual’s propensity to have equal rights (or access) and equal opportunities in all aspects of society depends largely on biological factors (individual traits and idiosyncrasies) and social factors that hinder or enable inclusion in society. The social constructivist theory also has implications for fnancial inclusion which is that an individual’s propensity to have access to fnance in the formal fnancial sector may be infuenced by biological factors and other social factors that hinder or enable fnancial inclusion. Biological factors, such as health conditions, physical ability/disability, personal traits, and habits, can hinder or enable fnancial inclusion. Social factors, such as culture, traditions, language, education, entrepreneurial ability, language barrier and religious belief, can also hinder or enable fnancial inclusion.
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3. Criticism of Financial Inclusion This section discusses seven criticisms of fnancial inclusion relating to poor decision-making, fnancial literacy, the fnancialization of poverty, the disappearing beneft of fnancial inclusion, the excessive use of transaction account, digital money, and the campaign against having cash in hand.
3.1. Poverty Is Associated with Bad Habits and Decision-Making That Hinder Financial Inclusion Financial inclusion ignores the evidence that poverty is associated with bad habits and poor decision-making that hinders fnancial inclusion. Evidence from the poverty and decision-making literature shows that poor people or lowincome individuals tend to focus on the present at the cost of the future such as unhealthy eating which damages health in old age, taking high-interest loans which favors meeting an immediate fnancial need as opposed to future needs (Sheehy-Skeffngton & Rea, 2017). Also, in the feld of political psychology, there is evidence that the lower one is in socioeconomic status, the more one is biased in one’s attitudes and behaviors toward members of one’s own social group, as opposed to members of other groups (Sheehy-Skeffngton & Rea, 2017;
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Financial Inclusion: A Strong Critique 5 Wagner & Zick, 1995), leads to poor decision-making. There is also evidence that perceptions of low status can cause greater desire for poor people to spend the little money they have on status-displaying goods such as clothing and electronics to improve one’s local social standing (Rucker & Galinsky, 2008; Sivanathan & Pettit, 2010), and also, there is evidence that those lower in socioeconomic status are less likely to move from their impoverished neighborhood to a smart urban neighborhood when given the opportunity (South & Crowder, 1997), possibly because they prefer proximity to one’s local geography than exploring new locations (Sheehy-Skeffngton & Rea, 2017). If unrestricted access to fnance is granted to people who exhibit these behaviors or make poor decisions, it is unlikely that access to fnance will improve their welfare in the long run. Perhaps, it is possible that fnancial education and fnancial literacy can help to mitigate these negative effects (Luhrmann, Serra-Garcia, & Winter, 2018), but we also know that fnancial education or literacy rarely leads to a change in old habits or a signifcant change from poor decision-making to better decision-making (Mandell & Klein, 2009; Willis, 2008). This does not mean that poor people should not be granted unrestricted access to fnance, rather the point is that there should be greater emphasis and inquiry on how poor people’s decision-making and habits hinder fnancial inclusion efforts, and the insights gained from this can help to develop policy solutions for better fnancial inclusion outcomes for poor people.
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3.2. Financial Literacy Does Not Improve Financial Inclusion in a Signifcant Way There is a large literature which suggests that fnancial literacy is the most important positive infuence for fnancial inclusion. These studies demonstrate, through arguments and correlations, that fnancial literacy can help excluded people be made aware of available fnancial services, but these studies do not demonstrate how fnancial literacy makes excluded people use available formal fnancial services since “being aware of available fnancial services” does not necessarily mean that excluded people have access to it. First and foremost, fnancial literacy and whatever it means has been branded a fallacy by many scholars because fnancial literacy does not demonstrate a causal chain from fnancial education to higher fnancial literacy, to better fnancial behavior, and to improved fnancial outcomes due to biases, heuristics, and other non-rational infuences on fnancial decisions (Cole & Shastry, 2008; Gale & Levine, 2010; Hathaway & Khatiwada, 2008; Willis, 2008, 2011). The fnancial literacy agenda has many problems. Willis (2011) identifed some of the problems. First, the high cost of fnancial literacy and education – deciding which fnancial literacy programs meet the fnancial education needs of different customers and the cost of such programs; deciding how long fnancial literacy programs should last whether 18 months, 2 weeks or 3 days and the cost implication of each decision; deciding which form of fnancial literacy programs should take place – whether as counseling sessions, seminars, lectures or group tasks and the cost implication of each decision; debates on whether fnancial education
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6 Peterson K. Ozili should be extended to non-fnancial topics such as teaching customers how to detect cyber-criminal activity, engaging in good social interactions, learning how to verify source of information, and the cost implication of extending fnancial education to non-fnancial topics. Second, the speed with which fnancial product offerings and industry practices change is a major obstacle for fnancial education and literacy. Yesterday’s new product can become outdated today, and may be discontinued, which means that customers have to be re-educated again to learn about new fnancial product offerings and this will have cost implications. The evolving nature of fnancial product offerings shows that fnancial education has a short life span. Third, the lack of interest or resistance to participate in fnancial education is another obstacle to fnancial literacy. Voluntary fnancial education is widely available and free yet seldom used by many people, which implies that there may be some resistance to participate in compulsory fnancial literacy programs too (Willis, 2011). In sum, these challenges of fnancial literacy casts doubt on whether fnancial literacy can improve fnancial inclusion in a signifcant or meaningful way.
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3.3. Invitation to Live by Finance and the Financialization of Poverty Financial inclusion is an invitation to live by fnance because fnance or money, which in the past used to be a secondary source of happiness in people’s life, will now become a primary source of happiness in people’s lives. Having money in one’s formal account will become the determinant of whether poor individuals or households will live a good life or a life flled with suffering. Through fnancial inclusion, everyone will own a formal account which will create a basis for people to compare themselves with others – by how much they have in their formal accounts, which may lead to greed, jealousy, and other vices. This sort of comparison already exists in society but full fnancial inclusion will make it more pronounced and even worse. As the global fnancial inclusion movement is placing greater emphasis on formal account ownership and the amount of money people have in their formal accounts to perform transactions, such emphasis will make people devalue other areas of life that does not require money, or access to fnance, to live a fulflling life. Financial inclusion also leads to the fnancialization of poverty. Financial inclusion follows the fundamental premise that poverty alleviation should be pursued through the expansion of fnancial markets (Mader, 2018), that is, the expansion of fnancial markets through the entry of new players in the fnancial sector. Advocates argue that the entry of new players in the fnancial sector will ensure that there are many providers of fnancial services to provide basic fnancial services to poor people, and the new players will reach poor people in remote areas for poverty alleviation (Chauvet & Jacolin, 2017; Ozili, 2018; Soederberg, 2013). This suggests that poverty can only be alleviated through the services offered by fnancial institutions; thus, fnancializing poverty (Mader, 2018). The problem with this is that some fnancial institutions have superior advantage in offering basic fnancial services than other fnancial institutions, and these institutions enjoy economic rents in some segment of the market. If these fnancial institutions target the poor and excluded population
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Financial Inclusion: A Strong Critique 7 they will not only spearhead the fnancialization of poverty in poor communities and enjoy rents, but may also engage in unethical business practices that will make poor people depend on them, leading to over indebtedness and without any opportunity for debt forgiveness. Mader (2015) contests that the fnancialization of poverty always beneft rentier capitalists and social investors at the expense of poor people. Second, fnancializing poverty will expose poor people to risks associated with fnancial markets (Prabhakar, 2019). Using fnancial inclusion to increase poor people’s participation in the formal fnancial sector will expose poor people to risks associated with engaging with the fnancial system which will advance the process of the fnancialization of poverty (Berry, 2015).
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3.4. The Benefts of Financial Inclusion Disappear After a Few Years There are three reasons or hypotheses that explain why the benefts of fnancial inclusion disappear after a few years. The frst reason or hypothesis is the quick fx hypothesis. The quick fx hypothesis argues that when there is an economic or fnancial crisis that affects poor people’s access to basic fnancial services, the government will provide benefts such as cash transfer payments and other benefts to poor people and other affected groups to improve their economic welfare for the time being. But when the crisis ends, the benefts given to poor people and the affected groups will stop after a while or will be reduced to a minimum due to high cost of sustaining the benefts program. In other words, the quick fx hypothesis states that when a “quick-fx” fnancial inclusion regime is over, the benefciaries will gradually withdraw from the formal fnancial sector when the benefts stop. Using quick-fxes to address the fnancial inclusion problems in a country is a great idea because it can help in reducing the negative effects of a crisis and can make the crisis become bearable for poor individuals for the time being. Affected individuals and groups will be encouraged to own a formal account where they can receive their benefts from the government such as cash transfer payments. But when the benefts stop, the affected individuals or groups may abandon the formal accounts they own and feel that they no longer need those formal accounts since the benefts have stopped, making the formal accounts become inactive or dormant and this would negatively affect fnancial inclusion because the goal of fnancial inclusion is not just to bring poor people and excluded groups into the formal fnancial sector, but to ensure that poor people and other users of fnancial services are active users of available fnancial products and services in the formal fnancial sector. Also, when the benefts fnally stop, the benefciaries – the poor and other excluded groups – may become dissatisfed because they want the benefts to continue for as long as it can even though the crisis has ended. Such dissatisfaction can lead to extreme reaction such as activism, counter-activism, closing of bank accounts, hatred toward the government, isolation, radicalization, and social exclusion, which will negatively affect the goals of fnancial inclusion and can hurt the community and the society. The quick-fx hypothesis is widely linked to the benefts program used by many countries such as Canada and the UK to help poor individuals and households
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8 Peterson K. Ozili who cannot access formal fnancial services during an economic crisis. For instance, the government in these countries tend to persuade domestic banks to provide specialized fnancial services to the affected population free-of-charge or at a low cost over a specifc period of time with the government promising to bear any signifcant costs associated with such services until the crisis ends; hence, a “quick-fx” solution. Sometimes, a government will make temporary profnancial inclusion commitments in order to protect and preserve its international economic development reputation. Since no government wants to be seen as performing badly in taking care of its citizens, governments have an incentive to adopt temporary fnancial inclusion measures to signal that they are performing well compared to other countries in the international development community. This is also a type of quick-fx. The second reason or hypothesis is the “post-achievement slack” hypothesis. The post-achievement slack hypothesis argues that the benefts of fnancial inclusion begins to disappear when a government has achieved its fnancial inclusion objectives and fails to sustain the infrastructure it created for the purpose of achieving its fnancial inclusion goals. The government may completely cease funding for fnancial inclusion once the fnancial inclusion objectives have been achieved, so that it can focus on meeting other economic priorities. The third hypothesis is the change-in-government hypothesis. The change-in-government hypothesis argues that the benefts of fnancial inclusion begin to disappear when a new government discontinues the existing national fnancial inclusion programs of the previous government. A new government can either continue or discontinue the existing national fnancial inclusion programs. If the existing program is continued, it may be continued with less intensity which would lead to a reduction in fnancial inclusion penetration. Also, a new government may discontinue the existing fnancial inclusion program if the new government believes that (i) the current fnancial inclusion program is too expensive to sustain, (ii) the new government has a better alternative, or (iii) if the new government believes that the intended goal has been achieved. Whichever is the case, a change in government usually reduces the intensity of fnancial inclusion activities, which may erode the short-term benefts of fnancial inclusion.
3.5. Promoting the Use of Transaction Account Financial inclusion promotes the use of transaction accounts. In recent years, fnancial inclusion is increasingly focused on having a greater number of active holders of transaction accounts – accounts that are actively being used to perform transactions (Allen et al., 2016). This suggests that fnancial inclusion requires having access to a transaction account (Demirguc-Kunt, Klapper, & Singer, 2017). A transaction account is an account used for day-to-day expenses so that individuals and businesses can withdraw cash or pay for things they want or need. But, does ownership of a transaction account mean that a person is fnancially included in the formal fnancial sector? Certainly, yes! But, does an increase in transaction account activity translate to greater fnancial or economic well-being for individuals? No. More so, is the number of transactions in a
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Financial Inclusion: A Strong Critique 9 transaction account a reliable indicator of who is active or inactive in the formal fnancial sector? The answer to this question depends on individuals’ spending habits, income level, closeness to a bank branch, and ease of access to an online bank account or digital fnance application. And this leads to a bigger question: is having a transaction account the best way to measure fnancial inclusion? Let’s take a moment to refect on the following. If I choose to own a formal bank account and I make lots of transactions, will I be considered to be fnancially included? Probably, yes! What if I don’t want a transaction account and I prefer to use some other type of accounts, will I still be fnancially included? What if I prefer to store money in the account and rarely use the account to send or receive payments for transactions, am I still fnancially included? What if I open an account and leave it inactive for two years because I don’t want to store any money in it and I don’t want to perform any transaction with the account, will I still be fnancially included or excluded? The questions above point out one fallacy of the modern fnancial inclusion agenda, which is that it assumes that people should be granted access to formal accounts to enable them to perform transactions that improve their welfare. It assumes that individuals and poor households want to perform transactions, and that they will make welfareimproving transactions from their transaction accounts. This assumption is ambitious because not all account holders have the intention of using their accounts to perform transactions, and even among those that want to use their accounts for transaction purposes, many of them do not perform transactions that meaningfully improve their welfare – they spend their money on things that worsen their welfare in the long run. Therefore, the emphasis on “having transactional accounts to improve welfare” should be viewed with caution. Another issue is the costs and risks associated with having a transaction account. Owning and using a transaction account has cost and risk implications which may become burdensome to poor account holders. Some identifed costs include: Monthly account fees to keep your account running, minimum account balance fees if your account balance falls lower than the minimum account balance, ATM withdrawal fee for using an ATM that is not affliated with your bank, branch withdrawal fee when you go to a teller to take money out at the branch, cheque deposit fee when your bank writes a cheque on your behalf if you don’t have a cheque account, and other fees. There are also associated risks with operating a transaction account irrespective of whether it’s a normal transaction account or an online transaction account. For instance, transaction accounts attract very low interest earned and they come with additional costs which makes it diffcult to operate for a long time; owning a transaction account involves lengthy paperwork which can be confusing and could lead to time wasting; corporate business transactions usually attract huge fees on a transaction account, and there are limits on the amount of funds that can be withdrawn in a day which can be a problem when emergency cash withdrawals need to be made. Another issue is the focus on the number of transaction accounts rather than quality of transactions. It may be helpful if the modern fnancial inclusion agenda focuses more on the quality of transactions in a transaction account rather than focusing simply on the number of transaction accounts in a transaction account.
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10 Peterson K. Ozili Recent policy statements in policy circles, show that there is already too much emphasis on the number of transaction accounts as opposed to the quality of transactions. For instance, the World Savings Banks Institute in 2015 announced that it aims to reach 1.7 billion customers and aims to achieve 400 million new transaction accounts by the end of 2020.1 Statements like this show that there is a total disregard for the issues associated with using the number of transaction accounts as an indicator of the level of fnancial inclusion.
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3.6. Digital Money Is Diffcult to Understand There are claims that fnancial inclusion can be achieved using digital money (Chipere, 2018; Donovan, 2012; Lichtfous, Yadav, & Fratino, 2018; Reese, 2015). But digital money is diffcult to understand by ordinary citizens, which may defeat the objective of fnancial inclusion. Using digital money requires memorizing passwords (Brunnermeier, James, & Landau, 2019), and sometimes require people to get help from an agent who may be unavailable. Customers may have to wait for a long time to talk to a help desk when there is a problem, and customers may even have to spend their own money to call the help desk – which is costly to poor customers. On the other hand, cash is much better than digital money. Cash does not require memorizing passwords, cash is easy to understand, and cash is culturally integrated with people’s lives in society. Members of the excluded population, and even some ordinary people, do not understand several aspects of digital money. Let’s consider some examples. For example, some ordinary people struggle to understand why there are different account balances in their digital wallets and in their account statements in the bank. They don’t understand what accounts for these differences. A banker probably understands that these differences happen when banks do not have a robust automated fnancial accounting and reporting process, or might be caused by too much transaction volumes that result in delay in account settlement and reconciliation, or might be caused by a temporal breakdown in banks’ digital technology infrastructure. Bankers understand these issues, but some ordinary bank customers do not understand these issues as they only care about having access to their money whenever they want it. In other words, if some fnancially included people struggle to understand how digital money works, it will be much diffcult for the excluded population to understand digital money. Also, digital money is not tangible, which is what makes it look like an illusion to most people – and this makes digital money diffcult to understand. There is a saying that “money that cannot be seen cannot be treasured.” The intangible nature of digital money makes it diffcult to mentally know how much one has left in their accounts without having to log into a digital device to check one’s account balance. People place a higher value on the money they can hold in hand than the money they can see in a device, and when periods of signifcant stress arise, people will not care about the money they can see in a digital account balance
1
https://www.wsbi-esbg.org/KnowledgeSharing/inclusion
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Financial Inclusion: A Strong Critique 11 rather they will place a higher value on the amount of money they are really sure is in their bank accounts in the bank. Another level of complexity with digital money relates to its utility. If the fear that digital money will become worthless is greater than the utility of using digital money, people will be unwilling to use digital money and will not put in any effort to understand digital money or how it works. On the other hand, if the utility of using digital money is greater than the fear that digital money may become worthless, then the utility of using digital money can becloud the lack of understanding of how digital money work, and can make people take the risk to use digital money yet risk-averse people will avoid digital money. Finally, there are suggestions in the literature that digital currency through mobile technology can help in bringing the underserved population into the formal fnancial sector thereby achieving fnancial inclusion ( see Dyson & Hodgson, 2016; Sapovadia, 2018; Chipere, 2018). Such studies claim that the use of digital currency through mobile technology can help in reducing time and will improve the accuracy and speed of bulk transactions. This argument appears sound, but it is in fact ironical because it assumes that digital currency will be embraced by the underserved population and will therefore bring them into the formal fnancial sector. Even in urban areas, it is diffcult to persuade many educated people to use digital money or to accept digital currencies, and it will be more diffcult for people in the underserved communities to embrace digital money as most of them are fnancial illiterates and only understand physical cash.
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3.7. Financial Inclusion Is a Campaign Against Having Cash-in-hand Over the years, people – both the poor and the rich – have developed a strong affnity toward having cash in hand. Today, a large segment of the rural population and a small segment of the urban population still prefer to have cash-in-hand which they can use for emergency expenditure and to make payment for goods and services rather than using cheques or digital payment alternatives. The benefts of having cash-in-hand are enormous: cash-in-hand can be used for emergency purposes; cash-in-hand can be used to make small purchases that cannot be done through digital fnance channels; cash-in-hand is an asset; cash-in-hand is king during recessions and during fnancial crises; having cash-in-hand makes people confdent in their ability to meet their daily need of transportation, feeding and leisure; and having all your money in your hand during a crisis will shield you from signifcant losses. In the last decade, proponents of global fnancial inclusion have transmitted the belief that achieving fnancial inclusion requires the use of non-cash means of payments or less use of cash payments, and this belief is very popular among policy makers in developed and developing countries. Policy makers in developed countries have already reduced the amount of cash in circulation and are migrating to advanced means of payments such as digital money, crypto currency, bitcoins, digital wallets and e-wallets, while policy makers in developing countries are intensifying their efforts to reduce the use of cash payments in favor of using noncash payment alternatives as well as reducing the amount of cash-in-circulation.
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12 Peterson K. Ozili Reducing the use of cash payments as a strategy to achieve fnancial inclusion is not much of a problem in itself. Rather, the approach used to reduce cash-based transactions is often the problem because some of the tactics used to reduce cashin-circulation often give the impression that there is a crusade against the use of cash in society particularly when the ethical dimensions are considered. In fact, there are existing perceptions that “cash is the enemy of fnancial inclusion” (Better Than Cash, 2014),2 which further validates the idea that there is an obvious or subtly crusade against having cash-in-hand. One major area of concern is the use of forceful policies to discourage cashbased transactions. What some policymakers have gotten wrong is their belief that the adoption of forceful rules or policies is the best way to make citizens migrate from cash payments to non-cash payments. Personally, I believe that using persuasion to encourage the population to use non-cash payment alternatives is a better option than using forceful policies and rules. But, from my experience in policy making, it appears that the major reason why policy makers use forceful policies or rules is because citizens usually have a strong affnity toward cash and will not let go of cash transactions without some degree of coercion. For this reason, policy makers believe that using forceful rules and policies to make people migrate to non-cash payment alternative will yield quicker results. But using a forceful approach tends to make the fnancial inclusion agenda look like a campaign against having cash in hand. Policies and rules such as giving ultimatums to individuals and businesses, imposing fees on large cash withdrawals, and imposing fees on large cash deposits to reduce the use of cash-based transactions are forceful in nature, which presents itself as a crusade against cash. Some policymakers justify using this approach by claiming that their citizens will not respond or listen to public persuasive communications or fnancial literacy campaigns that encourage the use of non-cash payment channels, implying that the citizens are stubborn as they will not migrate to non-cash payment methods even if they are given enough time to migrate to non-cash means of payments unless they are forced to do so; therefore, cashless policies for fnancial inclusion have to be imposed on the population. In addition to this argument, policymakers often bring up the usual economic argument against cash-in-hand which is that it will help in controlling infation, reduce theft, lower the incidence of money laundering and armed robbery, and it will lower the cost of cash management by Central banks. The countries that have used this kind of approach in the past (e.g., Sweden and Nigeria) witnessed mild protests against such forceful policies because of the immediate pain and hardship it brought to the population in the short-term, but after a while, the citizens adjusted to the cashless payment system. Imposing forceful policies for cashless fnancial inclusion on the people or citizens does not give the people much of a choice in deciding whether they want to embrace cashless payments or not, especially the fnancial illiterates that do not know what digital payment systems are, why they exist and are unaware of
2
https://www.betterthancash.org/news/blogs-stories/is-cash-the-enemy-of-fnancialinclusion
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Financial Inclusion: A Strong Critique 13 how to use digital payment systems. It is also important to understand that the citizens will never forget that the State through the fnancial authorities forced them to abandon cash-based transactions and to migrate to digital transactions, and when a severe payment system crisis occurs such as when people’s money suddenly begins to disappear from their digital accounts on a large scale and without authorization or when a nationwide digital downtime event occurs such as when nobody in a country is able to access the internet for many days, the consequences will be very severe and can be worse than any fnancial crises that have ever occurred in living memory. It can lead to a run on banks and a run on technological companies, it can lead to the collapse of payment system institutions and can give rise to resentment against the State and political instability in a country. The resulting public outcry, protests and violent riots from a digital payment crisis may become uncontrollable and may destabilize several countries. To sum up, persuading and encouraging the members of the population to embrace non-cash means of payment is a much better approach. This can be done through increased fnancial education and fnancial literacy programs that create digital payment awareness in schools, colleges, religious centers, villages and in semirural communities. Using this approach will give citizens two choices – a choice to migrate to non-cash payments and a choice to continue using cash payments – and at the same time informing citizens about the great benefts of using non-cash means of payments. Doing it this way will make the citizens feel that their independent choice was considered and protected, and they had the freedom to choose from the alternative payment methods: cash versus non-cash methods. This will ensure that there is a gradual transition to a cashless payment system and ensure that the possible unintended consequences of using non-cash means of payments will be minimal. But today, the persistent use of forceful policies continues to make the fnancial inclusion agenda have the resemblance of a campaign against having cash in hand.
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4. Conclusion Financial inclusion is an important area with much interest among members of the international development community. The policy literature is much more positive toward fnancial inclusion and sees the fnancial inclusion agenda as an attempt to reduce the number of people that are excluded from the fnancial system. This chapter critiqued some popular notions associated with the modern fnancial inclusion agenda in the policy literature. This chapter showed that the current fnancial inclusion agenda: (i) promotes the use of transaction account, (ii) want people to live by fnance, (iii) rely too much on fnancial literacy solutions, (iv) ignores how poverty affects fnancial decision-making, (v) promotes digital money which is diffcult to understand, (vi) ignores the fact that the beneft of fnancial inclusion often disappears after a few years, and (vii) fnancial inclusion looking like a campaign against having cash-in-hand. The implication of the fndings is that there needs to be a re-evaluation of the priorities of modern fnancial inclusion agenda so that the agenda will not collapse the way the microfnance agenda collapsed. An inclusive approach is needed to address these criticisms for further progress in policy and research on fnancial inclusion.
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14 Peterson K. Ozili
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REFERENCES Allen, F., Demirguc-Kunt, A., Klapper, L., & Peria, M. S. M. (2016). The foundations of fnancial inclusion: Understanding ownership and use of formal accounts. Journal of Financial Intermediation, 27, 1–30. Aslan, G., Deléchat, C., Newiak, M. M., & Yang, M. F. (2017). Inequality in fnancial inclusion and income inequality. Washington D.C.: International Monetary Fund. Beck, T., Demirgu¨c-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), 27–49. Berger, P. L., Luckmann, T., & Zifonun, D. (1967). The social construction of reality: a treatise in the sociology of knowledge. London: Penguin. Berry, C. (2015). Citizenship in a fnancialised society: Financial inclusion and the state before and after the crash. Policy & Politics, 43(4), 509–525. Better Than Cash. (2014). Is cash the enemy of fnancial inclusion? Media Communication. Retrieved from https://www.betterthancash.org/news/blogs-stories/is-cash-theenemy-of-fnancial-inclusion Brunnermeier, M. K., James, H., & Landau, J. P. (2019). The digitalization of money (No. w26300). NY: National Bureau of Economic Research. Chakrabarty, K. C. (2011). Financial inclusion and banks: Issues and perspectives. RBI Bulletin, November. Chauvet, L., & Jacolin, L. (2017). Financial inclusion, bank concentration, and frm performance. World Development, 97, 1–13. Chipere, M. (2018). Virtual currency as an inclusive monetary innovation for the unbanked poor. Electronic Commerce Research and Applications, 28, 37–43. Clark, C., Dyson, A., Millward, A., & Robson, S. (1999). Theories of inclusion, theories of schools: Deconstructing and reconstructing the ‘inclusive school’. British Educational Research Journal, 25(2), 157–177. Cole, S., & Shastry, G. K. (2008). If you are so smart, why aren’t you rich? The effects of cognitive ability, education, and fnancial literacy on fnancial market participation. Paper presented at 2009 Federal Reserve System Community Affairs Research Conference, WA, DC. Collard, S. (2007). Toward fnancial inclusion in the UK: Progress and challenges. Public Money and Management, 27(1), 13–20. Cull, R., Ehrbeck, T., & Holle, N. (2014). Financial inclusion and development: Recent impact evidence. CGAP (Consultative Group to Assist the Poor) Focus Note 9/2014. Demirguc-Kunt, A., Klapper, L., & Singer, D. (2013). Financial inclusion and legal discrimination against women: Evidence from developing countries. Washington D.C.: The World Bank. Demirguc-Kunt, A., Klapper, L., & Singer, D. (2017). Financial inclusion and inclusive growth: A review of recent empirical evidence. Washington D.C.: The World Bank. Dev, S. M. (2006). Financial inclusion: Issues and challenges. Economic and Political Weekly, 4310–4313. Donovan, K. (2012). Mobile money for fnancial inclusion. Information and Communications for Development, 61(1), 61–73. Dyson, B., & Hodgson, G. (2016). Digital cash: Why central banks should start issuing electronic money. Positive Money. Retrieved from https://positivemoney.org/publications/digital-cash/ Gale, W. G., & Levine, R. (2010). Financial literacy: What works? How could it be more effective? Paper presented at the First Annual Conference of the Financial Literacy Research Consortium, WA, DC, November 18. Gonzales, C., Jain-Chandra, S., Kochhar, K., Newiak, M., & Zeinullayev, T. (2015). Catalyst for change: Empowering women and tackling income inequality. FMI. Retrieved from http://www.imf.org/external/pubs/ft/sdn/2015/sdn1520.pdf
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Financial Inclusion: A Strong Critique 15 Hakura, M. D. S., Hussain, M. M., Newiak, M. M., Thakoor, V., & Yang, M. F. (2016). Inequality, gender gaps and economic growth: Comparative evidence for sub-Saharan Africa. Washington D.C.: International Monetary Fund. Hathaway, I., & Khatiwada, S. (2008). Do fnancial education programs work? Working Paper No. 0803, Federal Reserve Bank of Cleveland. Khan, H. R. (2012). Issues and challenges in fnancial inclusion: Policies, partnerships, processes and products. Korea, 18(250.29), 84–17. Lichtfous, M., Yadav, V., & Fratino, V. (2018). Can blockchain accelerate fnancial inclusion globally. From a core transformation/technology perspective. Part 02. Inside Magazine, 19. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/lu/ Documents/technology/lu-blockchain-accelerate-fnancial-inclusion.pdf Luhrmann, M., Serra-Garcia, M., & Winter, J. (2018). The impact of fnancial education on adolescents’ intertemporal choices. American Economic Journal: Economic Policy, 10(3), 309–332. Mader, P. (2015). The political economy of microfnance: Financialising poverty. Washington, DC: Palgrave Macmillan. Mader, P. (2018). Contesting fnancial inclusion. Development and Change, 49(2), 461–483. Mallory, B. L., & New, R. S. (1994). Social constructivist theory and principles of inclusion: Challenges for early childhood special education. The Journal of Special Education, 28(3), 322–337. Mandell, L., & Klein, L. S. (2009). The impact of fnancial literacy education on subsequent fnancial behavior. Journal of Financial Counseling and Planning, 20(1) , 15–24. Mohan, R. (2006). Economic growth, fnancial deepening, and fnancial inclusion. Dynamics of Indian Banking: Views and Vistas, 9–120. Ozili, P. K. (2018). Impact of digital fnance on fnancial inclusion and stability. Borsa Istanbul Review, 18(4), 329–340. Ozili, P. K. (2020a). Financial inclusion research around the world: A review. In Forum for social economics (pp. 1–23). Abingdon, UK: Routledge. Ozili, P. K. (2020b). Theories of fnancial inclusion. Retrieved from SSRN 3526548. Prabhakar, R. (2019). Financial inclusion: A tale of two literatures. Social Policy and Society, 18(1), 37–50. Reese, B. (2015). Why you should care about digital money, May 4. Retrieved from https://medium.com/@byrnereese/why-you-should-care-about-digital-moneyec32d6e11562 Rucker, D. D., & Galinsky, A. D. (2008). Desire to acquire: Powerlessness and compensatory consumption. Journal of Consumer Research, 35, 257–267. Sapovadia, V. (2018). Financial inclusion, digital currency, and mobile technology. In Handbook of blockchain, digital fnance, and inclusion (Vol. 2, pp. 361–385). Cambridge, MA: Academic Press. Sarma, M. (2012). Index of fnancial inclusion: A measure of fnancial sector inclusiveness. Delhi: Centre for International Trade and Development, School of International Studies Working Paper Jawaharlal Nehru University. Sheehy-Skeffngton, J., & Rea, J. (2017). How poverty affects people’s decision-making processes. York: Joseph Rowntree Foundation. Sivanathan, N., & Pettit, N. C. (2010). Protecting the self through consumption: Status goods as affrmational commodities. Journal of Experimental Social Psychology, 46(3), 564–570. Soederberg, S. (2013). Universalising fnancial inclusion and the securitisation of development. Third World Quarterly, 34(4), 593–612. South, S. J., & Crowder, K. D. (1997). Escaping distressed neighborhoods: Individual, community, and metropolitan infuences. American Journal of Sociology, 102(4), 1040–1084. Subbarao, D. (2009). Financial inclusion: Challenges and opportunities. Address delivered at the Bankers Club in Kolkata on December, 9.
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Teater, B. (2015). Social Work Theory. In J. Wright (Ed.), International Encyclopedia of the Social & Behavioral Sciences (2nd Edition, pp. 813–820). London: Elsevier. United Nations. (2016). Digital fnancial inclusion. International Telecommunication Union (ITU), issue brief series, inter-agency task force on fnancing for development, July. United Nations. Retrieved from http://www.un.org/esa/ffd/wp-content/ uploads/2016/01/Digital-Financial-Inclusion_ITU_IATFIssue-Brief.pdf. Accessed on November 10, 2017. Wagner, U., & Zick, A. (1995). The relation of formal education to ethnic prejudice: Its reliability, validity and explanation. European Journal of Social Psychology, 25(1), 41–56. Willis, L. E. (2008). Against fnancial-literacy education. Iowa Law Review, 94, 197. Willis, L. E. (2011). The fnancial education fallacy. American Economic Review, 101(3), 429–434.
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Chapter 2
The Performance of Pension Funds and Their Impact on Economic Growth in OECD Countries* Fisnik Morina and Simon Grima Abstract Purpose: With this study, the authors aim to analyze and highlight the fnancial performance of pension funds (public and private) and their impact on the economic growth of The Organisation for Economic Co- operation and Development (OECD) countries, while taking into account the effect of market capitalization, infation, and public debt.
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Methodology: To carry out this analysis, the authors subjected our secondary data (derived from published in the annual reports of the OECD, the World Bank and the IMF) to econometric tests, specifcally linear regression, random effect, fxed effect, the Hausman–Taylor Regression, the Generalized Estimating Equations (GEE), the Generalized Method of Moments – Arellano – Bond Estimation (GMM) and carried out an analysis of linear trends through the historical method and comparative method. Findings: Based on the empirical results of this study, the authors conclude that the assets of public and private pension funds have positively affected the economic growth of OECD countries (2002–2018). Practical Implications: This study provides an overview of the functioning of pension systems in OECD countries as well as the effects of these pension funds on their economic growth. Moreover, it provides additional new knowledge for governments and policymakers in these countries and a good source of information for all employees (whether public or private), on the quality and standards of living after retirement. * Edited by Ercan Ozen and Rebecca Dalli Gonzi. New Challenges for Future Sustainability and Wellbeing, 17–47 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211003
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18 Fisnik Morina and Simon Grima Signifcance: The importance of this study rests on the fact that OECD countries have a highly developed economy and have high-performance fnancial markets. Therefore, this highlights the importance of investments by pension funds in their fnancial markets for economic growth and for the indirect effects caused on their economies. Keywords: Economic growth; pension funds; investment; market capitalization; infation; public debt JEL Codes: G20; F43; G23; G11; G15; G18; E31; E22; H63; C33
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1. Introduction In recent years, many countries around the world have experienced the rapid creation and growth of pension funds. Davis (2003) noted that this growth is a result of the attention paid by these countries to their performance, due mainly to the sensitivity of the transactions involved. In fact, the activity of pension funds is considered to be an important stimulus for the development of capital markets since they act as substitutes for banks and are a result of on demand non-fnancial factors. The Organisation for Economic Co-operation and Development (OECD) data show that these pension funds have risen sharply in many developed countries and emerging markets, both in relation to gross domestic product (GDP) and in comparison with banks. The authors such as Meng and Pfau (2010), Impavido et al., (2003), and Antolin et al., (2009) have analyzed the performance of pension funds and their impact on the development of capital markets. Meng and Pfau (2010) highlighted the need for pension funds to be well managed especially because of the signifcant increase in population globally. They note that in most developing and developed countries, there is a signifcant increase in life expectancy and a decrease in the level of fertility. This is considered to be a threat to the sustainability of the traditional pension systems and, as a result, many countries have reformed their pension systems so as to ensure that pensions contribute to the economic development. Pension funds help in the development of fnancial markets through their replacement and complementary role with other fnancial institutions, especially with commercial investment banks. These funds promote competition and can improve the effciency of credit markets and securities markets. Such an effect affects the reduction of interest rates on loans and deposits as well as lowers the costs of entering the capital markets (Impavido et al., 2003). According to Antolin et al., (2009), pension funds should measure their fnancial performance against optimal long-term standards. They note that some of the important parameters that need to be taken into account during the fnancial performance are: other sources of pension income, income from public pension schemes, the rate of contributions, and the return on equity. Holzner et al., (2019), Davis and Hu (2008), Zandberg and Spierdijk (2012), Rajan and Zingales (1998), Samwick (2000), Thomas and Spataro (2016), Yilmaz
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Performance of Pension Funds and Their Impact on Economic Growth 19 and Ozturk (2016) Altiparmakov and Nedelkovic (2018), and Bijlsma et al. (2018) have all highlighted that the performance of pension funds has a positive impact on the economic growth of countries through the creation of activity in fnancial institutions, especially the investment frms. Pension funds usually have large amounts of money to invest, and these funds are the main investors in the listed and private enterprises. These funds are very important for securities exchanges where large institutional investors predominate. Sustainable pension development is of fundamental importance for socioeconomic development, since it has a close relationship with the stimulation of local economies and government revenues at the macroeconomic level, as well as changing savings behavior at the microeconomic level (Mourao & Vilela, 2018). Therefore, our aim is to analyze and highlight the fnancial performance of pension funds (public and private) and their impact on the economic growth of OECD countries, while, taking into account the effect of market capitalization (MC), infation, and public debt (PB). Our hypotheses are: H1: Investing assets in public pension funds has a positive impact on the economic growth of OECD countries. H2: Investing assets in private pension funds has a positive impact on the economic growth of OECD countries.
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The importance of such a study rests on the fact that OECD countries have a highly developed economy and have high-performance fnancial markets. Therefore, highlighting the importance of investments by pension funds in their fnancial markets for economic growth and for the indirect effects caused on their economies.
2. Literature Review As already noted above, studies on the impact of pension funds on the economic growth of OECD countries has been the focus of several authors. In one of these recent studies, Bijlsma et al. (2018) found that the increase in pension savings is associated with a higher increase in the performance of frms and relied mainly on external fnancing. They used data from 69 industrial sectors in 34 OECD countries during the period 2001–2010. Pension funds have a positive impact on the economic growth of these OECD countries as these institutional investors are engaged in most cases in long-term investments. However, it should be noted that the authors conclude that such a correlation between economic growth and pension funds was not supported during the fnancial crisis of 2008. This puts an end to the dilemma that larger pension savings can weaken the savings allocation of the banking sector by a movement from banks to pension funds. According to Thomas and Spataro (2016), the process of reforming the worldwide pension systems has been triggered by demographic transition and
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20 Fisnik Morina and Simon Grima globalization, which has infuenced some countries in their implementation of pension systems consisting of several pillars and in strengthening the pension funds. These authors suggest that the development of pension funds [compared to pay-as-you-go (PAYG) schemes] can be effective in increasing private and public savings, mainly in mandatory programs. The effect of pension funds on economic growth may vary depending on various institutional factors such as: the type of program (tax relief program), the size and structure of the pension funds, the level of fnancial development, the level of education in the country, and the drafting of other mechanisms for fnancing pension systems. Yilmaz and Ozturk (2016) studied the impact of pension funds on the economic growth of 26 OECD countries during the period between 2001 and 2015, using the causality test suggested by Dumitrescu et al. (2012) and identifed a bilateral correlation between pension funds and economic growth. The empirical results of this study revealed a one-sided causality between fnancial development and the performance of pension funds, as well as a two-way causality between pension funds and economic growth. Based on these results, the authors concluded that pension funds are very important for economic growth, and on the other hand, economic growth is an infuential factor in the performance of pension funds in OECD countries. According to Vurur and Özen (2013), the increase in the volume of bank deposits has a positive effect on economic growth and the volume of bank loans in Turkey. According to the fndings of this study, there is a one-sided causality from deposits in economic growth, from economic growth in credit and from deposits in credit. Zandberg and Spierdijk (2012) examined whether changes in the degree of pension fnancing affect economic growth. Their sample taken during the period 2001–2010 included 54 countries, of which 36 are OECD countries and the rest other developing countries. Their results show that pension funds affect the economic growth of these countries only in long-term, but not in the short term. In fact, in the short term, they did not fnd a high correlation between pension fnancing and economic growth, because increases in fnancing ratios affect the development of capital markets. Whereas, in the long term, they fnd a positive effect of pension fnancing on economic growth, where an increase of 10-percentage points in the fnancing ratio resulted in an average increase of GDP in the next 4 years by 0.18-percentage points. Meng and Pfau (2010) found that pension funds have a very signifcant impact on economic growth and development of capital markets, especially in countries with high levels of fnancial development. This study revealed that pension funds do not affect the development of the capital market in countries with a low level of fnancial development, since these countries need to reconsider the management approach and investment strategy in their pension funds. However, they noted that investments in these pension funds affect the growth of long-term funds, increase competition, promote fnancial innovation, and improve corporate governance practices. This was concurred to by Davis and Hu (2008) who found that pension fund assets have a positive impact on economic growth, consistently in OECD countries, as well as in emerging market economies. They found that these effects are
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Performance of Pension Funds and Their Impact on Economic Growth 21 greater in emerging market economies than for OECD countries, presenting new empirical evidence for future academic discussions. The practical implications of this study is that pension funds are a response to the challenges of an aging population, because they actually provide an additional beneft to the economy in terms of productive effciency even if savings do not increase at the same time. According to Yermo (2008), many countries are partially predetermining their pension system (PAYG) by developing existing public reserve funds that are publicly owned. According to this study, in most OECD countries, pension funds have had a positive impact on the economies of these countries. This since appropriate internal and external governance mechanisms have been established in the investments made by these pension funds. The increase in pension funds has affected the increase of ownership of the fnancial sector by institutional investors. A good performance of pension funds has had a positive impact on the development of stock markets, the development of the banking sector and in general on the economic growth of OECD countries. MC and the development of the banking system have contributed to the growth of pension funds, also affecting the liquidity of the stock market (Harichandra & Thangavelu, 2004). According to Davis and Steil (2004), the greater participation of institutional investors in the fnancial systems of OECD countries can ensure a better governance of frms and on the other hand ensure an improvement of the effciency of these frms, positively affecting economic growth. Samwick (2000) and Reisen and Bailliu (1998), in their studies, found that countries with a PAYG pension system tend to have a lower savings rate than countries with funded pensions. These empirical fndings are characteristic of both OECD and developing countries. Moreover, Wurgler (2000) highlights that pension savings can affect the development and effciency of capital markets, since these savings increase funds for private investment, thus improving effciency and economic growth. Pension savings affect the economic growth of different countries, increasing the weight of institutional investors, given their long maturity of liabilities and their ability to withstand long-term investments in the form of equity (Lakonishok et al., 1992).
3. Private Pensions and Reserve Funds Of Public Pensions In this section of this study, some important fnancial indicators for private pensions and reserve funds of public pensions for OECD countries for the period 2007–2019 are analyzed. These indicators provide data on the percentage of working age population included in private and public pension plans, the level of contributions by law and current contributions paid by members, assets in pension plans, the way of investing these assets, different types of pension plans in OECD countries.
3.1. Coverage of Funded and Private Pension Plans Information gathered from the annual OECD pension reports for 2007 shows that 11 of these countries have mandatory private pensions, while 8 of them have
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22 Fisnik Morina and Simon Grima private pensions based on the scheme with defned contributions (DC). In the Netherlands, 97% of mandatory private pension members are covered by a certain beneft plan (DB). In Iceland and Switzerland, mandatory pension plans operate similarly as they are based on the contribution-based pension scheme (DC), a certain interest rate, and a legal pension rate (OECD, 2007). Referring to the 2007 annual OECD pension report statistics, we note low targeted replacement rates (i.e., the ratio of pension benefts to individual earnings) by the mandatory (public) pension system. Therefore, in many OECD countries, enough space has been created for voluntary private pension insurance and their coverage of private pensions is very wide. About half of employees retire in private pensions resulting in a large potential gap in private pension coverage. Such an effect can be caused by the fact that the need for pension savings is concentrated toward those with high and medium incomes. The traditional way of encouraging voluntary retirement savings has been through tax incentives. However, these ways can be costly and there is strong evidence that they are ineffective, since much of the savings will occur without any incentives and tax incentives tend to be worth more to the higher-income segment of the population (OECD, 2007). In 2013, OECD countries attached great importance to private pension arrangements, as pension reforms have reduced public pension rights. In 18 OECD member states, private pensions are mandatory and manage to cover a very large proportion of employees through collective bargaining agreements. In eight other OECD countries, private voluntary pensions (professional and personal) cover more than 40% of the working age population (OECD, 2013). In 2016, 17 of the 35 OECD countries had a mandatory private pension system, providing a high degree of coverage for the working age population. In Finland, Iceland, and Switzerland, professional pensions are mandatory and cover more than 70% of the working age population. Mandatory personal accounting systems are widespread in Latin America and Central and Eastern Europe, where these countries have partially replaced social security benefts. Similar plans can also be found in Chile, Estonia, Mexico, and Slovakia (OECD, 2017). In 2018, 17 of the 36 OECD countries had a mandatory private pension system, accounting for a high level of the working population coverage. Professional pension systems can be classifed as those determined through collective agreements in all industries or across the country. That is, employers create schemes that employees need to join. In some OECD countries, such as in Denmark, the Netherlands, and Sweden, these systems are not classifed as mandatory. While in Turkey, participation in a plan is mandatory only for certain employees; for example Ordu Yardımlaşma Kurumu (OYAK) pension fund for military personnel in Turkey, constituting a relatively low percentage of people in a mandatory plan (OECD, 2019). Table 1 presents data on the coverage of private pension plans in OECD member countries, in 2011, 2016, and 2018 highlighting how member countries have regulated their pension schemes and the percentage of coverage in relation to the total working age population (15–64 years). We have chosen 2011, 2016, and 2018
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
x
x
75.60%
x
ATP: 83.7%; QMO: 61.9%
68.90%
74.20%
x
x
x
1.50%
84.80%
x
81.80%
x
.
12.20%
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Japan
Korea
23.40%
.
14%
x
41.30%
41.90%
20%
0.20%
71.30%
21.90%
25.40%
.
23.60%
62.10%
.
66.20%
45.20%
17.10%
.
x
91.10%
x
85.10%
x
x
x
x
89.80%
81.40%
ATP: 84%; QMO: 63.4%
x
84.30%
x
x
x
24%
50.80%
20%
.
46.70%
45.20%
18.40%
1.30%
70.40%
30.20%
25.60%
12.30%
18%
52.60%
.
51.50%
59.60%
31.90%
16.90%
.
x
78.20%
x
87.70%
x
.
x
x
93%
85.80%
ATP: 85.2%; QMO: 63.4%
x
86.70%
x
x
x
x
54.30%
20.60%
.
46.70%
45.20%
18.70%
< 5%
70.40%
33%
25%
11.20%
18%
64.10%
.
51.30%
50.60%
36.60%
x
Belgium
37.60%
75.20%
x
x
Austria
75.70%
68.50%
Australia
19.90%
Mandatory (2011) Voluntary (2011) Mandatory (2016) Voluntary (2016) Mandatory (2018) Voluntary (2018)
State
Table 1. Coverage of Private Pension Plans in OECD Countries.
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Performance of Pension Funds and Their Impact on Economic Growth 23
x
59.50%
88%
x
68.10%
56.50%
x
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
38.20%
x
x
PPS: ∼100%; QMO: ∼90%
70.50%
0.90%
Slovenia
Spain
Sweden
Switzerland
Turkey
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
43.30%
47.10%
United States x
x
1.50%
73.70%
PPS: ∼100%; QMO: ∼90%
x
x
36.10%
x
x
56.30%
x
88%
61.40%
X
60.10%
43%
14.90%
x
24.20%
18.60%
37.80%
19%
8.20%
68.20%
26.70%
81.60%
28.30%
1.70%
5.1%%
–
x
x
1.50%
73.60%
PPS: ∼100%; QMO: ∼90%
x
x
x
x
x
57.90%
80.20%
88%
65.40%
x
x
62.90%
5%
12.50%
x
24.20%
26.10%
40.10%
39.70%
17.20%
68.20%
23.10%
6.80%
28.30%
1.90%
4.90%
75.50%
Source: Authors data processing (OECD, 2019. Note: QMO – Compulsory Independent Work, PPS: Premium pension system, “.” – not available, “x” – not applicable, “∼” – approx. The coverage rate is provided in relation to the total number of working-age population, unless otherwise specifed in this table.
x
United Kingdom x
4.90%
x
27.10%
18.60%
x
Slovak Republic 44.40%
8.40%
1.30%
23.20%
71.60%
28.30%
1.90%
3%
–
20%
Luxembourg
–
∼100%
–
11.40%
Lithuania
∼100%
–
Latvia
–
Mandatory (2011) Voluntary (2011) Mandatory (2016) Voluntary (2016) Mandatory (2018) Voluntary (2018)
State
Table 1. (Continued)
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24 Fisnik Morina and Simon Grima
Performance of Pension Funds and Their Impact on Economic Growth 25 as our reference points to show the change over 7 years, taking a point at 7 years ago and showing the change after 5 years and then after 2 years. In 2018, the countries with the highest percentage of mandatory pension coverage are: Sweden [∼100%), Iceland (∼100%), Latvia (∼100%), Finland (93%), and the Netherlands (88%)]. That is, a high degree of coverage (over 85%) of mandatory pensions in relation to the total number of working age population. On the other hand, the countries with the highest percentage of voluntary pension coverage are: Lithuania (68.20%), Greece (70.40%), the Czech Republic (64.20%), and the United States (62.90%). That is, the highest coverage rate (over 60%) of voluntary pensions in relation to the total number of working age population.
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3.2. Assets in Funded Private Pension Plans and Public Pension Reserve Funds In 2011, the assets of pension funds in OECD countries surged to $20.6 trillion. The United States had the largest market within the OECD member states, with assets worth $10.8 trillion, representing 52.6% of the total OECD. According to 2011 statistics, other OECD countries with large pension fund systems are: UK worth $2.3 trillion, Japan $1.5 trillion, Australia $1.3 trillion, the Netherlands $1.1 trillion, and Canada with $1.1 trillion (OECD, 2013). In 2016, private pension fund assets (PPA) surged $38.1 trillion in OECD countries, while at the end of 2015, the total amount of public pension reserve funds was equivalent to $5.1 trillion for the 18 OECD member countries. In 2018, the value of PPA in the OECD area reached $42 trillion. By the end of 2018, the total amount of public pension reserve funds was equivalent to $6.0 trillion for the 17 OECD countries. The worth of the largest reserve in the United States was $2.9 trillion, or 48.7% of the total OECD. These reserves are held by the US Social Security Trust Fund and its assets consist of non-tradable debt instruments, issued by the US Treasury. Table 2 shows the assets values of private pension funds and public pension reserve funds for the 36 OECD member countries expressed as a percentage of the GDP of these countries for 2011, 2016, and 2018. Based on the data presented in Table 2, in 2011, the OECD member countries with the highest percentage of assets in private pension funds in relation to GDP are: the Netherlands (135.50%), Iceland (128.70%), Switzerland (110.70%), United Kingdom (95.80%), and Australia (93.20%). That is, in 2011, all these countries had a value of assets in private pension funds of over 90% of GDP. Meanwhile, the countries that had the highest percentage of assets in public pension reserve funds are: Korea (28.20%), Sweden (25%), and Japan (23.20%). In that same year, these countries had a value of assets above the average of 34 OECD countries (18.90%). In 2016, countries which as a result of various pension reforms had realized a signifcant increase in the value of assets in private pension funds, even above the average of OECD countries (83%). These countries were: Australia, Canada, Denmark, Iceland, the Netherlands, Sweden, Switzerland, the United Kingdom,
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4.20%
63.70%
58.50%
6.50%
49.70%
5.30%
75.00%
0.30%
5.50%
0.00%
3.80%
128.70%
46.20%
49.40%
4.90%
25.10%
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
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Japan 23.20%
x
x
8.60%
x
x
x
x
4.30%
x
x
x
x
1.90%
10.90%
5.00%
29.40%
9.40%
55.70%
40.70%
150.70%
4.30%
0.70%
6.80%
9.80%
59.30%
16.40%
209.00%
8.40%
69.60%
159.20%
6.90%
6.00%
25.80%
x
x
x
x
x
x
1.10%
2.50%
8.80%
x
x
x
3.60%
17.00%
5.20%
x
28.30%
9.80%
57.40%
33.90%
161.00%
5.30%
0.70%
6.90%
10.40%
57.20%
16.90%
198.60%
9.20%
70.20%
155.20%
10.90%
5.50%
28.80%
x
x
x
x
x
x
1.00%
2.50%
28.40%
x
x
x
5.10%
28.40%
x
x
7.70%
Belgium
x
140.70%
4.90%
7.30%
Austria
123.90%
93.20%
Australia 5.00%
Private Pension Public Pension Private Pension Public Pension Private Pension Public Pension Funds (% of Reserve Funds Funds (% of Reserve Funds Funds (% of Reserve Funds GDP, 2011) (% of GDP, 2011) GDP, 2016) (% of GDP, 2016) GDP, 2018) (% of GDP, 2018)
States
Table 2. Assets of Private and Public Pension Funds Expressed as % of GDP in OECD Countries.
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26 Fisnik Morina and Simon Grima
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..
..
1.90%
12.90%
135.50%
15.80%
7.40%
15.00%
7.70%
8.40%
2.90%
7.80%
9.20%
110.70%
4.10%
95.80%
72.20%
73.80%
Latvia
Lithuania
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
OECD 34 18.90%
17.80%
x
x
x
25.00%
6.20%
x
x
5.20%
0.80%
5.00%
8.80%
x
0.10%
x
..
..
28.20%
Source: Authors data processing (OECD, 2019). Note: “.” – not available, “x” – not applicable.
4.50%
Korea
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83.00%
134.90%
95.30%
4.80%
141.60%
80.60%
14.00%
7.00%
11.20%
10.80%
9.30%
10.20%
24.40%
180.30%
16.70%
2.90%
..
12.70%
26.90%
13.90%
15.40%
x
x
x
29.50%
3.00%
x
x
7.90%
1.10%
6.90%
11.80%
x
0.10%
30.20%
..
x
32.80%
82.30%
134.40%
104.50%
2.50%
142.40%
88.00%
12.50%
6.80%
11.70%
19.30%
8.50%
9.80%
27.40%
173.30%
16.20%
2.70%
7.20%
13.80%
28.50%
14.30%
14.30%
x
x
x
29.40%
0.40%
x
x
8.10%
2.00%
7.30%
13.20%
x
0.10%
30.80%
x
x
34.20%
Performance of Pension Funds and Their Impact on Economic Growth 27
28 Fisnik Morina and Simon Grima and the United States. Whereas the countries which had a better performance in the reserve funds of public pensions in 2016 were: Canada, Japan, Korea, Luxembourg, Sweden, and the United States. These countries had an asset value in public pension funds above the OECD average for 2016, which was 13.90% relative to GDP. In 2018, the average asset in private pension funds was 82.30% compared to the GDP of 36 member states. Among the nine countries with the highest value of assets in private pension funds, Denmark experienced the most signifcant decline (−10.4%), the Netherlands (−7%), and Canada (−4%) with GDP for that same year. Within the OECD countries during this year, Finland (57.20%), Chile (70.20%), and Israel (57.40%) also had a signifcant increase in the percentage of PPA. The average value of assets in the public pension reserve funds for 36 OECD countries in 2018 reached 14.30% as a percentage of GDP. Of the 36 OECD member states, 19 do not apply to the public pension reserves in their pension systems. The three OECD countries with the highest asset value in the reserve funds of public pensions in 2018 are: Korea (34.20%), Luxembourg (30.80%), and Sweden (29.40%).
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3.3. Investment Performance of Private Pension Funds and Public Pension Reserve Funds In 2018, the fnancial performance of investments in private and public pension funds fell to a record lowest since the period of the fnancial crisis of 2008. The real rate of return on investment in OECD countries in 2018 had a negative average value (−3.2%). Investments in private pension funds and public pension reserve funds suffered heavy losses in 26 countries out of 31 OECD countries reporting on investment performance. The largest losses in 2018 were in Poland (−11.1%) and Turkey (−9.4%). Some countries, for example, Australia, managed to continue the positive trend of real return on investment. Australian pension funds during 2018 have reached a rate of return of (5.6%) calculated during the period between June 2017 and June 2018. Referring to the graph above (Fig. 1), we can see that most OECD countries had a positive average value in investment performance over the past fve years. The highest average positive value of the real investment rate over the past 10 years was in the Netherlands (6%), Israel (5.8%), and Canada (5.7%). Meanwhile, in the past 15 years, Canada (4.8%), Australia (4.7%), the Netherlands (4.4%), and Denmark (4.2%) had the highest real average investment rate. Poor fnancial performance of investments in private pension funds and reserve funds of public pensions in 2018 resulted due to the decline in the value of shares in capital markets in the last quarter of that year. Investments in public pension reserves in 2018 had a better performance than private pension funds, where these net investments had an average rate of return of 1.9% in real terms. The highest performance of reserve funds was in New Zealand with a rate of return of 10.8% in real terms. Meanwhile, the reserve funds of
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Investment Performance
Performance of Pension Funds and Their Impact on Economic Growth 29 8.00
7.00
6.00
6.00
4.00
5.00
2.00
4.00
0.00
3.00
–2.00
2.00
–4.00
1.00
–6.00 –8.00
0.00
–10.00
-1.00
–12.00
-2.00 2018
5-year annual average
I0-year annual average
I5-year annual average
3 per. Mov. Avg. (2018)
Linear (2018)
Fig. 1. Real Geometric Average Annual Investment Rates of Return of Funded and Private Pension Plans in 2018 and Over the Last 5, 10, and 15 Years. Source: Authors data processing (OECD, 2019). public pensions in Sweden, Luxembourg, and Finland recorded a negative investment rate in that same year.
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4. Meta-Analysis of Pension Reforms In OECD Countries (2016–2019) Given that in recent years in some OECD countries, due to various political pressures not to implement previously taken measures for improving economic conditions, pension reforms have lost the trend of their implementation. Based on OECD estimates for the past four years, we note that most pension reforms have focused on removing age requirements for retirement, increasing personal benefts, including frst-rate pensions, and expanding pension coverage and promotion of private savings. One of the main challenges in the pension systems of OECD countries is the acceleration of population aging. According to offcial OECD statistics, over the past 40 years, the number of people over the age of 65 per 100 working age (20–64 years) has increased signifcantly from 20 to 31. Based on forecasts and studies by the European Commission (EC) (2015) and reports by the OECD (2019) by 2060, this value is likely to double to 58. Especially in those countries where population aging is expected to be very rapid such as: Greece, Korea, Poland, Portugal, Slovakia, Slovenia, and Spain, while Japan and Italy would remain among the countries with the oldest populations. From a meta-analysis of all the OECD annual statistical reports for the period between 2016 and 2019 on pension reforms, we fnd that the main pension reforms implemented by OECD countries during the period between 2015 and 2017 are as follows: 1. Twelve OECD countries had modifed contribution rates by age or income (Australia, Austria, Canada, Finland, Germany, Greece, Hungary, Israel, Japan, Latvia, New Zealand, and Slovak Republic).
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30 Fisnik Morina and Simon Grima 2. In 12 OECD member countries, changes were carried out at the level of benefts for all or certain groups of pensioners (Belgium, Canada, Finland, France, Greece, Iceland, Italy, Japan, Netherlands, Portugal, Spain, and Switzerland). 3. In seven countries (Australia, Canada, Finland, France, Germany, Greece, and Slovak Republic), the rules related to minimum pensions were changed. 4. In seven other OECD countries (Australia, Canada, France, Germany, Latvia, Ireland, and Israel), tax incentives related to pensions were changed, measures were taken to remove exemptions from duties for certain categories. 5. Measures were taken in fve other OECD countries (Finland, Germany, Latvia, Japan, and Turkey) to increase pension coverage. In these countries, some restrictions on participation in a pension scheme have been lifted (OECD, 2019).
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Fig. 2 shows the trend of the increasing ratio of old age and working age for OECD countries. Fig. 2 shows an accelerated increase in aging population. Over the past 40 years, the number of persons over the age of 65 per 100 working age (20 to 64 years old) has increased by approximately 50% in OECD countries (from 20 persons older than 65 years in 1980 to 31 in 2020). While over the next 40 years, this fgure (according to the values projected for 2060) is expected to double to 58 “ceteris paribus.” This increase is expected to result from people living much longer on average and having fewer babies (OECD, 2019). Fig. 3 graphically depicts the average ratio of old age and working age for all OECD countries for the years 1980, 2020 and forecasts for 2060. Denmark, Finland, and Sweden are the countries that currently have relatively high ratios of old age and working age. In 2060, based on OECD forecasts, they are expected to have a lower value than the OECD average. Based on these forecasts until 2060, the countries that will have the fastest aging population rate are: Greece, Korea, Poland, Portugal, Slovakia, Slovenia, and Spain, while Italy and Japan will remain among the countries with the oldest population (OECD, 2019).
Fig. 2. The Trend of the Increasing Ratio of Old Age and Working Age for OECD Countries. Source: Authors data processing (OECD, 2019).
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Performance of Pension Funds and Their Impact on Economic Growth 31
Fig. 3. Average Old Age Ratio for OECD Countries. Source: Authors data processing (OECD, 2019).
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Some of the main measures taken on pension policy in recent years in OECD countries are: 1. In Italy, the Netherlands, and Slovakia, the retirement age has been increased and early retirement options have been expanded (OECD, 2019). 2. In Estonia, the retirement age has been increased. 3. In Belgium, Canada, and Denmark, work incentives have been increased to enable work beyond retirement (OECD, 2019). 4. In Austria, France, Italy, Mexico, and Slovenia, the increase in the coverage of frst-level pensions and the frst layer for the social protection of old age was increased (OECD, 2019). 5. In Germany, pension benefts were increased while reducing contributions for low earners (OECD, 2019). 6. In Spain, the process of regulating pension benefts with demographic changes was suspended (OECD, 2019). 7. In Norway, the benefts of the public sector pension were adjusted to be more in line with the benefts of the private sector (OECD, 2019). 8. Pension contribution rates changed in Hungary, Iceland, and Lithuania. In Hungary, the contribution rate paid by employers to Pension Insurance Fund was reduced from 15.75% to 15.50% in January 2018; 13.69% in January 2019 and 12.29% in July 2019 (OECD, 2019). In Lithuania, in June 2018, the employer’s social security contribution rate was reduced from 31% of monthly payroll to 1.5%, and the employee contribution rate will rose from 9% of monthly earnings to 19.5%. Contributions were paid on earnings up to a new annual covered earnings-ceiling set at 120 times the average monthly wage of the previous year for 2019, 84 times for 2020, and 60 times for 2021 and onwards (OECD, 2019). In Iceland, in July 2018, the contribution rate paid by private-sector employers under mandatory occupational pension program rose from 8% of an employee’s gross earnings to 11.5%. 9. In Chile, the rate of compulsory pension coverage expanded. In February 2019, a new legislation was introduced for self-employment. The law made
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32 Fisnik Morina and Simon Grima contributions to the social security system compulsory for the self-employed, gradually increasing from 10% in 2018 to 17% in 2028. To smooth the impact on the net income of self-employed workers, the law introduced the following options: (1) Default-option: individuals contribute to the whole social security system (insurances, health, and pensions) and contribution for insurances and health will have a constant rate, while the contribution rate for pensions increases with the total contribution rate. (2) Individuals contribute with a lower contribution base for health and pensions, which increases gradually in a horizon of 9 years from 5% of taxable income to 100% of taxable income in 2027. 10. In Sweden, the taxation for pensioners on pension income was lowered in 2018 and 2019 pension income was lowered (OECD, 2019).
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5. Methodology To achieve this aim, we collected data (i.e., secondary data from the annual reports of the OECD, the IMF, and the World Bank) on assets of public and private pension funds and some specifc fnancial and macroeconomic factors that affect the performance of pension funds and economic growth, for a sample of 36 OECD member countries for the period 2002–2018 (612 observations). Then using panel data and an analysis of historical trends, we conducted a comparative analysis between different countries and discussed the effect of each control variable on the dependent variable. Furthermore, after carrying out an analysis of private pensions and reserve funds of public pensions, coverage of private pension plans as well as the performance of investments of private pension funds and reserve funds of public pensions; we carried out a meta-analysis for pension reforms in OECD countries for the period 2016 to 2019. To analyze the impact of pension funds on economic growth, it is necessary to consider many other factors that explain the relationship between these variables. As such for the specifcation of the chosen econometric models, we have relied on and replicated the choices made by authors who have analyzed the impact of pension funds on the economic growth of OECD countries. We processed all the data and verifed the validity of the hypotheses using the Stata program. Then we subjected our data to econometric tests, specifcally linear regression, random effect, fxed effect, the Hausman–Taylor Regression, the Generalized Estimating Equations (GEE), the Generalized Method of Moments – Arellano – Bond Estimation (GMM) and carried out an analysis of linear trends using the historical method and comparative method. The main purpose of using these econometric models lies in the fact that we are dealing with panel data and dynamic models. Through these statistical tests, most authors have identifed the link between pension funds and economic growth. The choice of variables in this study was made by referring to previous studies on the impact of pension funds on the economic growth of OECD countries. We however took into account the fact that the pension systems of OECD countries are different and have been subjected to different processes of pension reforms. Therefore, we have taken as our basis the assets of private and public pension funds.
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Performance of Pension Funds and Their Impact on Economic Growth 33 Table 3. Description of Variables Included in Econometric Models. Variables
Description of the Variable
Data Source
Dependent variable
Gross Domestic Product (GDP)
Annual Reports of the OECD and the World Bank, Total, Million US dollars (2002–2018)
Independent Public Pension variable Fund Assets (PFA)
Annual OECD Reports. Total, Million US dollars (2002–2018)
Independent Private Pension variable Fund Assets (PPA)
Annual OECD Reports. Total, Million US dollars (2002–2018)
Independent Market Annual Reports of the OECD, the World variable Capitalization (MC) Bank and the IMF, current US$ (2002– 2018) Independent Infation Rate (IR) variable
Annual Reports of the OECD, the World Bank and the IMF (2002–2018), consumer prices (annual %)
Independent Public Debt (PB) variable
Annual Reports of the OECD and the IMF (2002–2018), total (% of GDP)
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Source: Author data processing (2020).
To analyze the performance of investments and the performance of pension funds in these countries, we considered the effects of macroeconomic factors such as MC, infation, and PB as important variables. Moreover, these variables were also used in most studies where the relationship between pension funds and economic growth has been analyzed, their effect has been taken into account. To confrm the validity of the hypotheses of this study, we have formulated these two econometric models: GDPit = β0 + β1PFA it + β2 MC it + β3 IRit + β4 PDit + γ it GDPit = β0 + β1PPA it + β2 MC it + β3 IRit + β4 PDit + γ it where GDP – Gross Domestic Product PFA – Public Pension Fund Assets PPA – Private Pension Fund Assets MC – Market Capitalization IR – Infation Rate PD – Public Debt γ – stochastic variables (other factors not taken into account in the model) i – the code by which the OECD countries are encoded in the panel models which have been applied to derive the econometric results of this study t – time period.
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34 Fisnik Morina and Simon Grima In this study, GDP has been taken as a dependent variable, since it is one of the most important indicators of economic growth of OECD countries. The main independent variable in the frst econometric model are the assets of public pension funds that are defned as assets purchased with the contributions of a pension plan for the sole purpose of fnancing the benefts of the pension plan. This indicator is measured in millions of dollars or as a percentage of GDP. The main independent variable in the second econometric model is the assets of private pension funds where all forms of private investments are determined with a value related to a pension plan on which property rights are applied by institutional units, individually or collectively. This indicator is measured in millions of dollars. Other control variables that are important in explaining the impact of pension funds on the economic growth of OECD countries are: MC, IR, and PB. MC refers to the total market value of a company’s unpaid shares. This indicator is calculated by multiplying the total number of unpaid shares of a company by the current market price of a share. Infation is a term that indicates the overall increase in money supply (money) in a given economy over a period of time. PB is any fnancial obligation taken by the government, where it agrees to make interest and principal payments on certain dates. The term PB is often used interchangeably with sovereign debt.
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6. Comparative Analysis of Linear Trends for Assets of Pensional Funds and Economic Growth in OECD Countries Table 4 presents all data on the total value of GDP for 36 OECD countries, the total value of assets in public pension funds, and the total MC values. Referring to this data, we can see a continuous increase in the total value of assets in public pension funds in OECD countries. An increase has also affected the economic growth of these countries. In 2002, the initial value of assets in public pension funds was $10.42 trillion, while in 2018 this value reached $27.75 trillion. In 2002, the value of the GDP was 38.3 trillion US dollars, a value that in 2018 reached 51.58 trillion US dollars. The following formula calculates the growth rate of GDP and assets in public pension funds in OECD countries for the period between 2002 and 2018. 1/ n
Growth Rate = (current year / base year)
– 1(3) 1/17
– 1 = 5.92%
1/17
– 1 = 1.76%
Growth Rate ( PFA ) = (27,756,942 / 10,427,810) Growth Rate (GDP ) = (51,589,968 / 38,309,221)
From 2002 to 2018, GDP in OECD countries increased by 1.76%, while assets of public pension funds during this period increased by 5.92%. Fig. 4 graphically shows the linear trend function through the historical method between GDP, PFA, and MC. Based on Fig. 4, we can conclude that the increase in assets of public pension funds has caused the increase of GDP in OECD countries. This shows that the good performance of public pensions in OECD countries has had a positive
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Performance of Pension Funds and Their Impact on Economic Growth 35 Table 4. Linear Trend Analysis Results for All OECD Countries Between GDP, PFA, PPS, MC, IR, and PD. Year
GDP (Trillion US$)
PFA (Trillion US$)
PPA (Trillion US$)
MC (Trillion US$)
Infation PB (%) (%) of of GDP GDP
2002
38,309,221 10,427,810 14,510,268 2.12312E+13 2.73
58.78
2003
39,106,037 12,536,860 17,358,695 2.81156E+13 2.45
59.32
2004
40,375,737 14,033,115 19,502,459 3.27888E+13 2.33
58.07
2005
41,532,550 14,994,027 20,795,435 3.57402E+13 2.61
57.88
2006
42,841,301 16,655,553 23,516,445 4.25665E+13 2.65
55.82
2007
43,966,834 18,439,626 26,233,733 4.58802E+13 2.47
53.37
2008
44,065,864 14,528,077 20,801,166 2.55324E+13 3.59
58.63
2009
42,526,328 16,602,474 23,944,701 3.06695E+13 0.40
67.40
2010
43,793,387 18,406,796 26,665,738 3.4835E+13
1.77
71.11
2011
44,677,688 20,062,819 28,668,831 3.05798E+13 2.80
73.61
2012
45,279,848 21,903,533 31,422,522 3.54629E+13 2.17
80.64
2013
45,975,233 24,087,411 35,846,634 4.3665E+13
1.61
81.57
2014
46,986,810 24,812,024 37,070,418 4.48181E+13 1.77
84.62
2015
48,176,090 23,340,668 35,654,565 4.30561E+13 0.65
83.10
2016
49,040,997 25,136,049 38,844,860 4.58151E+13 1.15
82.73
2017
50,302,068 28,588,697 44,077,846 5.5399E+13
2.26
80.12
2018
51,589,968 27,756,942 41,392,570 4.88541E+13 2.62
76.81
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Source: Authors’ calculations in Microsoft Excel (2020).
impact on economic growth by providing more investment funds. A very important variable in this comparative analysis is MC, and in Fig. 4, we can see that MC has a positive linear trend, causing an increase in the value of assets of public pension funds and a positive impact on economic growth of OECD countries. The MC value increased from $2.12 trillion to $4.88 trillion in 2018. This increase in MC of 5.02% for the period 2002-2018, has caused unpaid shares and the current price their international fnancial markets to rise by this value. Therefore, given that public pension funds in OECD countries are the main institutional investors in international fnancial markets, the increase in MC has also affected the increase in the fair value of assets in public pension funds. Fig. 5 graphically presents the GDP data, assets in public pension funds, and the IR. Through this, we are able to understand the effect of infation on the performance of PFA and economic growth. We notice that during the analyzed period that there is a signifcant modest decrease in infation in relation to the value of assets in public pension funds. In 2002, the IR in OECD countries was 2.73%, while in 2009 it was 0.40%.
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36 Fisnik Morina and Simon Grima 60,000,000 50,000,000
y = 1E+06x + 1E+07
y = 727976x + 4E+07
6E+13 5E+13
40,000,000
4E+13
30,000,000
3E+13
20,000,000
2E+13
10,000,000
1E+13 0
– 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Pension Funds Assets
Market Capitalization
Linear (GDP)
Linear (Pension Funds Assets)
Linear (Market Capitalization)
Fig. 4. Graphical Representation of Linear Trend Through Historical Methods (GDP, PFA, and MC). Source: Authors’ calculations in Microsoft Excel (2020).
60,000,000
y = 1E+06x + 1E+07
y = 727976x + 4E+07
50,000,000
4.00 3.50 3.00
40,000,000
2.50 2.00
30,000,000
1.50
20,000,000
1.00 10,000,000
0.50 0.00
– 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Pension Funds Assets
Inflation
Linear (GDP)
Linear (Pension Funds Assets)
Linear (Inflation )
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Fig. 5. Graphical Representation of the Linear Trend Through Historical Methods (GDP, PFA, and IR). Source: Authors’ calculations in Microsoft Excel (2020).
During this same time period, the assets in public pension funds have increased from $10.42 trillion to $16.6 trillion. Infation had a downward trend, showing an inverse relationship between these two variables. In 2018, we had an increase in the IR from 2.26% as it was in the previous year to 2.62%. This increase in the IR was accompanied by a decrease in the value of assets in public pension funds by (−1.46%). Since OECD countries are countries with a highly developed economy and are considered to have high performance institutional investors, the increase in PB has had a positive impact on economic growth. This can be seen from Table 3, where an increase in the value of PB in relation to economic growth can be noted. In 2002, the value of PB in OECD countries was 58.78% of the GDP. With the increase of PB, the value of assets in public pension funds and economic growth had increased. During the analyzed period 2002–2018, we found a positive trend of increasing PB, in which the growth is also characterized by the positive linear trend of increasing assets in public pension funds and economic growth. We have a positive
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Performance of Pension Funds and Their Impact on Economic Growth 37 linear relationship, since OECD countries, even though they have high levels of returns on investment from public pension funds, do not apply those profts to the repayment of PB. However, in most of these countries, returns on investment serve as additional external funding for the real sector of the economy (Fig. 6). In recent years, a large number of OECD countries are promoting private pension funds and have operated both types of pension systems. In Fig. 7, we note that the total value of assets in private pension funds in 2002 was $14.51 trillion; while in 2018, this value had reached $41.39 trillion. There is a positive linear relationship between the assets of private pension funds and the economic growth of OECD countries. Also, MC between 2002 and 2018 had a positive upward trend, meaning that during this period in OECD countries, in addition to an increasing value of shares of various companies in the real sector of the economy, we had a signifcant increase in the value of shares of private pension funds. When the value of unpaid shares increased, their current price in international fnancial markets also increased, and thus the investments of private pension funds marked high returns from investments.
60,000,000
90.00 80.00
50,000,000
70.00
40,000,000
60.00 50.00
30,000,000
40.00
20,000,000
30.00 20.00
10,000,000
10.00
–
0.00
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Pension Funds Assets
Public Debt
Linear (GDP)
Linear (Pension Funds Assets)
Linear (Public Debt)
Fig. 6. Graphical Representation of the Linear Trend Using Historical Methods (GDP, PFA, and PD). Source: Authors’ calculations in Microsoft Excel (2020). 60,000,000 50,000,000
y = 727976x + 4E+07
y = 2E+06x + 1E+07
6E+13 5E+13
40,000,000
4E+13
30,000,000
3E+13
20,000,000
2E+13
10,000,000
1E+13
–
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Private Pension Assets
Market Capitalization
Linear (GDP)
Linear (Private Pension Assets)
Linear (Market Capitalization)
0
Fig. 7. Graphical Representation of Linear Trend Through Historical Methods (GDP, PPA, and MC). Source: Authors’ calculations in Microsoft Excel (2020).
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38 Fisnik Morina and Simon Grima
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Despite the upward trend of these private pension funds during the period, in 2008 due to the fnancial crisis, there was a signifcant decrease in their performance from $26.23 trillion to $20.8 trillion. However, this phenomenon was again seen in 2020 due to the pandemic situation caused by COVID-19. The performance of private pension funds is projected to decrease in the value due to a decrease in their underlying assets. Based on Fig. 8, we can conclude that there is a negative linear relationship between infation with assets of private pension funds and economic growth of OECD countries. In 2007, we had a decrease in infation of 0.26% when compared to 2002 when infation was 2.73%. A drop in the overall price level during this period was also accompanied by an increase in the value of assets in private pension funds to $11.72 trillion. During this period, the decrease in infation enabled many employees in various sectors of the economy to increase annual income and as a result of this effect, an increase in the pension contributions of private pension funds. With the increase in pension contributions, the value of assets in private pension funds increased until 2007, when the US fnancial crisis began (Fig. 9). In 2008, infation rose by 1.12%, causing a signifcant drop in the value of PPA by (−5.43 trillion dollars). This loss resulted from the fnancial crisis of 2008. Many of the benefciaries of private pensions lost their jobs or had a decline in their monthly salary, which caused losses in the amount of pension contributions. During this period, the value of the GDP in the OECD countries had decreased by −1.54 trillion dollars. While between 2009 and 2018, assets in private pension funds increased by $17.45 trillion. An increasing trend of assets in private pension funds means that the benefciaries of these pension plans during the analyzed period had an increase in their annual income and this income infuenced the increase of pension contributions and tax revenues collected by the governments of these countries. Such a chain effect had a positive impact on the economic growth of these countries and created more public fnancial resources to repay PB by increasing the value of assets of private pension funds. As a result of this, other additional external funds were 60,000,000
4.00 3.50
50,000,000
3.00
40,000,000
2.50
30,000,000
2.00 1.50
20,000,000
1.00
10,000,000
0.50
–
0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Private Pension Assets
Inflation
Linear (GDP)
Linear (Private Pension Assets)
Linear (Inflation )
Fig. 8. Graphical Representation of Linear Trend Through Historical Methods (GDP, PPA, and IR). Source: Authors’ calculations in Microsoft Excel (2020).
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Performance of Pension Funds and Their Impact on Economic Growth 39 60,000,000
100.00
50,000,000
80.00
40,000,000
60.00
30,000,000
40.00
20,000,000
20.00
10,000,000 –
0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP
Private Pension Assets
Public Debt
Linear (GDP)
Linear (Private Pension Assets)
Linear (Public Debt)
Fig. 9. Graphical Representation of the Linear Trend Through Historical Methods (GDP, PPA, and PD). Source: Authors’ calculations in Microsoft Excel (2020). created through which it was possible for enterprises of the real sector of the economy to have greater access to fnance.
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7. Econometric Analysis and Study Findings Table 5 summarizes the descriptive statistics for all variables included in the econometric models of this study. The histograms in Fig. 10 show the distribution of the statistical values of the variables GDP, PFA, and PPA. From Fig. 10, we observe that the dependent variable (GDP) has a normal distribution of values, causing the curve to be approximately symmetrical, which means that the values included in these econometric models are measurable. Based on the same principle, other independent variables PFA and PPA have a normal distribution, which means a high accuracy in the data collection. All three variables presented through the histogram have a mesocuartyl curve with an absolute value of 3. Probability graphs in Fig. 10 show the normal distribution of the statistical values in the three other independent variables (MC, IR, and PD) included in Table 5. Descriptive Statistics for Variables Included in Econometric Models. Variables
Obs.
Minimum
Maximum
Mean
Std. Deviation
GDP
612
9890.61
1.78e + 07
1239454
2603285
PFA
612
8
1.67e + 07
570004.3
2040800
PPA
612
8.4
2.85e + 07
976770.4
3585075
MC
612
9.27e + 08
3.21e + 13
1.26e + 12
3.73e + 12
IR
612
−4.48
44.96
2.418203
2.900144
PD
612
7.2
238.18
71.25596
43.10868
Source: Authors’ calculations in the Stata program (2020).
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
40 Fisnik Morina and Simon Grima
Fig. 10. Graphical Representation of Normal Distribution of GDP, PFA, PPA MC, IR, and PD Through Histogram and Probability Graph. Source: Authors’ calculations in the Stata program (2020).
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the econometric models of this study. These three independent variables have a normal distribution and a linear relationship since the points are distributed very close to the regression line except for certain standard deviations, which are summarized in the stochastic variable (e). In Table 6, we present the Pearson correlation coeffcient values between GDP and other independent variables (PFA, PPA, MC, IR, and PD). From Table 6, we notice that all the variables incorporated in both econometric models are correlated with each other. The GDP has a high positive correlation with the assets of public pension funds (R = 0.7099), which means that with an increase of the value of assets in public pension funds we will have an increase in the value of GDP and vice versa. Based on this positive linear relationship, we can conclude that the continuous investment of public pension funds in OECD countries has caused positive effects on economic growth.
Table 6. Pearson Correlation Analysis for Variables Included in Econometric Models. Variables GDP
PFA
PPA
MC
IR
PD
GDP
1
0.7099
0.7181
0.8425
−0.1390
0.4086
PFA
0.7099
1
0.8988
0.7338
−0.1201
0.2051
PPA
0.7181
0.8988
1
0.7401
−0.1277
0.2631
MC
0.8425
0.7338
0.7401
1
−0.1533
0.3340
−0.1390
−0.1201
−0.1277
−0.1533
0.4086
0.2051
0.2631
0.3340
IR PD
1 −0.2487
Source: Authors’ calculations in the Stata program (2020).
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−0.2487 1
Performance of Pension Funds and Their Impact on Economic Growth 41 The value of the Pearson correlation coeffcient between GDP and asset value in private pension funds is quite high (R = 0.7181), which means that even the increase in the value of these assets will have positive effect on increasing the value of GDP. The continuous promotion of private pension funds by OECD member countries, when taking into account the high performance in investments of these assets, is considered to be a successful strategy implemented in recent years in their pension systems (Fig. 11). The correlation between GDP and MC is quite high (R = 0.8425) indicating a positive linear relationship between these two variables. With an increase of MC in OECD countries, we will have an increase in the value of GDP. The increase in the value of shares and their current price in international fnancial markets will also have effects on increasing the value of assets in public and private pension funds. GDP and infation have negative linear links. Therefore, with the increase in the IR, we will have a decrease in the value of GDP. Given that the IR has a downward trend in the analyzed period 2002 to 2018, then we can consider that infation did not have major negative effects on the decline in the value of GDP. There is a positive linear relationship between GDP and PB, since by increasing PB we will have an increase in the value of GDP. However, although high investment performance in private and public pension funds has enabled the creation of external funds to fnance PB, OECD countries have applied other fnancial resources to repay PB (Table 7). lnGDPit = β0 + β1lnPFAit + β2 lnMC it + β3 IRit + β4 lnPDit + γ it lnGDPit = 10.0365378 + 0.0043252 lnPFA it + 0.0201229
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lnMC it – 0.0018502 IRit + 0.0364909 lnPDit + 0.2205 The results of the GMM (Arellano Bond Estimation) model show that all variables included in this econometric model are signifcant at a level of p < 0.05. If all other factors are constant, then the value of GDP will be $10.17 trillion (units). If the PFA increase by 1%, keeping other factors constant, GDP will grow by 0.004%. This statement is correct since the signifcance value (p-value =
Fig. 11. Graphical Representation of Pearson’s Correlation Between GDP with PFA and PPA. Source: Authors’ calculations in the Stata program (2020).
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
–
0.1072543*** (0.000)
0.4646151*** (0.000)
0.0777008*** (0.000)
0.4720824*** (0.000)
−2.250018*** (0.000)
0.7795
0.7779
GDP
PFA
MC
IR
PD
Const.
R Square
Adj. R2
0.7255
0.7763
10.17084*** (0.000)
0.0665462** (0.001)
−0.0055199** (0.014)
0.0829729*** (0.000)
0.0421666*** (0.000)
–
0.7189
0.7710
10.53625*** (0.000)
0.0598961*** (0.000)
−0.0062201** (0.003)
0.0736267*** (0.000)
0.0396591*** (0.000)
–
Random Effects – Fixed Effects Generalized Least Regression Squares (GLS) Regression
Source: Authors’ calculations in the Stata program (2020). Notes: p-values are shown in parentheses. *** shows statistical signifcance at the level of 1%. ** shows the statistical signifcance at the level of 5%. * shows the statistical signifcance at the level of 10%.
Linear Regression
Variables
Table 7. Empirical Results for the First Econometric Model.
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–
–
10.17171*** (0.000)
0.0611958*** (0.001)
−0.0061362** (0.003)
0.074678*** (0.000)
0.0399323*** (0.000)
–
–
–
10.20261*** (0.000)
0.0658326** (0.041)
−0.0055952 (0.138)
0.0819744*** (0.000)
0.0418998*** (0.000)
–
Hausman–Taylor GEE Model Regression
–
–
10.0365378 0.734
0.0364909*** (0.000)
−0.0018502** (0.023)
0.0201229*** (0.000)
0.0043252* (0.064)
0.9565413*** (0.000)
GMM Model
42 Fisnik Morina and Simon Grima
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Performance of Pension Funds and Their Impact on Economic Growth 43 0.064 < 0.10) is at the level of statistical signifcance. Based on this result, we can conclude that the asset investments of public pension funds have positively affected the economic growth of OECD countries. The increase of these pensions directly promotes economic growth by providing a source of funds for investments. These funded pensions can affect the performance of capital markets by having a positive effect on better capital distribution. To better explain the impact of PFA on the economic growth of OECD countries in the analysis, the effect of MC, IR and PB were also taken into account. If MC increases by 1%, keeping other factors constant, then the value of GDP in OECD countries will increase by 0.074%. This statement is correct, since the signifcance value is within the statistical signifcance (p-value = 0.000 < 0.01). Given that in the analyzed period (2002–2018) we have a positive linear trend of MC, a trend which is characterized by the continuous growth of GDP. The total market value of unpaid shares of listed companies in OECD countries increased from $2.12 trillion in 2002 to $4.88 trillion in 2018. Within the listed companies, there are also public pension funds, which have increased during this period by 5.92%. The growing trend of MC has enabled public pension funds to maximize returns on asset investment and in the same manner has positively affected the economic growth of these countries. If the IR increases by 1 unit while keeping other factors constant, then the value of GDP will decrease by 0.61%. This statement is correct considering that the signifcance level is within the statistical signifcance range (p-value = 0.003 < 0.01). Infation not only affects economic growth, but also the value of invested assets and the liabilities of a pension fund. Infation has a direct effect on nominal liabilities and the level of benefts paid. The value of liabilities in pension funds is affected by indirect infationary effects of prices. However, considering that for the analyzed period (2002 –2018) we have a downward trend of the IR, means that infation has not affected the decrease in the value of assets in public pension funds and this high performance of public pension funds in OECD countries has mitigated the negative impact of infation on the economic growth of these countries. If PB increases by 1% keeping other factors constant, then the value of GDP will increase by 0.061%. This statement is correct because the signifcance level is within the statistical reliability interval (p-value = 0.001 < 0.01). Thus, based on these econometric results, the increasing trend of PB in OECD countries has positively affected the economic growth of OECD countries and the level of PB has not affected the performance of public pension funds. The following are the econometric results for the second hypothesis of this study, which analyzed whether asset investments in private pension funds have positively affected the economic growth of OECD countries. lnGDPit = β0 + β1lnPFAit + β2 lnMC it + β3 IRit + β4 lnPDit + γ it lnGDPit = 10.0198346 + 0.0040799 lnPFA it + 0.00197321 lnMC it – 0.0018988 IRit + 0.037664 lnPDit + 0.2245
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44 Fisnik Morina and Simon Grima Based on the econometric results in Table 8, we can conclude that all independent variables are signifcant at levels 1%, 5%, and 10%. If investments in PPA increase by 1%, keeping other independent variables constant, then the value of GDP will increase by 0.004%. This assertion is correct since the signifcance value is within the statistical signifcance level (p-value = 0.041 < 0.05). Based on this result, we can safely say that investing in the assets of private pension funds has a positive impact on the economic growth of OECD countries. Therefore, both types of pension funds are benefcial to the economy of the OECD member countries. Continuous increase in the value of assets in private pension funds is very important, because private pensions can affect the development of private capital markets and higher levels of these pensions can strengthen the role of the institutional investors, who are expected to engage more on long-term investments. Referring to the econometric results presented in Table 8, we can conclude that the other three independent variables (MC, IR, and PD) are signifcant and affect the economic growth of OECD countries. Moreover, through these empirical fndings, we can conclude that assets in public and private pension funds have a positive impact on the economic growth of OECD countries taking into account the effect of MC, IR, and PB.
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8. Conclusions and Recommendations Most OECD member countries in recent years have encouraged the growth of private pensions funded as an addition to public pensions, which face challenges in demographic population growth. Through this study, we fnd that investments in public and PPA have positively affected the economic growth of OECD countries, taking into account the effect of MC, IR, and PB. Pension funds are considered to be very important institutional investors who have a positive impact on economic growth, as these investors can engage in longterm investments and provide high returns on investment for the economies of these countries. MC has positively affected the value of GDP since the increase in the value of shares of companies listed in OECD countries has had positive effects on increasing the value of assets in public and private pension funds. Therefore, as a result of the positive economic effects on the performance of pension funds, many additional funds have been created in the OECD countries which have affected the external fnancing of enterprises in various sectors of the real economy. The empirical fndings of this study show that the declining trend of the IR during the analyzed period has not affected the increase in the value of nominal liabilities of pension funds in OECD countries. Although infation has a negative impact on economic growth, its impact is asymmetric due to the good performance of assets in pension funds. PB has positively affected the economic growth of these countries. An increase is characterized by a good performance of public and private pension funds. As a result of this performance, it has been possible for the real sector enterprises of the economy to have greater access to external funds which were not to be used to repay PB.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
0.4772241*** (0.000)
−0.0766734*** (0.000)
0.437504*** (0.000)
−2.403583*** (0.000)
0.7755
MC
IR
PD
Const.
R2
0.7268
0.7810
10.13337*** (0.000)
0.0702431*** (0.000)
−0.0050803** (0.023)
0.0844003*** (0.000)
Source: Authors’ calculations in the Stata program (2020). Notes: p-values are shown in parentheses. *** shows statistical signifcance at the level of 1%. ** shows the statistical signifcance at the level of 5%. * shows the statistical signifcance at the level of 10%.
Adj. R
0.7739
0.0989263*** (0.000)
PPA
2
–
–
GDP
0.0385191*** (0.000)
Random Effects – GLS Regression
Variables Linear Regression
0.7207
0.7763
10.48938*** (0.000)
0.0636923*** (0.000)
−0.0057808** (0.005)
0.0742613*** (0.000)
0.0364563*** (0.000)
–
Fixed Effects Regression
Table 8. Empirical Results for the Second Econometric Model.
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–
–
10.11189*** (0.000)
0.0367277*** (0.000)
−0.0056966*** (0.000)
0.0763164*** (0.005)
0.0367277*** (0.000)
–
Hausman–Taylor Regression
–
–
10.14639*** (0.000)
0.0699465** (0.031)
−0.051121 (0.179)
0.0839873*** (0.000)
0.0384261*** (0.000)
–
GEE Model
–
–
10.0198346 0.841
0.037664*** (0.000)
−0.0018988** (0.020)
0.0197321*** (0.000)
0.0040799** (0.041)
0.9584754*** (0.000)
GMM Model
Performance of Pension Funds and Their Impact on Economic Growth 45
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
46 Fisnik Morina and Simon Grima As OECD countries through institutional investors have invested in international fnancial markets by providing large fnancial funds through long-term investments, these funds could be used in the future to repay PB. However, if we take into account the period of the fnancial crisis of 2008, various dilemmas arise in the ratio between pension funds and economic growth, since during this period the fnancial sector had suffered great fnancial losses. Therefore, based on these fndings, we recommend:
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a. That the OECD countries implement appropriate reform mechanisms in their pension systems in order to successfully cope with the various demographic pressures of the population and the rapid rate of aging of the population. Although in our models, the population variable (demographic component) has not been applied. We have used meta-analysis, taking the secondary data from the annual OECD reports to explain the aging trend and the challenges faced by these countries and the reforms they have undertaken). b. To further promote and encourage the growth of private pensions funded as a supplement to public pensions and which can positively affect the economic growth of these countries. c. That the OECD country governments, due to disruptions such as the fnancial crisis and the Covid-19 pandemic period (although the latter was not covered in this study), implement tax relief for public and private pension funds so that these funds recover and recover some of the losses they have suffered from investing their assets in capital markets. Such tax relief will make it possible for these investments, pension funds, to create external funds to fnance the sectors of the real economy. d. That the governments of these countries take the necessary measures to mitigate the negative consequences that may result in the coming years from rising infation. Because high infation can affect the increase in the value of nominal liabilities of pension funds. New measures should be implemented to increase the collection of pensions and, in some OECD countries, to remove some restrictions for participation in various pension schemes.
References Altiparmakov, N., & Nedelkovic, M. (2018). Does pension privatization increase economic growth? Evidence from Latin America and Eastern Europe. Journal of Pension Economics and Finance, 17, 46–84. Antolin, P., Hinz, R., Rudolph, H., & Yermo, J. (2009). Evaluating the fnancial performance of pension funds. Rio de Janeiro: OECD – IOPS Global Forum. Bijlsma, M., Bonekamp, J., Ewijk, C., & Haaijen, F. (2018). Funded pensions and economic growth. De Economist, 166, 337–362. Davis, E. P. (2003). Institutional investors, fnancial market effciency, and fnancial stability. EIB Papers, European Investment Bank (EIB), Luxembourg, 77–107. Davis, E. P., & Hu, Y. (2008). Does funding of pensions stimulate economic growth? Journal of Pension Economics and Finance, 7(2), 221–249.
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Performance of Pension Funds and Their Impact on Economic Growth 47 Davis, E. P., & Steil, B. (2004). Institutional investors. London: MIT Press. Dumitrescu, E., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29(4), 1450–1460. Harichandra, K., & Thangavelu, S. M. (2004). Institutional investors, fnancial sector development and economic growth in OECD countries. Working Paper No. 0405. Department of Economics, National University of Singapore, pp. 1–30. Holzner, M., Jestl, S., & Pichler, D. (2019). Public and private pension systems and macroeconomic volatility in OECD countries. Working Paper No. 172. The Vienna Institute for International Economic Studies, pp. 1–48. Impavido, G., Musalem, A. R., & Tressel, T. (2003). The impact of contractual savings institutions on securities markets. Working Paper, Policy Research, Washington, DC. Lakonishok, J., Shleifer, A., & Vishny, R. W. (1992). The impact of institutional trading on stock prices. Journal f Financial Economics, 32(1), 23–43. Meng, C., & Pfau, W. D. (2010). The role of pension funds in capital market development. Discussion Paper No. 10–17. National Graduate Institute for Policy Studies, Tokyo, Japan, pp. 1–20. Mourao, P. R., & Vilela, C. (2018). No country for old men”? The multiplier effects of pensions in Portuguese municipalities. Journal of Pension Economics and Finance, 1–35. OECD. (2007). Pensions at a glance. In Public policies across OECD countries (pp. 1–208). Paris, France: OECD Publishing. OECD. (2013). Pensions at a glance. In OECD and G20 indicators (pp. 1–368). OECD. OECD. (2017). Pensions at a glance. In OECD and G20 indicators (pp. 1–167). OECD. OECD. (2019). Pensions at a glance. In OECD and G20 indicators (pp. 1–224). OECD. Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. The American Economic Review, 88(3), 559–586. Reisen, H., & Bailliu, J. (1998). Do funded pensions contribute to higher aggregate savings: A cross-country analysis. Technical Papers 130. OECD Development Centre, OECD. Samwick, A. A. (2000). Is pension reform conducive to higher saving? Review of Economics and Statistics, 82(2), 264–272. Thomas, A., & Spataro, L. (2016). The effects of pension funds on market performance: A review. Journal of Economic Surveys, 1–33. https://doi.org/10.1111/joes.12085 Vurur, N. S., & Özen, E. (2013). The examination of the relationship between deposits bank credits and economic growth in Turkey. Journal of Social Sciences, 6(3), 117–131. Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1), 187–214. Yermo, J. (2008). Governance and investment of public pension reserve funds in selected OECD countries. OECD Working Papers on Insurance and Private Pensions No. 15, pp. 1–25. Yilmaz, B., & Ozturk, O. F. (2016). Pension funds and economic growth: Evidence from OECD countries. In 13th international conference of ASECU social and economic challenges in Europe 2016–2020, pp. 107–112. Zandberg, E., & Spierdijk, L. (2012). Funding of pensions and economic growth: Are they really related? Journal of Pension Economics and Finance, 1(1), 1–17.
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Chapter 3
Effects of Reciprocity on Knowledge Sharing Behavior: The Mediating Role of Organizational Commitment Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi Abstract Introduction: The current study examines the relationship of reciprocity and the knowledge sharing behavior (KSB) with the mediating role of organizational commitment. Aim: The purpose of this chapter is to examine linkages between reciprocity and KSB in Pakistani Pharmaceutical industry basing on social exchange theory (SET) (Blau, 1964). Employees’ affective and normative organizational commitments were proposed as mediator to explain these relationships.
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Method: Data were collected using Survey Questionnaires from a sample of 287 managers and staff of sales department of different pharmaceutical frms in Rawalpindi and Islamabad, Pakistan. This is an explanatory study with a quantitative approach. KSB model was developed and tested using a two-stage analysis. Initially, path analysis using AMOS was carried out followed by mediation through process analysis. Findings: Affective and normative commitment was found to be mediating between reciprocity and KSB using SET. Originality of the Study: Few empirical studies have analyzed the effects of reciprocity on KSB, especially in context of pharmaceutical industry. Mediation of employee’s commitment could provide new insights to management practitioners in fostering KSB.
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New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
50 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi Implications: The fnding will allow organizations in general and pharmaceutical frms in particular, to focus more on commitment toward their employee as a reciprocal beneft for improving knowledge sharing culture in their organizations. Keywords: Reciprocity; knowledge; sharing behavior; affective organizational commitment; normative organizational commitment; social exchange theory
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1. Introduction In the domain of human resource management, knowledge is becoming a competitive weapon with every passing day. Knowledge of employees in different organizations is being continuously exploited by the outsiders, that is, the external environmental pressures (Cavaliere, Lombardi, & Giustiniano, 2015). It is a well-known phenomenon that sharing certainly enhances employee knowledge within and outside of the company (Chou & Tsai, 2004). Knowledge sharing long since has become part and parcel of any organization, due to its elementary role in creating new information, establishing new prospects of business and socialized strategies necessary for advanced knowledge workers (Grant, 1996). A recent study has also confrmed that knowledge sharing acts as a root cause for an organization’s accomplishment and a survival scheme in the knowledge age (Tangaraja, Mohd Rasdi, Ismail, & Abu Samah, 2015). Although knowledge sharing remained neglected before this millennium, human resource development practitioners, students, and managers have focused to bring even the basics of this feld in spotlight (Blankenship & Ruona, 2009). Promotion of knowledge sharing culture in any organization not only improves business strategies but also gives room to organizations for proftably developing the attitude and behavior of their workforce, which will help in long lasting and consistent knowledge sharing culture (Lee & Choi, 2003). It remained a general question in different organizations and repeatedly being asked by benefciaries’ in organizations that whether these proposals, schemes, and strategies are adequate to look after growing knowledge sharing troubles among employees. It seems this needs to be questioned further exploration. Knowledge sharing is found to be an individual’s willingness to help and learn from others when developing new competencies (Yang, 2007, p. 83). The knowing process is a blend of sharing, learning, and thinking mechanisms reciprocally related to each other. Directors in different organization apply knowledge sharing processes in all functions thereby avoiding any stalemate. A common understanding is developed by sharing expertise, thoughts knowledge and beliefs among the workforce. Division of knowledge sharing has already been worked upon by different researchers. It’s not that easy to share knowledge (Szulanski, 2000). Yi (2009) stressed knowledge as mostly individual process which is tacit in nature and unidirectional. Organizational communications, written contributions, communities of practice and personal interactions, are being defned as its subsets. Knowledge sharing as a bidirectional process has also been conceptualized by
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Effects of Reciprocity on Knowledge Sharing Behavior 51 some scholars (Hooff & Ridder, 2004). Employees jointly create innovative knowledge by mutually exchanging explicit and implicit knowledge. For this study, knowledge sharing behavior (KSB) is defned “a reciprocal social process where employees mutually exchange (explicit as well as implicit) knowledge to mutually generate new knowledge” adopted from Ramayah, Yeap, and Ignatius (2013, p. 133). A potential research area is digging out predictors of employee’s KSB to comprehend what is more motivating for employees to develop a behavior for sharing knowledge and subsequently, instigate a suitable course to increase true positive behavior. True motivation furthermore urges employees to share their knowledge (Trong Tuan, 2017). In creating a positive attitude for sharing behavior, researchers have also given weighting to intrinsic motivation, thereby improving the inclination in voluntary sharing and learning of knowledge (Deci & Flaste, 1995; Osterloh & Frey, 2000). Intrinsic motivation, for example, self-effcacy, competence, task involvement, curiosity, enjoyment in helping others, and interest, has been highlighted by researchers in creating key employee’s knowledge sharing attitudes, intentions, and behavior. Extrinsic motivation, for example, deals with reciprocity, evaluation, competition, recognition, wealth and different tangible and intangible incentives, and has been studied by researchers as positive motivators for knowledge sharing (Fenwick & Olson, 1986). Reciprocity by Chiu, Hsu, and Wang (2006) is exchanging knowledge helpful in providing benefts to all individuals and group concerned in progression of knowledge sharing. It is perceived to be fair when knowledge is benefcial for receiver as well as provider. It has been termed by Lin (2007) as logical mutual or shared indebtedness. Organizational commitment found to be an important KSB predictor by scholars (Karkoulian, Harake, & Messarra, 2010). Commitment is a necessary force in which predictors of commitment create pressure bonding between different individuals (e.g., Meyer & Allen, 1991). To investigate how commitment mediates between reciprocity and KSB, this study will focus on different dimensions in commitment, that is, affective and normative commitment to organization. At last, employee commitment for their organization can transmit the effect of individual difference in terms of reciprocity to KSB. Pakistan pharmaceutical industry is very competitive and challenging. 400 pharma frms, including 25 being operated by multinationals, are present in Pakistan (Aamir and Zaman, 2011). Pakistan’s pharmaceutical industry is the 10th largest market (US$1.64bn) in Asia Pacifc behind Vietnam. It is growing by 11% per year and total amount to 1.64 billion US$ with is far more than the growth of international market. Pharmaceutical industry is facing tough challenges in recent time due to jumbled management strategies (Zaman, 2011). Contribution toward advancement of the body of KSB in pharmaceutical industry is much needed (Qureshi & Evans, 2015). Therefore, this study will be signifcant for developing management strategies in all organizations in general and the pharmaceutical industry in particular by examining underlying linkages between employees’ reciprocity and KSB in a Pakistani private sector. Employees’ affective organizational commitment (AOC) and normative organizational commitment (NOC) is proposed as mediators to explain these relationships.
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52 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi
2. Rationale of the Study
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Using social exchange theory (SET), Moghavvemi, Sharabati, Paramanathan, and Rahin (2017) examined that outcome expectation, perceived status, perceived reciprocal beneft, perceived enjoyment, and the power of knowledge are some of the main causes that control knowledge sharing between students by means of Facebook groups. The results showed that students are being encouraged by reciprocity (perceived reciprocal beneft for sharing of knowledge among other members). Reciprocity by Chiu et al. (2006) is defned as exchanging knowledge helpful in providing benefts to all individuals and group concerned in progression of knowledge sharing. Liou, Chih, Yuan, and Lin (2016), while studying antecedents toward behavior to share knowledge also found norm of reciprocity’s signifcant effect on KSB using social capital theory. Davenport and Prusak (1998) is also of the view whereby reciprocity motivates the KSB. On the other hand, Hooff and Ridder (2004) followed by Lin (2007) are of concrete proof that commitment infuences knowledge sharing. Sometimes it becomes rational to understand that organizational commitment found to be affecting employees consulting others expertise and their willingness toward positive addition in their organization. There is a natural resistance toward sharing of knowledge which leads to avoidance of sharing of knowledge as behavior and attitude. This behavior is being persuaded in terms of encouragement by organizational commitment (Hislop, 2003; Meyer et al., 2002). Commitment whether mediates between reciprocity and KSB is an unfasten query, as modest research is being found on this feld (Hislop, 2003; Martín-Pérez, Martín-Cruz, & Estrada-Vaquero, 2012; Tangaraja, Mohd Rasdi, Ismail, & Abu Samah, 2015). SamGnanakkan (2010) declared that lacking organizational commitment in organizations is a barrier to knowledge sharing. Therefore, intention of this research was to fnish this research gap, considering links between reciprocity and KSB via AOC and NOC. To better understand the antecedents of knowledge sharing by reciprocity using SET with mediation of organizational commitment, this study focused on pharmaceutical industry.
3. Knowledge Sharing Behavior Effectiveness can only be achieved within a competitive environment by managing knowledge that has become vital for survival (Cabrera & Cabrera, 2005; Nonaka & Takeuchi, 1995). Knowledge management (KM) systems are being implemented after introduction of KM by different organizations, truly understanding importance of knowledge (Cabrera, Collins, & Salgado, 2006; Wang & Noe, 2010). However, these systems alone cannot ensure that employees share their knowledge with others. Employees are considered as major barrier in KM rather than technologies and policies (Cabrera et al., 2006). No one can understand when employees hoard knowledge and when they share, so critical examination is required (Liu & Liu, 2011). Knowledge being a unique resource requires support that encourages employees for sharing (Cabrera & Cabrera, 2002). Knowledge is considered as a true belief as this phrase can be understood by increasing
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Effects of Reciprocity on Knowledge Sharing Behavior 53 knowledge capacity. (Nonaka & Takeuchi, 1995). “Knowledge” which is being defned as tacit by westerns is different from information (Sveiby, 1997) whereas others have been calling it as explicit in nature. Employees’ eagerness and inclination to share in an organization which organization think is an achievement for any organization and this is being called as knowledge sharing by few scholars (Gibbert & Krause, 2002). Knowledge sharing can be an individual’s willingness to help and learn from others when developing new competencies (Yang, 2007, p. 83). Four different unidirectional measures of knowledge sharing, namely: personal interaction, organizational communication, written contribution, and communities of practice, are being developed by Yi (2009). Hooff and Ridder (2004) considered it as bidirectional route where new knowledge is created and implemented by an equal exchange of explicit and implicit knowledge. For this study, KSB is defned as “a reciprocal social process where employees mutually exchange (explicit as well as implicit) knowledge to mutually generate new knowledge” adopted from Ramayah et al. (2013, p. 133). Written and embodied knowledge are the basis of Zander and Kogut (1995) studies, in which distinction of knowledge sharing into four types is certainly very much different from fve types of Cummings (2004) which were based on only specifc contents of shared knowledge. Knowledge is hard to be shared (Krogh, Roos, & Slocum, 1994; Szulanski, 2000). Properties wise knowledge closely relate with sharing, retention, accumulation, and diffusion (Argote, McEvily, & Reagans, 2003). Some Feeler of sociability tends and forces employees and individual to share experiences and knowledge (Wasko & Faraj, 2005). The distinction between types of knowledge sharing is crucial, leads to diffculty in the transfer of knowledge which can be only understood by the difference between explicit and tacit knowledge (Polanyi, 1966; Spender et al., 2000). Motivational perspective was being studied by Lin (2007), where he critically examined extrinsic (expected organizational reward and benefts reciprocal in nature) and intrinsic (knowledge self-effcacy and helping others enjoyment) motivators as key manipulators of focused employee knowledge attitudes in sharing and intentional sharing of knowledge. Welschen (2014) also categorized intrinsic and extrinsic motivators of sharing knowledge from a motivational point of view and made it sure to apply them to literature in sharing of knowledge context. Binti Zin (2013) suggested that accomplishment could be articulated through brilliant management strategies for KSB that is a method or alternative for excellent use of employees, thereby transferring the knowledge into conditions of the real working. Zheng (2017) studied knowledge sharing literature in depth and found that knowledge sharing’s measurement standard is still uncertain. Innovation performance and knowledge sharing relationship was being developed by Camelo-Ordaz, García-Cruz, Sousa-Ginel, and Valle-Cabrera (2011). Knowledge creation and innovation is a product of HRM practices through necessary affective commitment that makes it of utmost importance for those employees who share at their will. Same concept was used by Hislop (2003) earlier, in which he linked HRM practices via affective commitment producing KSB. This research has focused upon the knowledge sharing as discretionary behavior where reciprocity produces knowledge sharing which will augment the comments
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54 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi of Davenport and Prusak (1998). Meyer and Hezerovitch (2001) developed workplace commitment model in which reciprocity norm produces commitment which results in discretionary behavior. In this study, reciprocity as predictor of KSB via organizational commitment will be studied using SET. Earlier knowledge sharing research encompassed skilled groups to the amateurs groups of knowledge workers in all types of organizations. Engineers, academicians, managers, and accountants were studied using sharing knowledge by different researchers (Phang & Foong, 2010; Ramayah et al., 2013). Razzaque, Eldabi, and Jalal-Karim (2013) studied medical practitioners sharing knowledge. Communities of practice and information system personnel were studied by Blankenship and Ruona (2009) and Teh and Sun (2012). Employees in hotel industry were focus of Yang (2007) whereas postgraduate students and teachers were being deliberated upon by Isika, Ismail, and Khan (2013). Workers of oil industry are researched by Tohidinia and Mosakhani (2010). Construction team is studied by Zhang and Ng (2012). Employees of real estate knowledge were studied by Will (2012). On the other hand, no evidence is being found on such focus on pharmaceutical industry in general and Pakistan particularly. The focus of this study is KSB in sales department of the pharmaceutical industry.
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4. Social Exchange Theory The basic ingredient of SET is entity’s cognition, which include both organizational commitment and reciprocity. Status, approval, and respect learning are the requirements of individuals as social reciprocity which motivated them to socially interact with others (Blau, 1964). Reciprocity also motivates knowledge sharing (Davenport & Prusak, 1998). Feelings of sociability are being felt by few people while contributing to knowledge. Wasko and Faraj (2005) stated that people want to contribute with their knowledge because a positive sociability feeling is experienced by them. It can be intrinsic in nature as one feels elevated and professionally proud when one’s brilliant idea is being used by someone else (Cabrera et al., 2006). Tacit knowledge sharing is mostly facilitated intrinsic rewards (Osterloh & Frey, 2000). Expectation of benefts an individual gets also motivates him or her in communal sharing (Constant et al., 1996). SET (Blau, 1964) also laid emphasis on how self-interested costs and beneft becomes the basis for individuals in regulating their interactions with other individuals. Benefts may or may not be tangible, where employees on future expectation of reciprocity keep an interaction (Gouldner, 1960). The social exchanges cannot be counted in numeric but exchanging parties give it due value. SET specifcally views social exchanges as transactions (Blau, 1964) and assumes that people will respond equivalently in a give-and-take relationship, making reciprocal behavior central to the theory (Coyle-Shapiro & Conway, 2005). Individuals maintain their reciprocal exchanges if each receives something perceived to be of value allowing interdependence between parties to evolve over time (Shore, Bommer, Rao, & Seo, 2009). Outcomes may be delayed or have anticipated value and still motivate behavior due to feelings of trust and mutual obligation (Shore et al., 2009). Expected value an employee–employer bond is
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Effects of Reciprocity on Knowledge Sharing Behavior 55 reciprocal, with the exchange of an employee’s time, experience, and effort for the employer’s job security, benefts, and money (Hu, Tetrick, & Shore, 2011).
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5. Reciprocity For decades, the reciprocity construct has been important in anthropology and ethnography (Gouldner, 1960). According to Blau (1964), the reciprocity behavior is shown as a beneft for employees in SET. Reciprocity by Chiu et al. (2006) is exchanging knowledge helpful in mutual benefts of individuals and parties concerned in the knowledge sharing progression. It is perceived to be fair when knowledge is benefcial for receiver as well as provider (Chiu et al., 2006). It has been termed by Lin (2007) as logical mutual or shared indebtedness. Jinyang (2015) referred to reciprocity as itself being found in form of loss or gain when knowledge behaviors are exchanged. One must consider his contribution of knowledge as worthy enough to a body of knowledge or with group or with other employees. For the purposes of this study basing on previous studies, reciprocity is defned as a “provisional gain in form of knowledge sharing and its recognition in organization that people expect as future beneft for their present actions” adopted from Fehr and Gächter (2000). Foundation rule of SET is also found to be reciprocity. SET also poses that social contribution is a result of social activities. Reciprocity opens and stabilizes social interactions among exchange parties and individuals (Sullivan, Mitchell, & Uhl-Bien, 2003, p. 189), making it naturally applicable to many aspects of individual-level organizational theory. Reciprocity lies behind a range of organizational theories, from perceived fairness (Scott & Colquitt, 2007) to job satisfaction (Witt, 1991) to knowledge sharing (Chen & Hung, 2010). Chiu et al.’s (2006) study on members ex virtual communities’ professionals resulted in increased quantity of knowledge due to sharing norm of reciprocity which is a social contribution. In Reciprocity knowledge contributor time and again expect useful help and information, from receiver which he thinks as his obligation. (Lin, 2007). Constant et al. (1996) is also of the opinion that expected personal benefts are motivating the individuals to share knowledge. According to few scholars, there is degree that one can receive benefts via knowledge sharing. Bock, Zmud, Kim, and Lee (2005) found that effective motivation through knowledge sharing helps in the achievement of long-term mutual cooperation.
6. Reciprocity and KSB Obligation of knowledge sharing reciprocity viz-à-viz KSB has been analyzed through social capital, SET (Kankanhalli, Tan, & Wei, 2005). Desire of members of an organization to keep relationships with employees and colleagues especially while sharing knowledge is studied thoroughly by others, particularly regarding knowledge sharing interactions. Bock et al. (2005) using SET called them anticipated reciprocal relationship. Reciprocity by Chiu et al. (2006) is exchanging knowledge helpful in providing benefts to all individuals and groups concerned
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56 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi in progression of knowledge sharing. It is perceived to be fair when knowledge is benefcial for receiver as well as provider. Cho et al. (2010) found reciprocity to be a moral obligation for employees which make them very much inclined toward sharing knowledge. Free knowledge sharing is fully possible through reciprocity expectation. Virtual communities on professional conducted by Chiu et al. (2006) also showed increased in reciprocity norm with increase in knowledge sharing. Knowledge holder will be very happy to put across or share his knowledge and expertise while passing it on to the knowledge receiver if he thinks the knowledge receiver will be doing the same when he becomes a knowledge holder in future. Knowledge sharing got achieved in this way. Knowledge contribution on the basis of social exchange is most of the time reciprocal. (Bartol & Srivastava, 2002). Future help can be asked from others in terms of knowledge through reciprocity. Contribution to knowledge by employees made him to think it as a future expectation. Baker and Bulkley (2014) found knowledge as reciprocal, directly through knowledge receiver or from the person who got benefted out of it, that can be stranger in other organizations. Osterloh and Frey (2000) said that tacit knowledge sharing was mostly facilitated by the intrinsic rewards. In intrinsic feeling, one gets happy and feels elevated when his sharing of ideas is used by others. One thinks he is professionally sound and has potentials to generate good ideas (Cabrera et al., 2006). Supportive knowledge sharing is achieved when leading knowledge contributors expect help from others and feel mutually indebted and a reciprocal behavior is generated. Online communities are facilitated by powerful sense of reciprocity achieved through sharing of knowledge. Mutual long collaboration is again a purpose of knowledge sharing that is generated after effective motivation (Kankanhalli et al., 2005). Therefore, that person shares more knowledge who feels a reciprocal beneft in return in or outside of the organization. This reciprocal beneft can be in the form of recognition or reward or in form of sharing of knowledge in reversal or may be recognition of ideas as using them practically or helping in other matter to the knowledge provider. Free knowledge sharing occurs in an environment where chances of reciprocity are higher. Chiu et al. (2006) found highest trends of knowledge sharing in members of virtual communities. Hence, it is proposed: H1: Reciprocity is positively related to KSB.
7. Employee Commitment Commitment is that necessary force, in which predictors of commitment create pressure to tie a person to a target (Meyer & Allen, 1991). According to the Meyer and Herscovitch (2001), commitment keeps on fuctuating in terms of the psychological mindset it takes, for example, affective, normative and in terms of target, for example, organization, occupation, and career. Factorial model of three types of commitment is most comprehensive and well-supported conceptualization of commitment by Meyer and Allen (1991). Organizational commitment was called as “the strength of an individual’s identifcation with and association in one’s
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Effects of Reciprocity on Knowledge Sharing Behavior 57 company” (Porter, Steers, Mowday, & Boulian, 1974, p. 604). The organization values, goals, rules, and targets are being fulflled by the employees and individuals who are highly organizationally committed. Burud and Tumolo (2004) is of the opinion that organization goals are being looked after and worked upon by committed employees only. In the discipline of HR and organizational behaviour (OB), organization commitment is again and again studied for the reason it is positively related to work-related behaviors (Joo, Jun Yoon, & Jeung, 2012). An individual eagerness and desire that he or she belongs to an organization is well identifed as commitment (Mowday, Porter, & Steers, 1982). Organizational commitment has proven as positively related to Employees’ devotion to a particular group or organization and is being seen as positively related to Organizational commitment in literature. Some of the positive related results are association with career, union job, and supervisor (Bartlett, 2001). On the other hand, Wagner (2007) shows it as a negative relationship to all the outcomes of turnover. Here, we take organizational commitment as “a psychological bond, individuals have with their organization, characterized by a strong identifcation with the group or organization and desire to contribute towards attainment of its target” (Meyer & Allen, 1991). The Model of Meyer and Allen is most important and a vital contribution to the organizational commitment literature. It is the broadest empirical appraisal to date. Three dimensions which are most studied upon of organizational commitment are affective, normative, and continuance commitment. They are mostly psychological states which oblige individuals to particular results (Meyer & Herscovitch, 2001). Affective organizational commitment (AOC) moves toward personal involvement that is discretionary in nature. Normative commitment proceeds toward perceived obligation, that is, reciprocity norm with few other norms and continuance commitment concepts are somewhat like perceived cost. According to Meyer and Herscovitch (2001, p. 303), commitment (stabilizing force) gives direction to discretionary behavior. Commitment is the sense of being bound toward a discretionary target (Meyer & Herscovitch, 2001). Previous studies fail to testify links between AOC and NOC with KSB especially by KSB being fostered by perceived rewards and calculated cost (Bock & Kim, 2002; Olatokun & Nwafor, 2012). These external motivators contribute very less to produce voluntary behavior like knowledge sharing, so continuance commitment concepts are somewhat like perceived cost will not be included in this study. Continuance commitment has been linked with economic exchange, whereas mostly affective and normative commitment have mostly been seen associated with a social exchange (Meyer & Allen, 1997).
8. Affective Organizational Commitment AOC is the researcher’s concept of exchange, where employees join the frms and groups or organizations in exchange of gains from them (Angle & Perry, 1983). AOC is actually employee’s involvement in an organization, or it can be said as participation, recognition, or identifcation as determined by Meyer and Allen (1997) or can be categorized as emotional internal attachment to one’s organization.
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58 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi Affective commitment is the desire a person has with his organization, which continues to persist for long. Individual employees hang on or synchronize their goals with that of the organization for long, because they think their relationship with the organization is similar to that of its goal which increases their devotion (Beck & Wilson, 2000). Employees associate their identifcation with the organization because they think it’s a course leading toward the organization (Sheldon, 1971). Hall (1970) said that increasingly similar goals are being pursued by the employee and the organization in AOC. Affective component of AOC requires a person to put sweat to their work beyond work without even thought of reward (Gould, 1979). Role, job challenge, goal clarity, and reciprocity, openness by management, executive cohesion, feedback, and participation infuence AOC the most.
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9. Normative Organization Commitment NOC is termed as feeling of sentimental obligation which persists toward a job or an employer (Meyer & Allen, 1997). The internalized feeling keeps on obliging a person to continue his membership in his place of duty. This satisfaction or obligation over decades one gets is beyond comprehension as it ethically enforces him to stay and deliver and is not subjected to status enhancement or other sideline benefts is termed as normative in nature (Marsh & Mannari, 1977, p. 59). The concept of SET according to McDonald and Makin (2000) strongly argue that any employee receiving an advantage is under strong obligation to return it in the same way or better. NOC between the organization and its employees, according to accepted regulations are always reciprocal obligation (Suliman & Iles, 2000). Moral obligation of all types to be committed to parent organization within the society or the organization arises through a long process of socialization. As work force division, employees feel obliged and experience repaying of the benefts being received from the organization. Researchers are moved to multidimensional commitment due to combining of its different forms. Underlying mindset is the foundation on which different concepts and dimensions of commitment are based. In changing employee-employer relationship scenario different types or the components of commitment are affective, continuance and normative commitment (Meyer & Allen, 1991). Lack of harmony has been seen clearly in reaching a broad concept or multidimensional construct. Investigation for multidimensionality across cultures of organizational commitment is required, so as to see if US concept is the same in other cultures as developed by Allen and Meyer. A single construct is being proposed, refned, and agreed upon after years (Meyer & Allen, 1991, 1997). Construct validity of three-component model of commitment (Meyer & Allen, 1991) have been examined by different eminent scholars in decades. Many studies have tried to investigate behavioral and job outcomes of commitment construct.
10. Reciprocity and AOC A Person gets obliged in reciprocation for response to a favor by the other person or organization (Bishop et al., 2000). In social exchange’ individuals stimulate
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Effects of Reciprocity on Knowledge Sharing Behavior 59 feelings of trust, obligation because of the service embedded in them (Agarwala, 2003). Employee commitment in reciprocation is seen in respond to employer’s commitment (Eisenberger, Armeli, Rexwinkel, Lynch, & Rhoades, 2001). Reciprocity as antecedent to AOC has been proven by empirical evidence earlier. Keeping in mind how ft one is taken care of by the organization employees respond in reciprocity. Striving for balance as exchange is done to reciprocate in respond to other party (Dabos & Rousseau, 2004). According to Brooke, Russell, and Price (1988), feelings of increased commitment to the organization is achieved due to liking exchanged, respect and approval, fostering positive employee behavior which acts as socioemotional benefts. Studies showed that when all parties sustain equilibrium in the association, an employment relationship is further endured, meeting one’s reciprocity obligations (Dabos & Rousseau, 2004). Uses of intrinsic reward, etc. are seen used more to attract employees, to remain committed for organization in the creation of reciprocal process (Merchant, Van der Stede, & Zheng, 2003). Affective commitment is always generating positive feeling in an individual or employee because he sees benefts provided to him satisfying him and compatible to his values. Therefore, it can be hypothesized: H2: Reciprocity and AOC are positively related.
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11. AOC and KSB AOC is identifcation or involvement or emotional attachment with organization by the employee. Extra affective organization commitment inculcates positive feeling that employment relationship has created (Newman & Sheikh, 2012). This positive feeling will keep employee in behaviors benefcial to employer (Meyer & Herscovitch, 2001). Social exchange creates voluntary behavior like KSB due to employee motivation through feedbacks (Blau, 1964). An employee does expect similar favor in return of a work or positive gesture. According to SET, voluntary tasks like desiring to expend time mutually, knowledge sharing, be a member of a group, and sense of responsibility are a few effects of commitment in social relations. Karkoulian et al. (2010) is of the view that affective commitment is signifcant forecaster of KSB. Due to trust in co-workers and management, employees tend to show commitment and sharing of knowledge (Hinds & Pfeffer, 2003). There is an exchange of talent being shown by the workers and in return wait for the reward to give a concrete proof of how affective commitment is a predictor of performance may it be performing while sharing of knowledge (Barlings et al., 2000). Camelo-Ordaz et al. (2011) also augmented that for better sharing of knowledge, employees should have feelings of commitment. Having trust in co-workers and management, employees will be willing to show commitment and knowledge sharing (Van den Hooff & Van Weenen, 2004). Hislop (2003) says that the topic of affective commitment with respect to discretionary sharing or transferring of knowledge has not been covered so far. According to Storey and Quintas (2001), willingness in sharing is affected by motivation and additional discretionary effort which in return produces supreme commitment, that is, effective
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60 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi organizational commitment and these employees do not leave the organization so often. Scarbrough and Carter (2000) are also of the same opinion that commitment helps in fostering of knowledge. Lin (2006) asserts about tacit knowledge as a product of affective commitment. So it can be said on concrete footing that a positive relationship exists between affective commitment and KSB. H3: AOC is positively related to KSB.
12. Reciprocity and Normative Organization Commitment In SET, employees never leave organization’s investment unreturned, rather they think it as obligation to return it (Blau, 1964). Therefore, normative commitment is being seen to be reinforced by the reciprocity. It is considered as social obligation in the form of commitment within organizations when employees receive favorable treatment. Scholl (1981) proved that during hard times in the organization or when opportunities are knocking in other similar organization, committed employee will not leave the organization so as reciprocate in the form of true loyalty. This reciprocation continues until an employee thinks he or she has paid off the debt. Growth of employees’ normative commitment according to General Model of Workplace Commitment (Meyer & Herscovitch, 2001) is due to reciprocal behavior and the same commitment then leads toward discretionary behavior. Normative commitment is also found to be a product of reciprocity by Yao and Wang (2008) in two high-technology companies in Beijing so it can be said: H4: Reciprocity and NOC are positively related.
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13. Normative Organization Commitment and KSB Social exchange also talks about discretionary behavior which according to Blau (1964) is due to motivation one gets. Predictors of such motivation can be different at times. Commitment seems to one of such predictor. A favor is being demanded and expected in the form of a similar favor. Outcomes of commitment which become very obligatory to undergo can be, becoming a member of a group or wishing to spend time together, or can be a voluntary task in form of sense of responsibility and knowledge sharing. Normative commitment by Karkoulian et al. (2010) is a signifcant predictor of KSB. Commitment is considered as one’s responsibility to the organization in normative approach. Working in favor of interests and goals of the organization even in pressures is considered as normative commitment by different researchers which produce voluntary behavior which they consider in line with favors they have got. Individuals with high normative commitment are believed as willing full in sharing knowledge considering it normal thing to do to meet organizational goals. Hence, it is proposed: H5: NOC is positively related to KSB.
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Effects of Reciprocity on Knowledge Sharing Behavior 61
14. Mediation of Organizational Commitment Between Reciprocity and KSB Inspiring knowledge sharing successfully has become managers’ most demanding activities (Lin et al., 2012). Managers are always of thoughts and means to improve sharing of knowledge so as to improve a frm’s effciency and capability and avoid loss of key employees or knowledge. Mostly this sharing is dependent on reciprocity, forcing competitive organizations to derive ways and means to enhance KSB by developing concrete measures (Bartol & Srivastava, 2002). KSB being prosocial behaviors is easy to inculcate through motivation that can be reciprocal and employees are motivated to share (Robertson & O’MalleyHammersley, 2000). Cabrera and Cabrera (2005) research focuses on effect of rewards systems for knowledge transfer by affective commitment, emphasizing the need to gain employees. Tangible and intangible knowledge is being retained by offering reciprocal rewards inculcating affective commitment. Reduced turnover levels, improved loyalty, willingness of providing discretionary behavior for organization are out comes of induction of supreme affective commitment which only resulted through some reciprocated effort (Shepard & Mathews, 2000). Exchange is the core concept of affective commitment, in which employees give for a gain to attach them with organization (Angle & Perry, 1983). Martín-Pérez et al. (2012) analyzed the behavior of most committed employees and came to the conclusion that these employees are sharing knowledge more than others and they enjoy doing it as they are being motivated for the benefts being offered by their organization. They think they are paying off their debt and their performance is increasing day by day. Therefore, it can be hypothesized:
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H6: The AOC mediates the relationship between reciprocity and KSB. Meyer and Herscovitch (2001) developed General Workplace Commitment which shows discretionary behavior a product of normative commitment, and normative commitment is being facilitated by lot of things which are reciprocal in nature. Normative commitment mainly works on an worker’s feelings of obligation. Normative commitment by Karkoulian et al. (2010) is found as vital forecaster of KSB. Further this stance has been augmented by Yao and Wang (2008) when he proved reciprocity norm is highly related to normative commitment while researching upon companies in Beijing. Henceforth, the focus of this study will be the reciprocal norms inculcating obligated orientated commitment, that is, normative commitment which keeps an employee focusing on KSB. Kuo (2013) worked on concepts of reciprocity on KSB with few other scholars. Effects of normative commitment showing discretionary behavior have also been proven by Meyer and Herscovitch (2001). Therefore, it can be hypothesized: H7: The NOC mediates the relationship between reciprocity and KSB. Fig. 1 shows the Research Model.
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62 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi H1
H6 H2 Reciprocity H4
Affective Organizational Commitment Normative Organizational Commitment
H3 Knowledge Sharing Behaviour H5
H7
Fig. 1. Effects of Reciprocity on KSB with Mediating Role of Organizational Commitment.
15. Methodology
The study has developed seven hypotheses basing on literature review. Research problems followed by objectives were scanned by testing empirically related variables. Methodology includes research design, population, sampling, data collection tools, and measuring instruments for the measurement of relationships among variables termed as methodological section.
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16. Research Design Research design entails decisions regarding purpose of study, location, investigation type, time period, extend of interfering by researcher, basic element of analysis, sampling design, data collection methods, techniques for measurement and data analysis (Sekaran, 2011, p. 116). It was an explanatory research that followed quantitative approach based using survey questionnaires. Quantitative research is used to answer questions related to when and how much or many or often, thereby measuring something very precisely (Cooper & Schindler, 2003). Testing of hypothesis was done using quantitative methods, for determination of relationships among different variables. In this study, the mediating role of commitment between reciprocity and KSB was measured. It was a feld study, where by the unit of analysis was an individual employee. This study was cross sectional in nature. It was a casual study and done during natural environment that is in noncontrived setting.
17. Population and Sample Size Population according to Sekran (2011) is “the overall group of people, events or things of concern that the researcher wishes to investigate” (p. 265). Hence, target population selected was employees of Pharmaceutical sector of Pakistan. In all, 11 pharmaceuticals companies in vicinity of Rawalpindi and Islamabad were selected as the target population.
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Effects of Reciprocity on Knowledge Sharing Behavior 63 A sample consisting of 300 subjects was considered suffcient (Comrey & Lee, 1992). In a study involving a number of variables, the size of the sample should be above the minimum number of variables in a study multiplied by factor of 10 (Saunders, 2011). Sample would be selected keeping in view above criteria. Survey questionnaires were distributed to 410 workers of 11 Pharmaceuticals frms in Rawalpindi and Islamabad. In all, 363 questionnaires were collected back, 76 contained missing information or incomplete flling of data therefore they were excluded. Total sample size was 287 with 70% response rate. This sample represented the 400 pharmaceutical frms including 25 multinationals operating in the country.
18. Data Collection Tool Collection of data was done using survey questionnaires from sales/marketing managers and medical representatives of sales department of different pharmaceutical frms in Islamabad and Rawalpindi. One of the best tools of data collection is questionnaires (Bulmer, 2004). Non-probability sampling design was utilized to collect data. Information gathered from employees was only conveniently available.
19. Measuring Instrument All self-developed questionnaires were used to get demographic information from the sample. Participants were requested to frst provide info about organization, followed by designation, gender, marital status, age, how long in service and salary in the organization.
19.1. Reciprocity
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Reciprocity was measured by means of four items from Kankanhalli et al. (2005). The measure uses fve-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree. Cronbach’s alpha of this scale was 0.95, indicating high measuring reliability.
19.2. Knowledge Sharing Behavior Knowledge sharing was built on a scale containing eight-items and was developed by Swart (2014). The wording of the scale items were adjusted to research setting. All responses were required on fve-point Likert scale (endpoints: 1 = strongly disagree, 5 = strongly agree). In our study, Cronbach’s alpha of this scale was 0.85, indicating satisfactory measuring reliability.
19.3. Commitment AOC and NOC were measured using six items each of Meyer, Allen, and Smith (1993) scale. The measure uses fve-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree. In our study, three items of affective and normative organizational commitment were reverse coded accordingly. Cronbach’s alpha of
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64 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi Table 1. Reliabilities of used Instruments. S/No Variable
Items
Reliability
Reference
1.
Reciprocity
4
0.95
Kankanhalli et al. (2005)
2.
KSB
8
0.80
Swart (2014)
3.
AOC
6
0.91
Meyer et al. (1993)
4.
NOC
6
0.92
Meyer et al. (1993)
the affective organizational scale came out to be 0.91, representing high measuring reliability whereas one item of NOC was reverse coded. Cronbach’s alpha of NOC scale was 0.92, indicating high measuring reliability. Table 1 provides summary of reliabilities of all used measurement instruments.
20. Results
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Before data analysis, missing values and outlier were removed to ensure the uniformity of data as they were signifcantly distant from rest of the data set. Total of 287 responses were being used for data analysis in this research. Sample characteristics of designation, gender, marital status, tenure, salary and age were reported frst. Skewness and Kurtosis test was performed to check symmetry and normal distribution of data. Validity of result was being checked by Common method bias (CMB). Confrmatory factor analysis (CFA) in AMOS 20 revealed reliability and reported overall ftness of KSB model. Mean, standard deviations followed by correlations analysis of all variables were next to report. Lastly, relationship among different all four variables is tested using SPSS (V 22). Mediation effect of AOC and NOC has been studied through Hayes Process Macro Method.
21. Sample Characteristics 287 Survey questionnaires used for data analysis included employees of 11 Pharmaceuticals companies of Rawalpindi and Islamabad. Their designation was sales promotion offcer up to Sales Managers in sales department of different Pharmaceutical companies. Frequency table provided thorough description and summary of demographics of respondents. Demographics of the respondents measured were: ⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁
Designation Gender Age Marital status Tenure Salary.
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Effects of Reciprocity on Knowledge Sharing Behavior 65 More than 98% respondents were male whereas female respondents were 0.7% of total proportion as these organizations mostly work with large no. of male employees compared to female employees in sales departments. 56% that is more than half of respondents were married. 79% of respondent’s age lied between 20 and 35 years. Majority of employees were in earlier career tenure, that, 1 to 2 years (34%) and 2 to 4 (34%). More than 93% salaries lied above Rs. 20,000. Frequency table is part of the descriptive statistics. Table 2 represents the complete picture of frequencies for the demographics of respondents.
22. Skewness and Kurtosis Skewness always measure symmetry or no symmetry in data. Its value should be between −0.8 and 0.8, whereas Kurtosis shows data that are heavy-tailed/ Table 2. Demographics of Respondents. S/No
Variable
Scale
Frequencies
i
*Designation
SPO/SSPO
203
Gender
49
17.1
DSM/SDSM
28
9.8
7
2.4
265
98.3
2
0.7
Married
161
56.1
Single
126
43.9
20–35
229
79.8
36–45
49
17.1
46–55
7
2.4
56 and above
2
0.7
1–2
98
34.1
3–4
98
34.1
4–9
63
22
10 and above
28
Male Female
iii
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iv
v
vi
Marital Status Age
Tenure
Salary
70
FE SM ii
Percentages
Less than Rs 20,000
9.8
7
2.4
Rs 20,000–40,000
133
46.3
Rs 40,000–60,000
70
24.4
Rs 60,000 and above
77
26.8
Note: *Designation in different companies is different. SPO/SSPO Sales promotion offcer/Senior sales promotion offcer; FE = Field Executive; DSM/ SDSM = District sales Manager/Senior District Sales manager; SM = Sales Manager.
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66 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi
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Table 3. Skewness and Kurtosis. S/No.
Variables
Skewness
Kurtosis
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.
KSB1 KSB2 KSB3 KSB4 KSB5 KSB6 KSB7 KSB8 Rp1 Rp2 Rp3 Rp4 AOC1 AOC2 AOC3 AOC4 AOC5 AOC6 NOC1 NOC2 NOC3 NOC4 NOC5
−0.106 −0.061 −0.009 −0.029 −0.006 −0.033 −0.001 −0.008 −0.363 −0.329 −0.219 −0.288 −0.397 −0.461 −0.473 −0.305 −0.549 −0.455 −0.168 −0.247 −0.073 −0.273 −0.167
−0.622 −0.703 −0.110 −0.216 −0.196 −0.531 −0.021 −0.447 −0.673 −0.650 −0.585 −0.633 −0.771 −0.763 −0.857 −0.771 −0.809 −0.840 −0.016 −0.634 −0.423 −0.760 −0.632
24.
NOC6
−0.257
−0.744
Notes: N = 287, RP = Reciprocity, AOC = Affective organizational commitment, AOC = Normative organizational commitment, KSB = Knowledge sharing behavior.
light-tailed compared to normal distribution and its value lies between −0.3 and 3. All values in Table 3 show normal distribution.
23. Harman’s Single Factor Test This test checked CMB that threatens the validity of result. The 34% variance described by single factor in Table 4 shed off concern of CMB in this study (less than 50% cutoff point). If the frst instrument is less than 50, this means there is no biasness error and the result is very well valid.
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Effects of Reciprocity on Knowledge Sharing Behavior 67 Table 4. Harman’s Single Factor Test.
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Variables Eigen Values (Initial)
Extraction Sums of Squared Loadings
Total
Variance %
Cumulative Total %
1
8.250
34.374
34.374
2
4.374
18.224
52.598
3
2.643
11.013
63.611
4
1.935
8.063
71.673
5
0.577
2.406
74.079
6
0.552
2.301
76.381
7
0.515
2.146
78.526
8
0.448
1.867
80.394
9
0.430
1.790
82.184
10
0.386
1.610
83.795
11
0.379
1.579
85.374
12
0.371
1.547
86.920
13
0.367
1.528
88.449
14
0.342
1.427
89.875
15
0.306
1.276
91.152
16
0.287
1.198
92.350
17
0.277
1.152
93.502
18
0.269
1.119
94.621
19
0.254
1.058
95.679
20
0.247
1.030
96.710
21
0.216
0.901
97.611
22
0.204
0.850
98.461
23
0.191
0.798
99.259
24
0.178
0.741
100.000
8.250
% of Variance
Cumulative %
34.374
34.374
Extraction Method: Principal Component Analysis.
24. Confrmatory Factor Analysis and Measurement Model CFA was conducted to assess convergent validity in AMOS 20 prior to hypothesis testing. Standardized regression weights are called loadings. Factor loadings of items were examined on their respective constructs. Their values according to Hair, Babin, and Krey (2017) should be greater than 0.7. All loadings were well above the threshold value of 0.7 as shown in Table 5.
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68 Muhammad Raheel Matloob and Syed Tahir Hussain Rizvi
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Table 5. Factor Loadings of Scale Items in CFA. S/No
Loadings
Estimate
1.
KSB8
←
KSB
0.859
2.
KSB7
←
KSB
0.831
3.
KSB6
←
KSB
0.870
4.
KSB5
←
KSB
0.826
5.
KSB4
←
KSB
0.860
6.
KSB3
←
KSB
0.841
7.
KSB2
←
KSB
0.864
8.
KSB1
←
KSB
0.837
9.
Rp4
←
RP
0.704
10.
Rp3
←
RP
0.713
11.
Rp2
←
RP
0.718
12.
Rp1
←
RP
0.713
13.
NOC1
←
NOC
0.775
14.
NOC2
←
NOC
0.838
15.
NOC3
←
NOC
0.804
16.
NOC4
←
NOC
0.848
17.
NOC5
←
NOC
0.816
18.
NOC6
←
NOC
0.790
19.
AOC1
←
AOC
0.828
20.
AOC2
←
AOC
0.814
21.
AOC3
←
AOC
0.837
22.
AOC4
←
AOC
0.796
23.
AOC5
←
AOC
0.805
24.
AOC6
←
AOC
0.777
Note: Loading values should be greater than 7
The CFA model also ftted well. As shown in Table 6, CMIN/DF = 1.04; CFI = 0.99; GFI = 0.93; TLI = 0.99, and RMSEA = 0.013. Measurement model in Fig. 1 provided a good ft for the data.
25. Bivariate Correlation Descriptive statistics, including means, standard deviations, and correlation coeffcients, are shown in Table 7. Guidelines given by Cohen (1988) were followed for the understanding of high- and low-level correlation and interpretation of
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Effects of Reciprocity on Knowledge Sharing Behavior 69 Table 6. Goodness-of-ft Statistics. Model Fit Index
CMIN/DF Comparative Goodness Tucker-Lewis Root Mean Fit Index of Fit Index Index (TLI) Squared Error (CFI) (GFI) of Approximation (RMSEA)
Value
1.04
Recommended < 3 Level
0.99
0.93
0.99
0.013
> 0.9
>0.9
>0.9
75 1, if 75 < Polical Stability > 100 2
The import data of the country by resource were collected, taking into consideration the codes including 32- Coal, coke, and briquettes; 33- Petroleum, petroleum products, and related materials; and 34- Gas, natural gas and manufactured commodity under the SITC Rev.1 classifcation of the UN Comtrade Database. 3 The frst four countries (CR4 concentration rate) that the country imported at most in those periods were taken into consideration for the import amounts by fossil fuel. The main reason for this is because the frst four countries supply the large amounts of fossil fuel imports of the country, including 82% in coal, 70% in oil, and 84% in natural gas.
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Index Proposal for Supply Security Risk in Fossil Energy Imports 187 Similarly, since a lower logistics performance index of supplier countries indicates higher supply security risk, the regions with low logistics performance are assigned a value of 2 and those with higher logistics performance are given a value of 1. Accordingly, 2, if 1 < Logistic Performance Index < 3 di = 1, if 3 < Logistic Performance Index < 5
Apart from the variables of political stability and logistics performance indices, since the diversifcation of importing countries reduces the country’s risk of being exposed to supply disruption, the share of imports from country “i” in total imports, the net import dependency by fuel type, and the shares of fuel types in total energy consumption are also included in the index. Taking these assumptions into account, this study focuses on the short-term specifc risks regarding external energy supply security for coal, oil, and natural gas. In the analyzed period, the frst four countries from which the country intensely imports energy resources were included in the Appendix. On the other hand, this study assumes that the free zones from which the country imports oil at certain periods have high logistics performances and low political risks.
5. Empirical Results
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The risky external energy supply (Rees) index values were calculated using Eq. (1) for the fossil energy resources (coal, oil, and natural gas) used in Turkish economy in the period of 1999–2018 and presented in Fig. 1. According to Fig. 1, the risk of external coal supply increased in the period of 1999–2007, decreased in the period of 2008–2014, and increased signifcantly in the period of 2015–2018. These developments in index values over time suggest
Risky External Energy Supply for Coal 2017 2015 2013 2011 2009 2007 2005 2003 2001 1999 0.000
0.126 0.148 0.134
0.099
0.011 0.010 0.009 0.010 0.012 0.011 0.011 0.037 0.034 0.024 0.022 0.031 0.034 0.020 0.040
0.050 0.050 0.049
0.060
0.080
0.100
0.120
0.140
Fig. 1. Rees_Coal. Source: Calculated by the authors.
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0.160
188 İbrahim Murat BİCİL and Kumru TURKOZ
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a change in the country composition of coal imports from external suppliers as a fossil energy resource. The political stability and logistics performance index values of the frst four countries, from which coal was imported intensely in the period of 2008–2014 and where the index received low values, was relatively high. The source of increased index values, which indicate increased supply risk in the post-2014 period, is that the frst four countries with highest share in imports have a signifcantly high total share in imports, high political risks, and relatively low logistics performance index values. Fig. 2 shows the risky external energy supply index values for oil in the period of 1999–2018. Accordingly, the risk of external oil supply increased gradually in the period of 1999–2010 except for a few years, and increased in the following periods excluding 2011. Increased risk of external oil supply in the period 1999–2010 is due to high import concentration ratio and relatively low political stability and logistics performance indices of the frst four countries with highest share in imports. The factors that increased index values in the post-2011 period are both high political risks and relatively low logistics performance indices of the frst four countries with highest share of imports. Fig. 3 shows the risky external energy supply index values for natural gas in the period of 1999–2018. Accordingly, the risk of external gas supply increased gradually in the period of 1999–2010, but increased signifcantly in 2008. Then, it continued to increase in the 2009–2014 period, but gradually decreased in the following period until 2018. It is noteworthy that the countries with high share in imports in 1999, 2010, and 2014, in which the index was signifcantly deviated and high for natural gas, were the ones with high political risk and relatively low logistics performance. Imports from countries with low political risk and relatively high logistics performance are behind the gradual decline in the natural gas index in recent years.
Risky Externa l Energ y Supply f o r O il 2017 2015 2013 2011 2009 2007 2005 2003 2001 1999 0.000
0.216 0.195 0.190 0.149 0.169 0.146 0.136 0.112
0.512 0.527
0.389
0.167 0.214
0.104 0.115 0.100 0.200
0.267
0.300
0.377
0.400
0.597
0.455 0.446
0.500
0.600
Fig. 2. Rees_Oil. Source: Calculated by the authors.
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0.700
Index Proposal for Supply Security Risk in Fossil Energy Imports 189 Risky Externa l Energ y Supply f o r Na t ura l Ga s 2017 2015 2013 2011 2009 2007 2005 2003 2001 1999 0.000
0.042 0.048 0.038 0.051
0.053 0.019
0.088
0.105
0.032 0.045 0.039 0.035
0.059 0.053
0.020
0.074 0.069 0.070 0.067
0.040
0.060
0.070 0.106 0.080
0.100
0.120
Fig. 3. Rees_Natural Gas. Source: Calculated by the authors.
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6. Conclusion and Policy Recommendations This study, in which an index proposal was developed to assess the risk of energy supply security in Turkey by focusing on fossil fuel based energy imports from external suppliers, has also taken into account both the political risks and logistics performances of supplier countries, and the country’s internal dynamics in energy market such as import dependency by source and diversity of importing countries. Energy security in fossil fuels has a strategic importance for Turkey because fossil fuels including coal, oil, and natural gas meet around 80% of the country’s energy needs, where a large part of it (80%) is supplied through imports. For this purpose, the energy security risk for all three main types of energy was analyzed in the period of 1999–2018. When the energy security risk levels of these energy types were compared in this period, the index results showed that oil was the most risky energy resource in imports, followed by natural gas and coal, respectively. The empirical results of this study are consistent with those of the studies conducted by Öznazik and Narin (2016) and Birol (2020) to examine the energy supply security risks of Turkey. The risk profles, which vary by energy resource, signifcantly increased starting from 2015 for coal, and also signifcantly decreased starting from 2011 for oil and 2015 for natural gas. This may because of the substitution of oil and natural gas with coal in the short term and the import of coal from regions with higher political risk and lower logistics performance since 2015. However, the risk of energy supply security by resource is generally high by periods. This may be because the country could not reduce the risk due to its inability to import fossil fuels from different countries. Turkey imported coal, oil, and natural gas intensely from the same countries in the period examined and these countries are located in unstable regions with low political stability and logistics performance, increasing its external supply security risk. On the other hand, there are a number of factors that shape the developments in energy security. For example, an increase in
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
190 İbrahim Murat BİCİL and Kumru TURKOZ domestic consumption of both suppliers and other countries can increase energy competition, changing both availability and prices of energy supply. As a result, the country’s external energy supply security risk can increase. The Medium-Term Program for Turkey’s Energy Policy covering the period of 2006–2008 emphasizes on “meeting the energy needs of growing Turkish population and economy through stable, continuous and qualifed resources at minimum cost.” In fact, this statement, which emphasizes energy supply security, should also consider some other components. More specifcally, a well-designed energy policy should not only focus on the low cost, reliability and continuity of energy supply, but also try to minimize energy supply risk by considering both socioeconomic conditions of supplier countries (such as political risks and logistics performances of importing countries) and supplier diversity. Although Turkey is a major energy importer, its geographical location of neighboring countries with rich energy reserves can ease the diversifcation of its energy imports. Only in this way, the damage and severity of supply disruptions in its energy market can be alleviated. On the other hand, Turkey does not have a necessary technology infrastructure for renewable resources to meet the remaining part of its energy supply after fossil fuels and is dependent on imports in domestic supply equipment. If these defciencies are eliminated and the energy it needs can be substituted with domestic and renewable resources by replacing fossil fuels, then its energy supply security risk can be reduced to lower levels. In addition, these measures can have rehabilitative effects on both its economy and energy security by alleviating environmental pressures via reductions in greenhouse gas emissions caused by fossil fuels, decreasing energy input costs, and reducing foreign supply dependency.
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Acknowledgement This paper is the extended version of the study presented at IV. International Applied Social Sciences Congress 22nd-24th October 2020 and printed as a Full text.
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United Nations Comtrade. (2020). International trade statistics database. Retrieved from https://comtrade.un.org/data/ Vivoda, V. (2009). Diversifcation of oil import sources and energy security: A key strategy or an elusive objective? Energy Policy, 37(11), 4615–4623. Winzer, C. (2012). Conceptualizing energy security. Energy Policy, 46, 36–48. World Bank. (2020). World development indicators. Worldwide governance indicators. Retrieved from https://databank.worldbank.org/source/worldwide-governanceindicators Yergin, D. (2006). Ensuring energy security. Foreign Affairs, 85(2), 69–82. Zhang, L., Yu, J., Sovacool, B. K., & Ren, J. (2017). Measuring energy security performance within China: Toward an inter-provincial prospective. Energy, 125, 825–836.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
%
2007
%
2006
%
2005
%
2004
%
2003
%
2002
%
2001
%
2000
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
1999
%
TITH
COAL
44
Russian Federation
40
Russian Federation
38
Russian Federation
44
Russian Federation
44
Russian Federation
37
Russian Federation
47
Russian Federation
37
Russian Federation
48
Russian Federation
ITH1
9
South Africa
9
China
14
United States
12
China
13
South Africa
17
Canada
15
South Africa
18
Australia
13
So. African Customs Union
ITH2
9
China
9
United States
9
Colombia
10
South Africa
8
United States
13
Australia
10
Australia
17
United States
13
Australia
ITH3
8
Australia
9
South Africa
9
China
9
Ukraine
7
Australia
8
South Africa
9
China
11
South Africa
5
United States
ITH4
Shares of Countries in Which Turkey’s Imports of Fossil Fuels in the Period of 1999–2018 (CR4 -%).
APPENDIX
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70
CR4
67
CR4
69
CR4
74
CR4
72
CR4
76
CR4
80
CR4
83
CR4
79
CR4
(ITH1 + ITH2 + ITH13 + ITH4)/TITH
Index Proposal for Supply Security Risk in Fossil Energy Imports 193
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
%
2017
%
2016
%
2015
%
2014
%
2013
%
2012
%
2011
%
2010
%
2009
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
2008
%
TITH
OIL
36
Colombia
37
Russian Federation
37
Russian Federation
59
United States
52
United States
39
United States
40
United States
42
United States
41
Australia
42
Australia
ITH1
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34
Colombia
25
Colombia
12
Ukraine
15
Australia
25
Australia
19
Australia
21
Australia
29
United States
26
United States
35
Russian Federation
ITH2
9
United States
8
Australia
12
South Africa
8
Canada
15
Ukraine
15
Ukraine
14
Canada
17
Canada
14
Canada
13
Canada
ITH3
7
Australia
6
South Africa
9
Australia
7
Australia
6
Canada
10
Canada
12
Ukraine
12
Ukraine
7
Ukraine
13
Ukraine
ITH4
86
CR4
85
CR4
84
CR4
86
CR4
88
CR4
89
CR4
84
CR4
91
CR4
91
CR4
94
CR4
(ITH1 + ITH2 + ITH13 + ITH4)/TITH
194 İbrahim Murat BİCİL and Kumru TURKOZ
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
%
2008
%
2007
%
2006
%
2005
%
2004
%
2003
%
2002
%
2001
%
2000
%
1999
%
2018
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
44
Russian Federation
47
Russian Federation
37
Russian Federation
37
Russian Federation
33
Russian Federation
22
Russian Federation
20
Russian Federation
19
Russian Federation
20
Free Zones
17
Free Zones
40
Colombia
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9
United States
22
Iran
22
Iran
19
Iran
17
Libya
19
Iran
17
Free Zones
17
Libya
14
Saudi Arabia
16
Iran
32
Russian Federation
6
Italy
9
Saudi Arabia
12
Libya
14
Libya
16
Iran
15
Libya
14
Iran
16
Iran
13
Libya
14
Libya
10
United States
6
France
3
Iraq
10
Saudi Arabia
11
Saudi Arabia
10
Saudi Arabia
11
Saudi Arabia
13
Libya
13
Free Zones
13
Iran
12
Saudi Arabia
9
Australia
65
CR4
81
CR4
82
CR4
81
CR4
75
CR4
68
CR4
64
CR4
66
CR4
60
CR4
59
CR4
90
CR4
Index Proposal for Supply Security Risk in Fossil Energy Imports 195
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
%
2018
%
2017
%
2016
%
2015
%
2014
%
2013
%
2012
%
2011
%
2010
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
2009
%
TITH
NATURAL GAS
38
Russian Federation
32
Russian Federation
28
Russian Federation
26
Russian Federation
24
Russian Federation
25
Russian Federation
21
Russian Federation
19
India
52
Russian Federation
53
Russian Federation
ITH1
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21
India
19
India
25
India
19
India
18
Greece
19
Greece
17
Italy
18
Russian Federation
8
Italy
5
United States
ITH2
10
Greece
10
Greece
7
Israel
10
Italy
16
India
17
India
15
India
13
Italy
6
India
4
Greece
ITH3
5
Israel
8
Bulgaria
7
Bulgaria
10
Greece
12
Israel
11
Italy
15
Greece
11
Greece
5
Greece
4
Italy
ITH4
75
CR4
69
CR4
67
CR4
65
CR4
70
CR4
71
CR4
68
CR4
61
CR4
71
CR4
67
CR4
(ITH1 + ITH2 + ITH13 + ITH4)/TITH
196 İbrahim Murat BİCİL and Kumru TURKOZ
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
%
2008
%
2007
%
2006
%
2005
%
2004
%
2003
%
2002
%
2001
%
2000
%
1999
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
53
Algeria
41
Algeria
31
Algeria
45
Algeria
45
Algeria
41
Algeria
50
Algeria
53
Algeria
53
Algeria
42
Russian Federation
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11
Norway
11
Norway
16
Norway
10
Norway
21
Norway
25
Norway
16
Norway
16
Norway
12
Kuwait
39
Algeria
9
Libya
9
Kazakhstan
9
Libya
9
Saudi Arabia
8
Saudi Arabia
7
United Kingdom
15
Russian Federation
12
Kuwait
12
Norway
4
Kuwait
8
Kazakhstan
8
Libya
7
Russian Federation
9
Libya
6
Kazakhstan
5
Ukraine
3
Ukraine
5
Ukraine
7
Saudi Arabia
4
Saudi Arabia
82
CR4
69
CR4
64
CR4
73
CR4
81
CR4
78
CR4
84
CR4
87
CR4
84
CR4
89
CR4
Index Proposal for Supply Security Risk in Fossil Energy Imports 197
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
100
World
41
Algeria
42
Algeria
32
Algeria
34
Algeria
34
Russian Federation
34
Russian Federation
29
Algeria
33
Algeria
36
Algeria
36
Algeria
ITH1
21
United States
24
Norway
19
Russian Federation
25
Russian Federation
32
Algeria
25
Algeria
27
Russian Federation
20
Russian Federation
19
Russian Federation
19
Norway
ITH2
13
Norway
12
Kazakhstan
17
Norway
15
Kazakhstan
17
Kazakhstan
19
Kazakhstan
19
Kazakhstan
19
Kazakhstan
17
Kazakhstan
16
Russian Federation
ITH3
13
Kazakhstan
12
United States
16
Kazakhstan
13
Norway
13
Norway
14
Norway
17
Norway
10
Norway
14
Norway
14
Kazakhstan
ITH4
88
CR4
90
CR4
85
CR4
87
CR4
96
CR4
92
CR4
92
CR4
82
CR4
86
CR4
84
CR4
(ITH1 + ITH2 + ITH13 + ITH4)/TITH
Source: World Bank (2020). World Development Indicators (https://databank.worldbank.org/source/worldwide-governance-indicators).
%
2018
%
2017
%
2016
%
2015
%
2014
%
2013
%
2012
%
2011
%
2010
100
World
2009
%
TITH
NATURAL GAS
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198 İbrahim Murat BİCİL and Kumru TURKOZ
Chapter 10
An Alternative to Corporate Social Responsibility Studies: Intellectual Company Murat Güreşci Abstract Introduction: Nowadays, corporate social responsibility (CSR) activities carried out by companies to create a positive corporate image and a good reputation on target audiences have lost their credibility. Target audiences perceive these companies as “doing as if they are doing” CSR activities. It is effective for companies to carry out works that put them in a good light, cover the back of the showcase, make their ways appealing, cover some facts, polish their image, and carry out works that do not aim to create value or beneft. Purpose: The purpose of this study is to reveal that the intellectual company model is an alternative model to CSR studies.
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Methodology: This study consists of two parts. The frst part will focus on CSR understanding and will be handled with a critical perspective; the second part will discuss, through a theoretical framework, the concept of the intellectual company for sustainable economic, environmental and social development and the intellectual company will be examined. Findings: The results of the study are as follows. (i) It was determined that the intellectual company made sustainable contributions on economic, social, and environmental issues. (ii) Sustainability is central to the intellectual company’s work on social and environmental issues. The intellectual company model is an alternative model to CSR studies. The intellectual company will make more positive contributions to social and environmental issues as it focuses on sustainability. This will affect consumer trust positively and increase brand loyalty.
New Challenges for Future Sustainability and Wellbeing, 199–209 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211011
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
200 Murat Güreşci Keywords: Intellectual company; corporate social responsibility; public relations; sustainability; environmental issues; consumer trust; brand loyalty JEL Codes: M1; M14; M19
1. Introduction The author is critical of the work of corporate social responsibility (CSR) in that he sees that companies look at CSR as a public relations tool to be used to improve their image and reputation. In the formation of this judgment, it is effective for consumers to view CSR activities carried out by companies as Public Relations (PR) strategies. Consumers believe that companies carry out their CSR activities in order to show they are doing good work. They think that companies conduct CSR activities to hide what is happening behind the scenes. In addition, consumers consider CSR activities as a PR tool used by companies. This creates a serious trust problem between consumers and companies. Saydam clearly defnes the conditions under which CSR studies should be carried out:
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The owner of a company that employs little children, turning the wardrobe so as not to send his boys to the military, does not pay or miss tax, in an effort to destroy union work, does a somersault to avoid openness, transparency and accountability, If CSR works, it will shoot at its own feet.(Saydam, 2011, p. 243) Is this really the situation in practice and is it being carried out considering these criteria? Unfortunately, it is not possible to answer in the positive. Companies and brands prefer to pretend that they are carrying out CRS activities, to be seen “as if ” they are doing it. But what does “as if ” mean? As Saydam clarifes in his book, “as if ”: is, to show what is not present as it is, to shine something that is not” (Saydam, 2011, p. 27). In other words, exaggeration, lies, illusions, and roles, creating an image that is far from the truth. It is still not possible to silence it today; because nowadays companies and brands are now facing customers who ask about and question their work. Today’s communication environment is growing much faster and exponentially; the issues that took months or years to appear in the past are now out of control in hours or minutes. It is getting harder to follow the media. Companies are confronted with countless comments, which come from countless blogs and social media accounts. Attempting to ban broadcasts from huge massive media, where users’ ideas are shaped through interaction does not work, and usually causing the opposite effect, causing more and more talk of events and issues and even greater reactions. Reputations can also be quickly harmed in an era when news spreads very quickly and opinions take shape at this speed due to the interaction and sharing features of social media. In our age, speed is at the center of everything. Loss of reputation can lead companies and brands to crisis much faster. However, this contains an opportunity and a threat at the same time. On
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
An Alternative to Corporate Social Responsibility Studies 201 the other hand, the threat can sometimes create dire situations that endanger companies’ assets. The situation is serious, and attention must be paid to every step taken. Taking the approaches and ways of thinking of the old order, does not work in today’s communication age. The intellectual company conducts its studies on social, environmental, and economic issues not as a PR study, but from the sustainable social, environmental, and economic development center.
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2. An Overview of CSR Approach The existence of economic enterprises, which form the basis of organizations that are similar to those in mass production today, is encountered in Europe after the Industrial Revolution in the eighteenth and nineteenth centuries. The Industrial Revolution at that time increased the social wealth through the infuence of new inventions in Europe and the use of steam powered machines in production. For example, with the increase in the standard of life in society, coffee, tea, and sugar, which were previously considered as luxury consumer goods, have become daily goods for the middle class. The book Richness of Nations, published by Adam Smith in 1776, deals with the division of labor and specialization that forms the infrastructure of the capitalist industry by revealing the fundamental principles of capitalism. Smith introduced the concept of free market economy and described it as follows. According to Smith, state intervention in the free market economy should be minimal; this is because buyers or sellers can decide freely, and the economy must operate entirely on the balance of supply and demand. The market is managed by the invisible hand. The most important aim of businesses for this period is the increase in proft and production; other than that, they do not blame themselves. This understanding continued until the Great Depression in 1929. Failure of the state to intervene in the economy caused a great economic and social collapse, such that it caused 50 million people in the world to become unemployed, the total production on earth to decrease by 42% and the world trade to 65%. As a result, the necessity of state intervention in the economy became understood, enacting anti-trust laws with the state regulation duty, and brought controls in the feld of regulation and banking. Such a huge economic crisis has also shown that the economy does not function on its own. One of the advocates of the view that companies’ responsibilities should be economic development, proft and production increase is the US economist Milton Friedman, who received the Nobel Prize in Economics in 1976. In his book Capitalism and Freedom, which he wrote in 1962, he pointed out that companies have a single social responsibility, which is proftability: As long as an economy is within the rules of the game, and open and free competition without deception and fraud, only one and only social responsibility of companies is to use activities that will enable them to use their economic resources and increase their proftability.(Friedman, 1962, p. 112) Friedman went even further and strongly advocated that the understanding of social responsibility would be “fundamentally disruptive” for companies. In fact,
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202 Murat Güreşci “the very few trends that advocate that the authorities have a social responsibility other than making as much money as possible to shareholders can deeply undermine our free society” (Friedman, 1962, p. 112). In 1963, Joseph McGuire frstly acknowledged the economic concerns of companies, expressed the expansion of this view, such as Adam Smith and Milton Friedman, and assumed that companies’ social responsibility not only consisted of economic and legal obligations, but also that they had certain responsibilities toward society (McGuire, 1963, p. 144). Eells and Jalton (1961), who put forward almost the same view on this issue, say that companies think about social responsibility from the moment they begin to manage their social relations with ethical principles (Eells & Jalton, 1961, pp. 457, 458). When the concept frst emerged, the frst approaches in the 1950s were that companies’ only obligations in terms of social responsibility will be to fulfll legal obligations, and their main responsibility is on proftability and more proft for shareholders. How far are companies today from this idea? Companies are close to CSR activities; but maintaining sustainability is not so easy; either projects lose their excitement on the frst day, or the budgets are reduced or the implementation is terminated before the end of its life. It can be said that the main purpose of Adam Smith which was the proftability of the companies and the understanding of responsibility toward the shareholders, is a very strong obstacle in the initiation and sustainability of CSR efforts. There are those who evaluate the concept from a broader perspective, such as Bowen (1953), who is called the father of CSR, as well as those who evaluate the social responsibility approach from a narrow framework. Bowen (1953) believes that companies are important decision and power centers and that their actions touch people’s lives at many points. Bowen asks the question “What reasonable responsibilities can be expected from businesspeople?” (Bowen, 1953, p. xi). In his book Social Responsibilities of the Businessman, which he wrote in 1953, Bowen states that what is desirable is to follow the goals and values of society when making their decisions and creating policies related to them (Bowen, 1953, p. 6). In addition to legal responsibilities, social values and moral rules should be followed by companies. It is also expected that companies should comply with unwritten rules, be part of the community they are in, and also contribute to the solution of the problems of the society in which they are located. The main view of Adam Smith’s book, The Wealth of Nations, published in 1776 is that companies have a single purpose, which is to increase proftability and production. Today, of course, we are far from this view. It is not correct to evaluate the relations of companies with society only from a narrow framework, such as producing products and services. It is not possible to evaluate its responsibilities toward society from this narrow framework. Companies are expected to be sensitive to social problems. This expectation is in line with today’s target audience. Generation Z is not like the old generations; they care about the social stance. Trust and transparency are also important for this generation. In this respect, social responsibility studies that enable companies to show their social sensitivity in their relations with society are a must; however, it is a fact that the initiation and sustainability of social responsibility efforts are stuck in the proftability barrier. So again we come to the idea of Adam Smith and Milton Friedman
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An Alternative to Corporate Social Responsibility Studies 203 that the main purpose should be proftability. Intense competition and global economic crises cause the initial excitement of the projects to gradually disappear; however, we sometimes see that management changes in companies are effective in determining the life of the projects. Another important and serious criticism is that companies simply look at their participation in CSR activities as “reputation management.” At the basis of this idea, we fnd that CSR studies are successful only to the extent that they contribute to proftability and can be applied specifcally because they have such an effect. Most companies’ management does not want to deal with any social issues outside of their business. Looking at the journey companies have undertaken, it is constantly conveyed that companies should deal with social issues; But since the 1950s, there has been a problem with companies’ social responsibility awareness. Although the content of the concept has been enriched over time and includes new approaches to its many areas, since there is no legal obligation, compliance and integration with ethical codes adheres to the principle of volunteering. The intellectual company model brings new insights into this CSR approach. First, this new expansion means that company owners are interested in something other than their own business and take action and are intellectual. The defnition of being intellectual here includes understanding the changing dynamics of time. It also defnes the importance of accumulation in different areas by not being able to accumulate in only one area. Why is this important? Unfortunately, creating information from the exponential growing data stack and transforming it into information is problematic and diffcult for us who are accustomed to linear thinking. There is a need for information to be accumulated in different areas; from economics to sociology, from history to philosophy, etc. Such tools are also necessary for companies to survive and adapt in a competitive environment. This is what makes an intellectual company; it means that managers are accumulating information from different areas. Intellectual company vision is when a company considers the sustainability of its works as an important criterion. A company is required to be stable, resolute and determined in the felds such as environment, culture, arts, education, or women’s rights. An intellectual company takes into consideration values, taking a standpoint and taking responsibility. These four elements make it easier for companies to understand and adapt in time, while keeping their assets strong and healthy. Intellectual companies know that sustainable economic development will not happen without social and environmental development. At this point, it would be appropriate to remember the words of the late Vehbi Koç, the founder of Koç Holding: My Constitution is this; as long as I have a state and a country, I am. If there is democracy, we are all there. We must make every effort to strengthen the economy of our country. As our economy strengthens, democracy is better established. Our reputation in the world will increase. The intellectual company is of course not an intellectual leader. Vehbi Koç is a person who has laid this foundation at the root of Koç Holding with his
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204 Murat Güreşci intellectual leadership. If the intellectual leader has a vision and understanding in the basic foundation of the company’s organization, we know that the company will continue having that same vision, and continue to contribute to social and environmental development with the same desire, intention, determination, as well as economic development. In fact, the intellectual company that knows how to be sensitive to the environment and society can only achieve intelligence, values, attitudes, and responsibility.
3. How to Become an Intellectual Company?
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One of the most important flms of the 2012 was Capital, directed by Costa Gavras, which tells about the relationship between young and ambitious Marc Tourneuil and Phoenix Bank, one of the biggest banks in Europe. The movie starts with images on the golf course. One of the men playing golf collapses on the ground. Later in the movie, we understand that Marc Tourneuil had an inner voice; “This shot changed the fate of the chairman. Mine too.” The movie by Costa Gavras, which is a critique of capitalism, conveys the issues of brutal ambition, power struggle, greed, and deception in companies to the audience. The person who collapses while playing golf is Jack Marmande, the chairman of the bank. The main business of Marc Tourneul, who was appointed as the new board chairman after Jack Marmande collapsed, is to focus on proftability. The words he said on the board of directors are very shocking. He says that his only goal is to steal from the poor and continue to give to the rich. While the pressures of proftability and usefulness push leaders to form policies that ignore people and the environment, PRs take on the job of telling the public what has been done. In the striking presentation of Claude Marmande, a member of the bank’s board of directors, we can see how PR will share their company policies with the public. At the meeting of the board of directors, where the decision to be taken regarding the layoffs of the bank is discussed, Claude Marmande says: My suggestion for these mass layoffs is as follows: One; social plan is not a management game. This is old. The real problem here is communication. We must act very carefully and quickly. We should report this to the press with expressions such as personnel adjustments, competitive environment, and the future of the company. Everyone on the board listens quietly to the presentation. This silence is also an affrmation. Meanwhile, Mark’s inner voice is heard. For Claude’s approach, Marc says: “He is approaching our social slaughter as if he is playing golf, no doubt.” On the poster of the flm, there’s written “Money is master” under the title Capital. Undoubtedly, priority assets are sustainable so that companies can ensure social development and environmental protection by making sustainable contributions on social and environmental issues. Proftability is essential for the sustainability of all companies. In a company, proft and cash are like blood and water in a healthy body, they are essential for life, but they are not the essence
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An Alternative to Corporate Social Responsibility Studies 205 of life. The question here is: How can we make the proftability in companies sustainable by taking care of the society and the environment? Today, it is not possible to talk about a comprehensive and versatile holistic change based on information alone. Industries today are undergoing transformation, which is triggered by information and digital technologies which defne a faster, fexible, higher quality, and effcient industrial journey that companies have started to use in their value chains, but this is no longer enough for companies to adapt to today’s competitive environment. Focusing on its main economic affairs and adapting to this change in the economic feld is not enough to make companies competitive. Therefore, a company cannot be expected to focus only on its own business today. Our world and societies face various and more complex problems than before. The biggest threat is global warming and environmental problems. Nevertheless, the rapid development of communication technologies, the changes brought by capitalism and urbanization, are destroying the values and behaviors of the past. We face many complex problems due to the new social structures dominated by superfcial, instant, self-centered, interest-oriented, and short-term relationships. Crises are always at our door. One day we wake up, we face an economic crisis, another day we face the refugee crisis, an international crisis, an environmental crisis, or worse, the risk of war. Uncertainty lies at the heart of this new era. International Monetary Fund (IMF) President, Kristalina Georgieva said in Davos, “The new normal in the world is uncertainty” (www. bloomberght.com; Bloomberg, 2020). This creates a situation that requires more effort and struggle to understand and adapt in today’s people. Yuval Noah Hariri asks the following question in his book 21 Lessons for the 21st Century: “How to live in an age of surprise where old narratives collapse and new ones are not replaced?” (Hariri, 2018, p. 237). Along with technological developments such as information technology, big data algorithms, and artifcial intelligence; environmental problems, epidemic viruses, geopolitical risks point to a period in the future where human beings, companies, and societies will face much more complex problems, which can be defned as chaos. The collaboration, communication, and creativity that Yuval Noah Hariri has shown as the way to deal with these problems in the same book will become more important than ever. The companies of this new era should both integrate information and digital technologies with their production processes and become intellectual companies that are sensitive to complex and diverse social and environmental problems, and dealing with non-duty jobs. Why should companies be Intellectual? To answer this question, we need to look around us. What’s going on around us? What do young people think and do about what is happening in the world? The issue of the environment and global warming is the frst item on their agenda. Young people are more sensitive to this issue than anyone. Global warming was the main agenda item of the World Economic Forum held in Davos, Switzerland in 2020. One of the important guests of the Forum was the much-anticipated Swedish Greta Thunberg, together with Donald Trump. Attracting the attention of the media with the “school strike for the climate,” Thunberg has been interested in climate change and global warming since she was very young. Thunberg was nominated as one of the 25 most
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206 Murat Güreşci infuential young people of 2018 by Time magazine. At the age of 15, Thunberg went to New York by crossing the Atlantic Ocean with a zero carbon dioxideemitted sailboat from England and participated in the Climate Summit, addressing world leaders in her opening speech: “You stole my childhood with your empty words,” she criticized with harsh words. Thunberg said,
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This is all wrong. I shouldn’t be up here. I should be back in school on the other side of the ocean. Yet you all come to us young people for hope. How dare you! You have stolen my dreams and my childhood with your empty words. And yet I’m one of the lucky ones. People are suffering. People are dying. Entire ecosystems are collapsing. We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you! …come here saying that you’re doing enough… You say you hear us and that you understand the urgency. But no matter how sad and angry I am, I do not want to believe that…because if you really understood the situation and still kept on failing to act, then you would be evil. And that I refuse to believe… (www.onedio.com; Onedio, 2020) Greta’s “school strike for the climate” movement started all over the world and has been one of the most important events of recent years. 5,800 climate strikes took place in 160 countries. 73 unions, 3,024 companies, and 820 non-governmental organizations supported the strikes. In total, 4 million citizens went on strike for the climate amongst them 1.4 million in Germany and 25,000 people attended in New York. According to these numbers announced by 350.org, 10,000 people participated in a total strike climate in Turkey. The number of participations in Istanbul has been announced at 3,500 (www.bianet.org; Bianet, 2020). Looking at the numbers, the movement started by climate activist Thunberg who is a serious participant and cannot be underestimated. At the climate summit, Thunberg’s statement, “The eyes of future generations will be on you,” is important. It shows that young people are very sensitive to this issue and follow the sincerity of both companies and public authority. The school strike for the climate initiated by Thunberg is called “Friday for the Future.” Regarding the response, the “Friday for the Future” movement has reached and its impact on a global scale, Greta Thunberg says, “I am very happy, this is a great victory” and she is getting more and more support day by day. There is now a generation that started such powerful movements on a global scale. This new generation is pursuing its ideals. They can be heard from everywhere. They expose. These young people are called Z-zones. The important feature of the Z generation, born after 2000, is that they were born into this technology. They were never without it. Therefore, technology is extremely normal for them. As to the characteristic features of the Z belt, Seymen (2017) argues that they are connected with a spirit of unison and togetherness through the use of technology, bringing together activists and volunteers who believe in people cooperating and communicating with images/videos and visuals, thus focusing on building a more successful future (Seymen, 2017,
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An Alternative to Corporate Social Responsibility Studies 207 p. 474). Unlike previous generations, today youths are very quickly organized and act fast, are caring, take responsibility, believe in unity and solidarity, collaboration, critical thinking, are creative and interested in the world outside. How should we think of an intellectual company? First, the intellectual company is a Chimera. So, it represents the best. This Chimera represents leadership, excellence, and sustainability for companies. The intellectual company also represents the best in these three areas. Based on these features, the intellectual company is an institutionalized organization and its organizational culture is such that makes it a leader of the market, making innovation and changes, seeking and managing excellent business processes in the feld of management–production– communication, taking initiative as a social entrepreneur beyond social responsibility in social issues and in the environmental felds. The author’s reason for making this defnition is that an ordinary company cannot have an intellectual vision. One of the important features of the intellectual company is its institutionalization. Without institutionalization, there is no hierarchical structure. An intellectual company has a horizontal hierarchical structure rather than a vertical hierarchy; however, the horizontal hierarchy needs to dominate the entire operation of the company. In the layout and residence plan of the company’s headquarters, it requires a new management approach, in which managers and employees can work side by side closer to each other. It is not possible to talk about the intellectual company in a place where there is no institutionalization. This also guarantees accountability and transparency. Merit cannot exist in a company where there is no professional management style. With no professional management, companies turn into amateur structures where each manager takes care of his own man and brings his own team to work. This is not allowed in institutionalized structures. It is the performance of people and the recruitment on a merit basis that keep the companies alive. The intellectual company has an extremely rational system where performance-based criteria are the main indicators for promotion. In order for us to speak about the intellectual company, it is essential that that company be institutionalized. As Vehbi Koç says in his views on social and environmental issues, the “country issue” (Koç, 1987, p. 1) approach lies. They do not evaluate their studies on social and environmental issues with a simple understanding of social responsibility. They take an approach with an intellectual company vision. For all these reasons, leading companies are also very successful in attracting the best workforce. The success of intellectual companies does not depend on a leader. Regardless of the leader, by their nature, these companies are leaders. The reason for this is that these companies have strong corporate structures; because every employee in these companies is the best in his feld, he has the vision of being the best. A real sense of WE dominates these companies. Since promotion and appointment are based on merit criteria in these companies, there will be very serious competition among the employees of the company. Therefore, all employees will pursue the best. The intellectual company therefore represents perfection. Intellectual companies advance their communities together with their stakeholders through their leadership mission. Along with their economic output, they contribute to social and environmental development by taking social initiative,
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208 Murat Güreşci which is important for social development. These contributions are made with the understanding of social entrepreneurship in many felds such as education, environment, culture-art, science, and history. The understanding of the founding generation of the Turkish industry in the 1960s follows also in this direction. They have not only focused on economic development, but have also led to the establishment of civil society organizations in different areas for social development including, Turkey Economic and Social Studies Foundation (TESEV), Turk Administration Association (TSID), the Economic Development Foundation (IKV), Turkish Education Foundation (TEV), Turkish Industrialists and Business People’s Association (TUSIAD), Istanbul Culture and Art Foundation (IFCA), Turkey Family Health and Planning Foundation (TAPV), İzmir Culture, Art and Education Foundation (IKSEV), Foreign Economic Relations Board (DEIK), Turkey Combating Soil Erosion, for Reforestation and the Protection of Natural Assets (TEMA), Turkey third Sector Foundation (TÜSEV), the Educational Volunteers Foundation of Turkey (TEGV). (Eczacıbaşı, 2018, p. 17)
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Like many non-governmental organizations that are established and continue to serve today’s social development with great service. The intellectual company, as Bülent Eczacıbaşı states, starts a movement based on the idea of “something needs to be done” and plays a leading role in social development. When it comes to perfection, it is understood that a company carries out excellent business processes in production, quality, technology, and product variety. However, the pursuit of excellence does not only cover these four areas. The management understanding and practices above these four areas should aim for the whole system. Jim Collins describes this in his book From Good to Perfect Company. In fact, in a perfect company, proft and cash are like blood and water in a healthy body: they are essential for life, but they do not constitute the essence of life. (Collins, 2002, p. 228) If the goal is to generate proft and cash, one cannot create a perfect company. Excellent companies must ensure the sustainability of two important factors that will sustain a company like proft and cash. But focusing only on proft and cash does not bring any results. Companies are asked to provide proft and cash as a result of their excellent business processes and structures. Proft and cash should be the result, not the end. In order to achieve this result, companies need to make their way to perfection and add the behavioral codes to their systems.
4. Conclusion Here, this text focused on how to ensure sustainability in social and environmental issues. Companies achieve this through the foundations they lay for their organizations and with boards of directors or chairmen of trustees, who have
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An Alternative to Corporate Social Responsibility Studies 209 independent fnancial resources and also have independent corporate structures. This model lies behind the fact that the foundations established by the founding leaders of the Turkish industry are still alive and doing successful work. The contribution of this model to sustainability is as follows: Even if the founding sponsors of the company have completed their economic lives, foundations will continue to exist independently from them, so that their studies on social and environmental issues can be continued. We know that the lifetime of the social responsibility activities carried out by the companies is short; that is, there are serious problems with their sustainability. The main reason for this is related to economic conditions. According to time and circumstance, the way companies contribute to their social responsibility activities changes. While this may sometimes be increase and sometimes decrease, sometimes projects are completely terminated. For these reasons, the understanding of sustainable economic, social, and environmental development in the intellectual company model is not a simple PR study such as CSR. Economic, social, and environmental sustainability is the key in this business model.
Acknowledgement The study was presented at IV. International Applied Social Sciences Congress 22nd-24th October 2020 and printed as a summary text.
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References Bianet. (2020). Retrieved from https://bianet.org/bianet/dunya/213380-dunya-capinda4-milyon-kisi-iklim-grevindeydi-bu-buyuk-bir-zafer. Accessed on January 24, 2020. Bloomberg. (2020). Retrieved from https://bloomberght.com/ımf-baskani-georgieva-artıkpara-politakasi-tek-kurtarıcı-degil-2244925. Accessed on January 24, 2020. Bowen, H. R. (1953). Social responsibility of the business. New York, NY: Harper Row. Collins, J. (2002). İyi’den Mükemmele Şirkete. İstanbul: Boyner Publishing. Eczacıbaşı, B. (2018). İşim Gücüm Budur Benim. İstanbul: Yapı Kredi Yay. Eells, R., & Jalton, C. (1961). Conceptual foundation of business. Homewood III: Richard D. Irwin. Friedman, M. (1962). Capitalism and freedom. Chicago, IL: University of Chicago Press. Hariri, Y. N. (2018). 21. Yüzyıl için 21 Ders. İstanbul: Kollektif Bookstore. Koç, V. (1987). Hatıralarım, Görüşlerim, Öğütlerim. İstanbul: Vehbi Koç Vakfı Yay. McGuire, J. W. (1963). Business and society. New York, NY: McGraw-Hill. Onedio. (2020). Retrieved from https://onedio.com/haber/26-yasindaki-greta-thunberg-bmiklim-zirvesi-nde-konustu-sadece-paradan-bahsediyorsunuz-bu-ne-curet-885760. Accessed on January 24, 2020. Saydam, A. (2011). Vazgeçmek Özgürlüktür. İstanbul: Remzi Bookstore. Seymen, A. F. (2017). Y ve Z Kuşak İnsan Özelliklerinin Milli Eğitim Bakanlığı 2014-2109 Startejik Programı ve TÜBİTAK Vizyon 2023 Öngörüleri ile İlişkilendirilmesi. Kent Kültürü ve Yönetimi Hakemli Dergi, Cilt:10 Sayı 4, Kış 2017.
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Chapter 11
The Interaction Between Perceived Risk, Attitude, and Intention to Use: An Empirical Study on Bitcoin as a Crypto Currency Serdar Ögel and İlkin Yaran Ögel Abstract Introduction: As internet and communication technologies are getting developed, the commercial transaction is becoming more electronic. This change also brings new approaches to new payment mechanisms like emergence of crypto currencies. They are virtual and digital currencies which can only be used in electronic environment but they are increasingly treated as a new payment and investment tool. Nevertheless, their use has not spread into the general public, yet. At this point, it will better to take the complex nature of the crypto currencies into consideration because it may still lead to some risks for people and the type of the risks perceived by consumers may infuence their attitudes toward and intention to use crypto currencies.
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Aim: Accordingly, this study attempts to examine the interaction between perceived risk, attitudes toward and intention to use crypto currencies within the context of Bitcoin, as the frst crypto currency. Method: This study was designed as a causal research. The sample of the study was reached by using convenience sampling method and data were collected with survey. The compiled data were tested with Structural Equation Model. Findings: A statistically signifcant and negative relationship was found between perceived fnancial, time and psychological risk and attitudes toward the use of Bitcoin, and a statistically signifcant and positive relationship was found between attitudes toward and intention to use Bitcoin. The fndings of the study are expected to contribute to both relevant literature and practice by explaining the fnancial behavior of the individuals within the context of perceived risk theory. New Challenges for Future Sustainability and Wellbeing, 211–241 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211012
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212 Serdar Ögel and İlkin Yaran Ögel Keywords: Perceived risk; attitude; intention to use; crypto currencies; electronic transactions; Bitcoin JEL Codes: E42; G41; M31
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1. INTRODUCTION The growth of Internet and the developments in communication technologies have increasingly changed the nature of commerce and led to the emergence of new commercial models like e-commerce. Hence, traditional commercial transactions have transformed into electronic commercial transactions. As the commerce has become more electronic particularly for a last decade, the fnancial and monetary systems have necessarily adapted themselves to this change. As a result of this adaptation process, new money and payment mechanisms have emerged to be used in electronic transactions. The emergence of crypto currencies can be regarded as one of the most important outcomes of this process. Crypto currencies are completely digital currencies which are created and traded only in electronic environments (Ögel & Ögel, 2018). Since these currencies are inherently virtual, they provide several advantages to their users from high transaction speed and low transaction costs to privacy. In this context, even for some people, they have already been accepted as a new investment and payment tool. Nevertheless, crypto currencies have not been appreciated by the rest of society, yet. The dis-adoption of crypto currencies by the whole society can mostly be explained with the complex nature of the crypto currencies. As stated before, crypto currencies are the digital currencies, and so they are also regarded as the technological currencies whose usage requires enough technology knowledge. Additionally, crypto currencies are internet-based currencies, and unfortunately the internet offers an open environment in which people are exposed to several digital security threats from worms, crackers, viruses, spoofng to password-sniffing (Lu, Hsu, & Hsu, 2005; Vivo, Vivo, & Isern, 1998). Besides these threats, personal security of the people can be threatened because of the attacks by hackers in this open environment. Consequently, all of these threats primarily originating from the use of internet may increase the uncertainty perceived by people, and the extent of this uncertainty may infuence the attitudes of people and their intention to use internet-based applications. The review of relevant literature indicates that perceived risks have already been examined within the context of adoption and usage of the products (Bauer, 1967; Dowling & Staelin, 1994) and within the context of several internet and technology based products and services like mobile banking services (e.g., Chen, 2013), internet banking (e.g., Lee, 2009), online shopping (e.g., Ariff, Sylvester, Zakuan, Ismail, & Ali, 2014; Crespo, del Bosque, & de los Salmones Sánchez, 2009), online product presentation (e.g., Park, Lennon, & Stoel, 2005),
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 213 and other online applications such as online antivirus application (Lu et al., 2005) and pirated software (Liao, Lin, & Liu, 2010). However, perceived risks have not been examined as a multi-dimensional construct within the context of crypto currencies yet in the relevant literature. At this point, it can be said that the complex nature of crypto currencies may lead to some risks for people, as well. Additionally, to provide a better understanding of perceived risk, the perceived risk variable is not used as a single construct but it is modeled on the basis of its facets − fnancial, performance, privacy, psychological, social, and time risk. In this respect, to better explain why consumers resist using crypto currencies, this study attempts to examine whether the type of the risks perceived by consumers may infuence their attitudes toward and intention to use crypto currencies by selecting the Bitcoin as one of the most well-known crypto currencies. In order to explain the dis-adoption of the crypto currencies with respect to the interaction between perceived risks, attitudes and intention to use, structural equation modeling in adopted in the study. The data of the study are compiled via face to face survey method and analyzed with SPSS and LISREL statistical software programs. The fndings of the study are expected to contribute to the perceived risk literature by examining the perceived risk concept in crypto currency context to understand consumers’ attitudes toward and intention to use these currencies. Additionally, it is expected that the fndings of the study contribute to efforts for increasing the adoption of crypto currency in the society by decreasing perceived risks through right communication messages.
2. LITERATURE REVIEW
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2.1. Crypto Currencies Crypto currency is a virtual money system which causes re-discussion of classical value and payment tools because this virtual money system enables the circulation of money without central bank and other offcial authorities. Accordingly, while all the money and its derivatives have been circulated and managed by the central banks of the countries and offcial authorities until 2008, the dominance of these institutions on money control has been removed at the frst time in 2009 with the emergence of crypto currencies (Rogojanu & Badea, 2014). In this money system, no one needs either coins or bank notes, and everything is created in the electronic environment, based on hardware mining, economy, computer data systems, and cryptography (Alpago, 2018). As its name signifes, crypto currencies are created in a cryptic way, and so these types of currencies are referred as crypto currencies. As well as its creation, trading of these currencies is only possible with crypto. Thus, these currencies are only created and completely traded in digital environment. By virtue of their digital characteristics, they are called “virtual money,” “cryptographic money,” “electronic money,” or “e-money” as well (Ateş, 2016). Crypto currencies have similar characteristics with the money circulated by the central banks in terms of being store of value, medium of exchange and instrument of payment (Turan, 2018). Additionally, just like the money circulated by
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214 Serdar Ögel and İlkin Yaran Ögel the central banks, crypto currencies have limited availability and inimitability characteristics and their supply is based on specifc rules. For instance, Bitcoin system has been designed to supply 21.0000.0000 Bitcoin in total, and so excessive Bitcoin supply has been limited from the very beginning (Alpago, 2018). However, while the currencies circulated by the central banks gain these characteristics through public authority and the laws, crypto currencies gain these characteristics through system organizers which are designed with special methods and programs in digital area (Brezo & ve Bringas, 2012). Eventually, since crypto currencies are also scarce and controllable on the basis of specifc rules and limitations, they have a system which balances and protects themselves against infationary effects without any authority. As a digital money system, crypto currency system is based on blockchain technology. Blockchain is the name of digital registry system which is accepted as global trading book of the crypto currency (Turan, 2018). The virtual money generated in the system is registered into this book, and so the virtual money is produced. The frst crypto currency generated from digital information blocks registered as blockchain is the Bitcoin and it was circulated by Satoshi Nakamoto in 2008. Its name comes from the combination of byte and coin words, and it is abbreviated as BTC and symbolized as ฿ (Sönmez, 2014). Today, Bitcoin is regarded as one of the most well-known crypto currencies which can be used all over the world. In order to keep Bitcoin and allow people to trade on them, programs are needed, which are called Bitcoin wallets. Thus, as stated before, as well as the formation of the crypto currencies, their store and trade are performed completely in electronic environment. Principally, every Bitcoin owner has to have two digital wallets. First wallet is open to the public and used for receiving Bitcoin payments and the second wallet is a private wallet used for storing and carrying the currencies (Baur, Hong, & Lee, 2018). Every individual, who completes the Bitcoin membership procedures and buys Bitcoin by making required payment, has a wallet. An account number consisting of 34 characters is given to this wallet and this account number can be explicitly seen by everyone who has an open public wallet (Alpago, 2018). Together with this account number, a password consisting of 51 characters is also given to the users. This password gives them the rights of both signature and property. Accordingly, if the password is either stolen or hacked by the hackers, the real owners of these virtual currencies can be easily excluded from the system. In this respect, crypto currencies can be readily considered as risky. All in all, although Bitcoin and other crypto currencies such as “Ethereum,” “Ripple,” “Litecoin,” “Dash,” “Neo,” “Iota,” “Monero,” “Nem,” and “Zcash” are increasingly becoming important in economic system because of their medium of exchange, storage of value, portability, divisibility, durability, limited supply, and acceptability characteristics, there are still question marks in their use. Additionally, although crypto currencies provide their users more fnancial freedom, more earnings’ expectation, more speed in transactions and privacy; although they decrease the revenue loss of their users by minimizing several expenses in banking charges and exchange process; and although they offer low transaction
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 215 cost to their users, they have not been used by majority of the society, yet. For instance, relative to the other currencies, the circulation rate of Bitcoin as the frst crypto currency was reached to 2%, in spite of the fact that approximately 10 years passed from its frst entrance to the real economy in 2008 to 2018 (Fanusie & Robinson, 2018). This case can be explained with its complex nature which is based on internet technology that requires technological knowledge and infrastructure and suffers from online security threats. Thus, although the crypto currencies systems provide ultimate security to their users, the unsecured nature of internet environment make many people perceive some risks toward the use of crypto currencies. Eventually, these risks perceived by individuals might infuence their use of crypto currencies. The next section discussed the perceived risks to explain the individuals’ behavior toward the use of crypto currencies.
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2.2. Perceived Risk Perceived risk is one of the main antecedents of several consumers’ behaviors. Since the 1960s, perceived theory has been adopted to explain several behaviors of consumers (Lee, 2009). Accordingly, understanding the risk perception of individuals can be regarded as signifcant to predict consumers’ behaviors particularly regarding adoption of a new product and services. Perceived risk concept has several defnitions. For instance, Bauer (1967, p. 15) suggested that perceived risk is “a combination of uncertainty plus seriousness of outcome involved.” Peter and Ryan (1976) summarized the concept as subjective expected loss. Cunningham (1967) indicated that perceived risk involved the extent of the potential loss, if the outcomes of the behavior and subjective feelings of consumers about certainty were unfavorable. In this respect, perceived risk can also be defned as uncertainty felt in the use of a product or service, if there is a potential to confront any negative consequences (Featherman & Pavlou, 2003). All in all, based on these defnitions, it can be readily said that the expectation of loss potentially occurred as result of purchase or use of a product or service is more likely to structure the risk perceptions of the consumers. Risks can be perceived for online products and services, as well. Depending on the nature of online transactions, perceived risk defnition can change as “perception about implicit risk in using the open internet infrastructure to exchange private information” (Chen, 2013, p. 416). In this context, perceived risk can also be defned as loss that can be potentially confronted in the pursuit of a desired outcome of using an online product or service (Featherman & Pavlou, 2003). Perceived risks generally occur when the consumers’ decisions regarding either adoption or usage of a product or service lead to feelings of uncertainty, anxiety, or discomfort (Dowling & Staelin, 1994); conficts in consumers’ minds and hearts (Bettman, 1973); and cognitive dissonance (Festinger, 1957; Germunden, 1985). Accordingly, since internet provides an unsecured environment, consumers might feel uncertainty, anxiety, concern, discomfort, and cognitive dissonance, when they use internet for their online transactions. In order to explain the perceived risk comprehensively, understanding its facets is important. According to a great deal of scholars, perceived risk is a
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216 Serdar Ögel and İlkin Yaran Ögel multidimensional construct which includes several facets (e.g., Cunningham, 1967; Featherman & Pavlou, 2003; Jacoby & Kaplan, 1972). In this context, in the relevant literature, perceived risk has been initially characterized by Cunningham (1967) on the basis of six types of loss – fnancial loss, performance loss, opportunity/time loss, safety loss, social loss, and psychological loss. Jacoby and Kaplan (1972) also divided perceived risk into six categories – fnancial risk, performance risk, time risk, social risk, security/privacy risk, and physical risks. By combining the perceived risk categorization of Cunningham (1967) and Jacoby and Kaplan (1972), Featherman and Pavlou (2003) categorized the perceived risks into seven dimensions as performance, fnancial, time, psychological, social, privacy risk, and overall risk. Among the facets of perceived risk, fnancial risk can be defned as potential for fnancial loss (Lee, 2009). Particularly, it mostly occurs when the products or services are not worth the price paid for them. Within the context of online fnancial goods and services, fnancial risk can be expanded into potential for fnancial loss due to fraud (Featherman & Pavlou, 2003) or hackers’ attacks. Today, vast majority of the customers are still afraid of losing their money, while they are performing online transactions and transferring money over the internet (Kuisma, Laukkanen, & Hiltunen, 2007). Although online fnancial services are protected through several security softwares, compared to the assurance provided in traditional setting through formal proceedings and receipts, they have lack of that much assurance due the unsecured nature of the internet (Lee, 2009). Thus, consumers may potentially loss their money, when they confront errors in transactions. Performance risk is another facet of the perceived risk. It can be defned as a risk which potentially occurs, if the product does not perform as it is designed and advertised to the customers (Grewal, Gotlieb, & Marmorstein, 1994). Therefore, failure in performance of the product leads to failure in delivering the desired benefts to customers and satisfying their expectations. With respect to online goods and services, the extent of performance risk can be expanded into the losses occurred due to either defciencies or malfunctions of the websites of the fnancial goods and services. Customers sometimes suffer from disconnection from the internet or a breakdown of system servers, if these problems occur while they are performing online transactions (Kuisma et al., 2007). Thus, due these kinds of problems, customers may potentially confront unexpected losses. One of the other facets of perceived risk is the time risk. It is sometimes referred as opportunity risk (Cunningham, 1967) or convenience risk (Lee, 2009). Time risk is defned as potential for time loss, if a purchase either takes too long times or wastes too much time (Lu et al., 2005). In this context, sometimes, consumers can lose time when they give a bad purchasing decision; when they waste their time for researching products or services, making their purchase or learning how to use them; and when they replace the products if they do not perform well enough to satisfy expectations (Featherman & Pavlou, 2003). Thus, any product failure paves the way for opportunity cost of fnding another product that will satisfy the expectations and this leads to time loss for consumers. Within the
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 217 context of online products and services, the time loss can be extended to time loss and inconvenience occurred because of delays in receiving and making payment or the diffculty in fndings right services and hyperlinks (Lee, 2009). In this context, either disorganized or confusing websites and web pages, which are too slow to open, to make transactions or to download something else, result in time loss for customers (Forsythe & Shi, 2003) and so the time wasted for waiting the website or learning how to use it may lead to time risks. The other facet of perceived risk is the privacy risk which can also be called security risk (Jacoby & Kaplan, 1972). Privacy risk can be defned as possibility of loss of control over personal information (Featherman & Pavlou, 2003). Privacy risk mostly occurs, if personal information of someone is used without his or her knowledge or permission. So, when there is a potential to lose your control over your personal information like identity which can be used for a crime like making fraudulent transactions, privacy risk will increase. Privacy risk can be directly felt when customers use online goods and services. In this context, any potential loss occurred because of hacker attack or fraud threatening the security of an online service lead to privacy risk. Additionally, crimes like phishing, in which sensitive personal information such as usernames, passwords, and credit card numbers are fraudulently acquired by phishers by pretending as a trustworthy entity in an electronic communication, enhance the privacy risk for internet users (Lee, 2009; Reavley, 2005). Thus, as well as leading to fnancial loss, all kind of frauds and hacker attacks violate the privacy of internet users, and this makes a remarkable number of consumers still believe that they are highly indefensible against identity theft when they perform their online purchases and transactions (Littler & Melanthiou, 2006). The other perceived risk facet is the social risk. Social risk occurs, if the products or services used by consumers result in embarrassment in the society. In this context, social risk can be defned as possibility for loss of one’s status in his or her social environment by looking foolish or untrendy after buying or using a product or service (Featherman & Pavlou, 2003). Sometimes, consumers may feel this type of risk, if the online goods and services that they use result in disapproval coming from their family members, friends, or working groups. On the other hand, as being one of facets of perceived risk, psychological risk is defned as potential loss of self-esteem or ego due to frustration arisen from being unsuccessful in a buying goal (Crespo et al., 2009). In this respect, the risk felt due to selection or performance of the product is more likely to infuence the peace of mind and self-perception of the customers, negatively (Mitchell, 1992). Thus, psychological risk can potentially occur, when the product infuences the mental well-being of its user. Finally, the other perceived risk facet is physical risk which can be felt by the consumers when product becomes a threat to their physical well-being or health. Accordingly, physical risk can be defned as the potential loss of one’s health and physical well-being due product that threats to human life (Lee, 2009). Nevertheless, since online and electronic products and services do not incur any threat to human physical well-being because of their virtual nature, physical risk is not included in this study as well it was not included in several
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218 Serdar Ögel and İlkin Yaran Ögel studies (e.g., Chen, 2013; Crespo et al., 2009; Featherman & Pavlou, 2003; Lee, 2009; Liao et al., 2010). All in all, in order to completely understand the perceived risk concept, concentrating on its facets is signifcant. However, it is important to note that the facets of perceived risk can vary according to nature of the product or service class. For instance, as stated above, although physical risk can be potentially felt from any physical products like cosmetics products, it is not felt from online services like online banking (e.g., Littler & Melanthiou, 2006; Zhao, Hanmer-Lloyd, Ward, & Goode, 2008). Additionally, understanding perceived risk is highly infuential to explain several consumer behaviors. The extensive literature on consumer behavior also supports the adoption of the risk facets to explain consumers’ product and service evaluations, attitudes and intention to use them. On the basis of the relevant literature, the next section examines the link between perceived risk, attitudes toward and intention to use crypto currencies to determine the conceptual model and hypotheses of the study.
2.3. Conceptual Model and Hypotheses Development
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2.3.1. The Link Between Perceived Risk and Attitudes Toward the Use of Crypto Currency Consumers are in tendency to be reluctant to make even simple online purchases and transactions (Donna, Thomas, & Marcos, 1999; Hoffman, Novak, & Peralta, 1999) because of their security and uncertainty concerns that pave the way for risk perceptions (Pavlou, 2001). For that reason, perceived risk can be seen as one of the barriers which infuence the attitudes of consumers toward electronic services (Featherman & Pavlou, 2003). Additionally, Theory of Reasoned Action (Ajzen & Fishbein, 1980) and Theory of Planned Behavior (Ajzen, 1985) also claim that perceptions of risk may affect attitudes toward using mobile services like mobile banking services (e.g., Chen, 2013). Compared to several online transactions and purchases, the adoption and use of crypto currencies can be perceived as more complex because of the technology that it is based on. Additionally, it is known that the more the decision becomes important, the more it increases the potential effects of the risks (Koller, 1988). In this context, since crypto currencies can be used as a store of value and payment instrument just like the money in the pocket of consumers, the risks perceived by consumers are more likely to become signifcant. Accordingly, the type of risk perceived by consumers may infuence their attitudes toward adoption and use of crypto currencies. In this context, since fnancial risk is concern over potential fnancial loss due to transactions errors, defciencies in the operating system of the online services or unauthorized external access (Littler & Melanthiou, 2006), it can impede the adoption of electronic and online services. A great deal of consumers still resists using several online services like online banking due to the fear of such losses (Kuisma et al., 2007). In this context, although blockchain technology has its own safeguards, buying and trading of crypto currencies can generate feelings
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 219 of insecurity and uncertainty for many customers because these currencies are the digital and electronic currencies that are only created and traded over the internet. Thus, the feelings of insecurity and uncertainty about losing the currencies can negatively infuence the attitudes of customers toward the use of crypto currencies. Accordingly, with respect to fnancial risk, it can be assumed that: H1: The perceived fnancial risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies. Besides fnancial risk, many customers have concerns over the performance of the online services (Littler & Melanthiou, 2006). As it is known that online services are given over the internet through websites and either defciency or malfunction of websites can potentially result in performance risk (Lee, 2009). Yiu, Grant, and Edgar (2007) suggested that the sudden breakdown of websites is more likely to cause unexpected losses for consumers who are conducting their online transactions. Additionally, download speed of the website or the time required to move from one websites to another can make consumers bored (Chen, 2013). Thus, the concern occurs due to lack of effectiveness in performance of the online services can negatively infuence the attitudes of consumers toward the adoption of these services. In this context, since crypto currencies are traded over the internet, with respect to performance risk, it can be assumed that:
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H2: The perceived performance risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies. As well as the fear of performance risk, many consumers suffer from time risk, when they perform their online transactions. When the customers have to devote extra time to implement, learn, use, or troubleshoot an electronic service like mobile banking services, their perceived time risks increase (Littler & Melanthiou, 2006). Particularly for the time-conscious customers, time risk can be serious barrier to adopt electronic services, when they take high setup, switching and maintenance costs into account (Featherman & Pavlou, 2003). In this context, since use of crypto currencies requires a technological knowledge, the length of time spent for learning and using the crypto currencies may negatively infuence the attitudes of customers toward their use. Thus, with respect to time risk, it can be assumed that: H3: The perceived time risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies. Use of technological services like mobile payment technologies can also be limited by security concerns of the customers (Chen, 2013). Additionally, potential hackers’ access to consumers’ accounts and electronic devices remotely to steal their sensitive personal information like credit card details can impede their
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220 Serdar Ögel and İlkin Yaran Ögel adoption of technological services. It can be readily thought that due the concern over the privacy of the internet and electronic devices, the biggest disadvantage of the electronic payment technologies is regarded as privacy. Many customers still have concerns over external intrusion, which in turn, lead to lose of personal fnancial information and even the loose of money from their accounts (Littler & Melanthiou, 2006). Such privacy concerns, which potentially result in loose of sensitive personal information and money, can also negatively infuence the attitudes of consumers toward the use of crypto currencies. In this context, with respect to privacy risk, it can be assumed that: H4: The perceived privacy risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies. Sometimes, either purchase or use of certain products or services can potentially result in loss of self-image and prestige of the consumers in the eyes of society (Forsythe & Shi, 2003) and this leads to social risk for them. Since crypto currencies are not traced and they are not under the control of any control mechanism, they can be used for different purposes. These characteristics of the crypto currencies are mostly associated with the dark side of the crypto currencies. In this context, the unfavorable perceptions of customers’ social environment toward the use of crypto currencies may affect their attitudes toward the use of these currencies, negatively. Additionally, as well as their self-image and prestige, consumers’ self-perception can negatively infuence the attitudes toward the use of crypto currencies. Thus, with respect to social and psychological risk, it can be assumed that:
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H5: The perceived social risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies. H6: The perceived psychological risk in use of crypto currencies has signifcantly a negative effect on attitudes toward the use of crypto currencies.
2.3.2. The Link Between Perceived Risk and Intention to the Use of Crypto Currency A remarkable number of studies indicate that perceived risk has a negative infuence on intention to use online services, as well as they negatively infuence the attitudes of consumers toward the use of these services (e.g., Featherman & Pavlou, 2003; Pavlou, 2003; Tan, 2002). Additionally, if there is a risk, customers’ intention to use specifc products and services can depend on the risk considerations about the products and services regardless of their attitudes toward them (Liao et al., 2010). In such a case, the more the perceived risk of consumers is high, the more they become risk averse (Campbell & Goodstein, 2001). Hence, if the concern of customers over loss of money, performance, time, privacy,
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 221 self-image, prestige, and self-perception increases when they are using online services, they are less likely to adopt them. Accordingly, customers’ intention to use these services can be negatively infuenced by the type of risks perceived by the customers. Therefore, since crypto currencies are also perceived as risky due to their nature, with respect to perceived fnancial, performance, time, privacy, social and psychological risk, it can be assumed that: H7: The perceived fnancial risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies. H8: The perceived performance risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies. H9: The perceived time risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies. H10: The perceived privacy risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies. H11: The perceived social risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies. H12: The perceived psychological risk in use of crypto currencies has signifcantly a negative effect on intention to use of crypto currencies.
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2.3.3. The Link Between Attitude Toward and Intention to Use Crypto Currencies Attitudes can be considered as one of the antecedents of behavioral intention within the context of adoption of a new product or service (Davis, Bagozzi, Richard, & Warshaw, 1989). Attitude of customers includes beliefs regarding the outcome of their behaviors, and so the behaviors of consumers can be predicted by their attitudes toward that behavior (Chen, 2013). In this context, since the attitudes toward use of crypto currencies is more likely to positively infuence intention to use of crypto currencies, it can be assumed that: H13: The attitude toward use of crypto currencies has signifcantly a positive effect on intention to use of crypto currencies. Depending on the specifed link between perceived risk in and attitudes toward the use of crypto currencies; perceived risk in and intention to use crypto currencies; and attitudes toward and intention to use the crypto currencies, the research model of the study is displayed in Fig. 1.
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222 Serdar Ögel and İlkin Yaran Ögel Perceived Risk • • • • • •
Financial Risk Performance Risk Privacy Risk Psychological Risk Social Risk Time Risk
Attitude toward Crypto Currencies
Intention to Use Crypto Currencies
Fig. 1. Research Model of the Study.
3. METHODOLOGY
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3.1. Sampling Procedure A remarkable number of empirical studies on technology adoption suggest that compared to the elderly people, young people can adopt and uses a new technology faster and more easily (e.g., Gilly & Zeithaml, 1985; Kerschner, 1984). Initiated by this argument, when their knowledge and skills in using computer, technology and internet is taken into consideration, particularly university students seem as an appropriate group to collect data to test the interaction between perceived risk, attitudes toward and intention to use crypto currencies. Additionally, working with homogeneous sample groups that have small differences in terms of variables such as age, gender, income and so on, is better to test a model (Erdem, Swait, & Valenzuela, 2006). In this respect, university students also seem an appropriate sample group for the study because they are frequently considered as a homogenous group. On the basis of these criteria, sample of the study was derived from the undergraduates studying in Faculty of Economics and Administrative Sciences in Afyon Kocatepe University, Turkey. Undergraduates studying in this faculty were particularly included in the sample group of the study because they are more likely to have more knowledge about the existence of crypto currencies like Bitcoin than the students in other faculties due to the fnance courses that they took. After determining sample group, sample size was determined for the study. To determine sample size accurately, there are several criteria. For instance, sample size must be must be ten times of the item number and it must not be less than 200 (Kline, 2011). Additionally, when the population size is approximately 10.000.000, sample size should be at least 384 (Sekaran, 2003). In this context, since the number of students studying in Faculty of Economics and Administrative Sciences in Afyon Kocatepe University is approximately 3,000, a sample size with 384 participants can be considered as enough for the study. Nevertheless, by taking standard deviation as 1, signifcance level at 0.05, and sampling error as 0.1, an accurate sample size was determined as 340 for the study.
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 223 In order to reach the specifed sample size, convenience sampling method was adopted in the study, particularly when several limitations such as time and budget constraints are taken into consideration. Finally, through the convenience sampling method, 420 students were reached in data collection process.
3.2. Instrument Development and Data Collection In order to collect data, a face-to-face survey method was adopted in the study as a data collection instrument. The data were compiled in the period between December 2nd, 2019 and January 6th, 2020. As stated above, it was reached to 420 participants but 40 of the 420 questionnaires were not completely fulflled, and so they were excluded from the study. Eventually, the questionnaires of 380 participants were deemed full completed with an approximately 90.5% response rate. The demographic characteristics of the participants are displayed in Table 1. According to Table 1, 182 of the participants (47.9%) were female and 198 of them (52.1%) were male. A vast majority of the participants (82.9%) were Table 1. Demographic Characteristics of the Participants. Demographic Characteristics Gender
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Age
Department
Class
Frequency
Percentage (%)
Female
182
47.9
Male
198
52.1
Total
380
100
18 years old and less
28
7.4
19–24
315
82.9
25 years old and above
37
9.7
Total
380
100
Economics
94
24.7
Public Finance
73
19.2
Business Administration
132
34.8
International Trade and Finance
81
21.3
Total
380
100
Freshmen
53
14.0
Sophomore
89
23.4
Junior
95
25.0
Senior
143
37.6
Total
380
100
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224 Serdar Ögel and İlkin Yaran Ögel between the ages of 19 to 24. With respect to departments, the participants studying Business Administration were 34.8% of the 380 participants, followed by the participants studying Economics with 24.3%, International Trade and Finance with 21.3%, and Public Finance with 19.2%. Finally, in terms of class, 53 of the participants (14.0%) were freshmen; 89 of them (23.4%) were sophomore; 95 of them (25.0%) were junior; and 143 of them (37.6%) were senior. Thus, it can be readily concluded that more than half of the participants (62.6%) were junior and senior students. Additionally, it is important to note that all participants specifed that they have never used crypto currencies such as Bitcoin, before. The questionnaire form used in the study consisted of four main parts. The frst part of the questionnaire included questions to collect demographic data of the participants. The second part of the questionnaire included items to measure perceived risk in terms of fnancial, performance, privacy, time, social, and psychological risks. In this context, to measure fnancial risk, the scale with 3 items; to measure performance risk, the scale with 5 items; to measure privacy risk, the scale with 3 items; to measure time risk, the scale with 4 items; to measure social risk, the scale with 2 items; and to measure psychological risk, the scale with 2 items, which were used by Featherman and Pavlou (2003) and Martins, Oliveira, and Popovič (2014), were adapted to the study. The third and fourth parts of the questionnaire consisted of items to measure attitudes toward and intention to use crypto currencies, respectively. To measure attitudes, the scale with 4 items used by Taylor and Todd (1995) and Cheng, Lam, and Yeung (2006), and to measure intention to use, the scale with 3 items which was used by Taylor and Todd (1995), Karahanna, Straub, and Chervany (1999), and Cheng et al. (2006) were adapted to the study, as well (See Appendix). To measure the items in the scales, 5-point Likert Scale was employed in the study. Accordingly, in the response of measurement tool, each item was measured through indicators ranging between “1 = Totally Disagree,” “2 = Disagree,” “3 = Neither Disagree nor Agree,” “4 = Agree,” and “5 = Totally Agree.” In order to adapt scales into Turkish, double translation method was utilized (Mcgorry, 2000). According to this method, one of the two scholars, who have high profciency in both Turkish and English, initially translated the scales into Turkish and then the translated scales were re-translated into English by the other. Finally, original scales were compared with the re-translated scales. Finally, scales became ready to be used in data collection after making last revisions. Before delivering questionnaire to participants, each one was informed about the crypto currencies.
3.3. Analysis of the Study Descriptive statistics, Cronbach’s α coeffcients, and exploratory factor analysis were performed by using SPSS statistical program; whereas confrmative factor analysis was performed and the model of the study was tested with LISREL statistical program. In order to test the model of the study, structural equation modeling was adopted. 3.3.1. Results of Reliability and Validity Tests of Scales Used in the Study. In order to uncover the underlying relationships between measured variables,
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 225
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exploratory factor analysis was initially performed. In this context, Kaiser– Mayer–Olkin (KMO) and Bartlett’s tests were also performed for each scale used in the study to understand whether the sampling adequacy of the data is good enough to be used for Factor Analysis. Accordingly, the factor structures of measured variables were detected. The results of analysis of measurement tools and values of KMO and Bartlett’s tests were given in Table 2. According to Table 2, there were no variables which had KMO values less than 0.50. Additionally, p values of Bartlett’s test calculated for the variables were less than 0.05. Depending on the KMO measure of sampling adequacy values and Bartlett’s tests’ results of the variables, it can be concluded that exploratory factor analysis could be performed with all of the tables. Table 2 also indicates that 6 factors were determined for perceived risk. These factors consisted of perceived fnancial risk, perceived performance risk, perceived time risk, perceived privacy risk, perceived social risk, and perceived psychological risk. Additionally, 1 factor was detected for attitudes toward use of crypto currency and 1 factor was detected for intention to use of crypto currencies. As a result of exploratory factor analysis performed with all measured variables, KMO measure of sampling adequacy test value was found as 0.879 which was closer to 0.90. So, it was concluded that the data structure of the study was good enough for factor analysis according to sampling adequacy (Şencan, 2005). Then, by using principal component analysis and varimax rotation technique, factors were reduced. Since factor loadings of each item were above 0.50, all the items, and so the factors were included into the study (Costa-Font & Gil, 2009). As a result of exploratory factor analysis, 8 factors and 26 items, which had eigen value above 1 and explained the 77.349% of the total variance, were found. The results of exploratory factor analysis were displayed in Table 3. After performing exploratory factor analysis, confrmatory factor analysis was performed with Lisrel statistical program to test the relationship between observed and latent variables (İlhan & Çetin, 2014). To understand the model ft, Table 2. Analysis of Measurement Tools. Perceived Risk
Attitudes Toward Use of Crypto Currencies
Intention to Use Crypto Currencies
KMO Measure of Sampling Adequacy
0.883
0.773
0.756
Bartlett’s Test of Sphericity
χ2 = 4237.645 df: 171 p: 0.000
χ2 = 1183.969 df: 6 p: 0.000
χ2 = 855.443 df: 3 p: 0,000
Number of Factors According to Factor Loadings
6 Factors
1 Factor
1 Factor
Total Variance Explained
74.954%
79.136%
86.490%
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0.685 0.668
TimRisk2
0.914
SocRisk2
TimRisk1
0.913
0.669
SocRisk1
0.713
PsyRisk2
0.829
PriRisk3
Psychological Social Risk Time Risk Risk
Factors
PsyRisk1
0.776
0.744
PerRisk5 0.691
0.802
PerRisk4
PriRisk2
0.767
PerRisk3
PriRisk1
0.768
PerRisk2
0.700
FinRisk3 0.572
0.639
FinRisk2
Performance Privacy Risk Risk
PerRisk1
0.786
Financial Risk
FinRisk1
Items
Table 3. Results of Exploratory Factor Analysis.
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Attitudes
Intention to Use
226 Serdar Ögel and İlkin Yaran Ögel
13.985
8.513
5.356
8.753
10.996
Bartlett’s Test χ2 = 6825.909 df: 325 p: 0.000
KMO Measure of Sampling Adequacy: 0.879
29.671
35.027
43.78
54.776
67.295
77.349
7.173
Cumulative Variance Explained (%)
21.158
0.859 10.054
% of Variance Explained
12.519
7.173
In3
0.822
0.775
Att4
Int2
0.836
Att3
0.843
0.827
Int1
0.783
Att2
0.795
TimRisk4
Att1
0.823
TimRisk3
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 227
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
228 Serdar Ögel and İlkin Yaran Ögel initially several goodness of ft indices indicating the ft between data and factor structure were examined (Hair, Anderson, Tatham, & Black, 1998). The goodness of ft indices values were displayed in Table 4. Within context of goodness of ft indices, χ2/df ratio indicating the sample size adequacy was frstly controlled. As a result of confrmatory factor analysis, χ2/df ratio was found nearly as 2.03 (χ2 = 543.50, df = 268, p = 0.000). Accordingly, it was concluded that χ2/df ratio was within the acceptable ft criteria (Kline, 2011). The other goodness of ft indices such as comparative ft index (CFI) (0.98), normed ft index (NFI) (0.96), non-normed ft index (NNFI) (0.98), relative ft index (RFI) (0.96), incremental ft index (IFI) (0.98), standardized root mean square residual Table 4. Goodness of Fit Indices. Fit Indices
Perfect Fit Indices Criteria
Acceptable Fit Findings Indices Criteria
Results
a 2
0 ≤ χ2/df ≤ 2
2 ≤ χ2/df ≤ 3
2.03
Acceptable Fit
b
AGFI
0.90 ≤ AGFI ≤ 1.00
0.85 ≤ AGFI ≤ 0.90
0.87
Acceptable Fit
c
GFI
0.95 ≤ GFI ≤ 1.00
0.90 ≤ GFI ≤ 0.95
0.90
Acceptable Fit
c
0.95 ≤ CFI ≤ 1.00
0.90 ≤ CFI ≤ 0.95
0.98
Perfect Fit
c
0.95 ≤ NFI ≤ 1.00
0.90 ≤ NFI ≤ 0.95
0.96
Perfect Fit
c
0.95 ≤ NNFI ≤ 1.00
0.90 ≤ NNFI ≤ 0.95
0.98
Perfect Fit
c
0.95 ≤ RFI ≤ 1.00
0.90 ≤ RFI ≤ 0.95
0.96
Perfect Fit
c
0.95 ≤ IFI ≤ 1.00
0.90 ≤ IFI ≤ 0.95
0.98
Perfect Fit
d
0.00 ≤ RMSEA ≤ 0.05
0.05 ≤ RMSEA ≤ 0.08
0.052
Acceptable Fit
d
SRMR
0.00 ≤ SRMR ≤ 0.05
0.05 ≤ SRMR ≤ 0.10
0.046
Perfect Fit
e
RMR
0 ≤ RMR ≤ 0.05
0 ≤ RMR ≤1
0.042
Perfect Fit
χ /df
CFI NFI NNFI
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RFI IFI RMSEA
a
Kline (2011).
b
Schermelleh-Engel & Moosbrugger (2003).
c
aumgartner & Homburg (1996); Bentler (1980); Bentler and Bonett (1980); and Marsh, Hau, B Artelt, Baumert, and Peschar (2006),
d
Browne & Cudeck (1993).
e
Golob (2003).
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 229 (SRMR) (0.046), and root mean square residual (RMR) (0.042) values were found within perfect ft criteria; whereas adjusted goodness of ft index (AGFI) (0.87), goodness of ft index (GFI) (0.90), and root mean square error of approximation (RMSEA) (0.052) values were found within acceptable ft criteria. Eventually, it was concluded that there was a good ft between measurement values and measurement model (Hair, Black, Babin, & Anderson, 2013; Tabachnick & Fidell, 2013). The results of confrmatory factor analysis and reliability test were presented in Table 5. As shown in Table 5, the standardized parameter values between observed and latent variables ranged between 0.51 and 0.91. Accordingly, since there was no standardized parameter value less than 0.05, all values were accepted as statistically signifcant (p ≤ 0.05). So, all the items were included into the study to test the model (Hair et al., 2013). Moreover, all t-values were found as statistically signifcant (t > 1, 96). According to Table 5, the composite reliability (CR) values ranged from 0.65 to 0.91. The CR values between 0.60 and 0.70 are acceptable; whereas the values higher than 0.70 present a good construct reliability (Hair, Hult, Ringle, & Sarstedt, 2014). However, the CR value more than 0.95 is certainly undesirable (Nunnally & Bernstein, 1994). In this context, according to Table 5, CR values showed that there was a good construct reliability in the study (Fornell & Larcker, 1981). Here, it was also important to note that all CR values were above the all average variance extracted (AVE) values, and so convergent validity was also supported (Anderson & Gerbing, 1988; Bagozzi, Yi, & Philips, 1991; Chau, 1997; Fornell & Larcker, 1981; Hair et al., 2013). AVE values should be more than 0.50 in order to be considered as adequate for convergent validity (Bagozzi & Yi, 1988; Henseler, Ringle, & Sinkovics, 2009). According to Table 5, AVE values calculated for fnancial risk, performance risk, privacy risk, social risk, time risk, attitudes and intention to use were 0.51, 0.54, 0.59, 0.83, 0.56, 0.65, and 0.71, respectively, but it was 0.48 for psychological risk. In spite of the fact that AVE value should be at least 0.50, the value less than 0.50 could be still accepted, if the CR is higher than 0.60 (Fornell & Larcker, 1981). Accordingly, it was concluded that since CR value of psychological risk was 0.65 (>0.60), the AVE value less than 0.50 could not lead any problem for the study. Cronbach’s α coeffcient was calculated as 0.718 for fnancial risk; 0.874 for performance risk; 0.819 for privacy risk; 0.879 for psychological risk; 0.931 for social risk; 0.847 for time risk; 0.912 for attitudes toward use of crypto currencies; and 0.922 for intention to use crypto currencies. Since all Cronbach’s α coeffcients were above 0.70 as a rule of thumb, it was readily concluded that the model was highly reliable (Nunnally, 1978). The total Cronbach’s α coeffcient of the scale was measured as 0,809. Thus, it was re-confrmed the model was highly reliable. Finally, to understand whether there was a probability of common method bias, Harman’s single-factor test was adopted (Podsakoff & Organ, 1986). Accordingly, all items were loaded on a single factor and confrmatory factor analysis was repeated (Podsakoff et al., 2003). The results of repeated confrmatory factor analysis presented that there was a weak ft between the data and factor structure ((χ2(df: 299) = 5780.06; p = 0.00; adjusted goodness of ft index (AGFI) = 0.37; normed ft index (NFI) = 0.74; comparative ft index (CFI) = 0.75; incremental ft index (IFI) = 0.75; goodness of ft index (GFI) = 0.46; root mean square error of approximation (RMSEA) = 0.22). Eventually, it was concluded that common method bias was not a problem for the study.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
0.51
0.84
FinRisk2
FinRisk3
0.82
0.81
0.79
0.71
PerRisk2
PerRisk3
PerRisk4
PerRisk5
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
0.73
PriRisk3
PsyRisk1
0.87
0.84
PriRisk2
Psychological Risk
0.76
PriRisk1
Privacy Risk
0.71
PerRisk1
Performance Risk
0.72
Standardized Loadings
FinRisk1
Financial Risk
Factors
20.12
15.31
18.49
16.29
15.24
17.78
18.43
18.76
15.27
17.56
9.70
14.67
t-values
0.879
0.819
0.874
0.718
Alpha Coeffcient
CR
0.65
0.81
0.86
0.75
Table 5. Results of Confrmatory Factor Analysis and Reliability Test.
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0.48
0.59
0.54
0.51
2.9816
3,3605
3,3105
3,2289
3.3316
3.3184
3.3421
3.2289
3.1921
3.1579
3.0684
3.1132
Average Mean Variance Extracted (AVE)
1.07854
0.91831
0.97103
0.95420
0.90472
0.96163
0.89491
0.90889
0.92027
0.86033
0.72319
0.85973
Std. Deviation
230 Serdar Ögel and İlkin Yaran Ögel
0.93
086
0.65
0.56
TimRisk2
TimRisk3
TimRisk4
0.85
0.74
0.84
Att2
Att3
Att4
0.93
0.88
0.87
Intent1
Intent2
Intent3
Intention to use
0.83
Att1
Attitudes
0.86
TimRisk1
Time Risk
0.93
SocRisk2
0.91
SocRisk1
Social Risk
PsyRisk2
20.88
21.36
23.55
19.04
15.52
19.34
18.62
11.19
13.44
19.63
19.63
22.26
22.34
21.57
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0.922
0.912
0.847
0.931
0.85
0.87
0.82
0.91
0.71
0.65
0.56
0.83
2.8842
2,9974
2.8789
2.9789
3.0816
2.9816
3.0026
2.9579
2.8395
3.0789
2.9395
2.5895
2.5605
2.9000
1.05634
1.06639
1.05574
0.96075
0.99930
0.99454
1.01050
1.03159
1.04668
0.96595
0.94661
0.94709
0.95493
1.02502
The Interaction Between Perceived Risk, Attitude, and Intention to Use 231
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
232 Serdar Ögel and İlkin Yaran Ögel 3.3.2. Analysis of the Model. Similar to the measurement model, the same set of goodness of ft indices was adopted to examine the structural model. Since model-ft indices surpassed the recommended minimum threshold (χ2/df = 2.10, RMSEA = 0.054, GFI = 0.90, AGFI = 0.87, NFI = 0.96, NNFI = 0.97, CFI = 0.98), it was concluded that there was a good ft between the structural model and the data (Hair et al., 2013; Tabachnick & Fidell, 2013). Accordingly, the examination of path coeffcients of the structural model was performed. The results of hypotheses testing were given in Table 6. Depending on the empirical results, it was concluded that attitudes toward the use of crypto currencies was the most infuential predictor of the intention to use Table 6. The Results of Hypotheses Testing.
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Causal Path
Hypotheses
Expected Sign
Standardized Structural Coeffcient
t-value
Perceived Financial Risk Attitude
H1
−
−0.29*
Perceived Performance Risk Attitude
H2
−
0.24
Perceived Time Risk Attitude
H3
−
−0.22*
−2.66
Perceived Privacy Risk Attitude
H4
−
−0.12
−1.35
Perceived Social Risk Attitude
H5
−
0.18*
2.33
Perceived Psychological Risk Attitude
H6
−
−0.31*
−2.99
Perceived Financial Risk Intention
H7
−
−0.062
−0.82
Perceived Performance Risk Intention
H8
−
−0.079
−0.76
Perceived Time Risk Intention
H9
−
−0.017
−0.26
Perceived Privacy Risk Intention
H10
−
0.22*
2.99
Perceived Social Risk Intention
H11
−
0.0085
0.14
Perceived Psychological Risk Intention
H12
−
−0.050
−0.59
Attitudes Intention
H13
+
0.71*
13.79
*p < 0.05.
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−3.16 1.83
The Interaction Between Perceived Risk, Attitude, and Intention to Use 233 crypto currencies (β = 0.71, p < 0.05). Thus, H13 was validated because of the strong positive relationship between attitudes toward and intention to use crypto currencies. Perceived fnancial risk, perceived time risk, and perceived psychological risk were signifcantly negative associated with attitudes toward use of crypto currencies by rendering support for H1, H3, and H6. However, performance risk and privacy risk had a non-signifcant effect on attitudes toward use of crypto currencies. Therefore, H2 and H4 were not supported by the data. Additionally, although it had a signifcant effect of attitudes the use of crypto currencies, empirical results indicated that social risk had a positive effect on attitudes toward use of crypto currencies. Thus, H5 was not supported, as well. Empirical results also presented that perceived fnancial risk, performance risk, time risk, and psychological risk had a non-signifcant effect on intention to use crypto currencies, although they had a negative effect on intention to use these currencies. Therefore, H7, H8, H9, and H12 were not supported by the data. Additionally, H11 was not supported because perceived social risk had both nonsignifcant effect and positive effect on intention to use crypto currencies. Finally, although psychological risk had a negative effect on intention to use crypto currencies, H12 was not supported because it had non-signifcant effect on intention to use crypto currencies.
4. CONCLUSION
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4.1. Implications for Theory After Bauer (1960) originally introduced the perceived risk concept, perceived risk theory has been used to explain several consumer behaviors. Accordingly, this concept has been analyzed within different contexts. In recent years, perceived risk theory has been particularly utilized to understand consumers’ behaviors regarding adoption of new technologies. In this context, perceived risk has been conceptualized in several electronic and online services like mobile banking (e.g., Chen, 2013), internet banking (e.g., Lee, 2009), online shopping (e.g., Ariff et al., 2014; Crespo et al., 2009), online product presentation (e.g., Park et al., 2005), and so on in the relevant literature. In extant literature, perceived risk concept has also been adapted to use of crypto currencies (e.g., Arias-Oliva, Pelegrín-Borondo, & Matías-Clavero, 2019; Jung, Park, Phan, Bo, & Gim, 2018; Mendoza-Tello, Mora, Pujol-López, & Lytras, 2018; Mendoza-Tello, Mora, Pujol-López, & Lytras, 2019; Metin & Yakut, 2018). Nevertheless, this concept has not been adopted to explain the consumers’ attitudes toward and intention to use of crypto currencies. Initiated by this gap, this study attempted to adapt perceived risk concept into the context of crypto currencies which are known ad virtual and digital currencies traded and used as payment instrument in the internet area. Thus, this study concentrated on examining the interaction between perceived risk, attitudes toward and intention to use crypto currencies within the context of Bitcoin which is one of the well-known crypto currencies. Additionally, since perceived risk is a kind of a multi-dimensional construct (Cunningham, 1967; Jacoby & Kaplan, 1972), perceived risk concept was examined in terms of
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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234 Serdar Ögel and İlkin Yaran Ögel its types in the study. Thus, different from the extant studies on perceived risk and crypto currencies in the relevant literature, this study examined the role of perceived risk on attitudes toward and intention to use crypto currencies with respect to different types of risk such as fnancial risk, performance risk, privacy risk, time risk, social risk, and psychological risk (Featherman & Pavlou, 2003). The empirical results of the study indicated that there was a negative and statistically signifcant relationship between perceived fnancial, time and psychological risk and attitudes toward the use of crypto currencies. Since crypto currencies are treated as money in terms of their functions, it was normal to fnd that potential fnancial loss negatively infuences the attitudes of the consumers toward use of crypto currencies. Similarly, since use of crypto currencies requires enough technological knowledge, it was normal to fnd that potential loss of time to learn new things negatively affects the attitudes of the consumers toward use of crypto currencies. Finally, since the use of crypto currencies has a dark side because they are not controlled by any mechanism, self-perception of consumers negatively infuences the attitudes of consumers toward use of them. Nevertheless, although the same relationships were expected to be found between perceived performance and privacy risk and attitudes toward use of crypto currencies, it was detected that these risks had a non-signifcant effect on attitudes toward use of crypto currencies. Moreover, in spite of the fact that there was a statistically signifcant effect, the relationship between perceived social risk and attitudes toward use of crypto currencies was found surprisingly positive. With respect to intention to use of crypto currencies, it was found that perceived fnancial, performance, time and psychological risk had a negative but non-significant effect on intention to use them. On the other hand, it was detected that perceived privacy risk had a signifcant but surprisingly positive effect on intention to use crypto currencies as well as perceived social risk which had a non-signifcant positive effect on intention to use these currencies. Finally, it was found that attitude toward use of crypto currency was the biggest determinants of intention to use these currencies as it was expected. The contradictory empirical results could be explained with the limitations of the study. In this context, the frst and serious limitation of the study was the sample group used in the study. As stated before, sample size consisted of undergraduates whose knowledge about the crypto currencies were not good enough, although the crypto currency concept was explained and Bitcoin was given as an example. For that reason, for further research, it should be better to work with more knowledgeable participants about crypto currencies. Since this study was designed to understand how risk perceptions to crypto currency adoption are important and what types of risk are salient in this behavior, another limitation of the study was the number of variables used in the study to explain consumers’ attitudes toward and intention to use crypto currencies. In further research, to explain the consumers’ attitudes toward and intention to use crypto currencies, some other variables like perceived usefulness and perceived ease of use in Technology Acceptance Model, compatibility or image should also be included into the research model.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
The Interaction Between Perceived Risk, Attitude, and Intention to Use 235 4.2. Implications for Practice The world that we live in is getting more digitalized and almost every transaction can be performed over the internet. In such an environment, it is normal to expect that the use of digital currencies may become necessity after a while, although it seems risky for many people now. For that reason, understanding why consumers hesitate to use crypto currencies is important to mitigate the problems that will probably decrease the use of these currencies. In this context, the fndings of empirical studies on adoption of crypto currencies are expected to contribute to design of communication and promotion strategies for crypto currencies. For instance, the fndings of this study indicated that fnancial, time, and psychological risks have a negative effect on attitudes toward the use of these currencies. Accordingly, if a communication or a promotion campaign emphasizes that use of crypto currencies minimizes the fnancial loss and does not require too much time to learn and use them, the attitudes of consumers toward use of these currencies may be shaped positively. Thus, the adoption rate of crypto currencies will increase dramatically.
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 237 Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39–50. Forsythe, S. M., & Shi, B. (2003). Consumer patronage and risk perceptions in internet shopping. Journal of Business Research, 56(11), 867–875. Germunden, H. G. (1985). Perceived risk and information search: A systematic meta-analysis of empirical Evidence. International Journal of Research in Marketing, 2(2), 79–100. Gilly, M. C., & Zeithaml, V. A. (1985). The elderly consumer and adoption of technology. Journal of Consumer Research, 12(3), 353–357. Golob, T. F. (2003). Structural equation modeling for travel behavior research. Transportation Research Part B, 37(1), 1–25. Grewal, D., Gotlieb, J., & Marmorstein, H. (1994). The moderating effects of message framing and source credibility on the price-perceived risk relationship. Journal of Consumer Research, 21(1), 145–153. Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C. (1998). Multivariate data analysis. Englewood Cliffs, NJ: Prentice Hall. Hair, J., Black, W., Babin, B., & Anderson, R. (2013). Multivariate data analysis (Pearson New International Edition). NJ, USA: Pearson Education Limited. Hair, J., Hult, G. T. M., Ringle, C., & Sarstedt, M. (2014). A primer on partial least squares structural equation modelling (PLS-SEM). Los Angeles, CA: Sage Publications, Incorporated. Henseler, J., Ringle, C. M., & Sinkovics, R. R. (2009). The use of partial least squares path modeling in international marketing. Advances in International Marketing, 20, 277–319. Hoffman, D., Novak, T., & Peralta, M. (1999). Building consumer trust online. Communications of the ACM, 42(4), 80–85. İlhan, M., & Çetin, B. (2014). LISREL ve AMOS Programları Kullanılarak Gerçekleştirilen Yapısal Eşitlik Modeli (YEM) Analizlerine İlişkin Sonuçların Karşılaştırılması. Eğitimde ve Psikolojide Ölçme ve Değerlendirme Dergisi, 5(2), 26–42. Jacoby, J., & Kaplan, L. B. (1972). The components of perceived risk. In Proceedings of the third annual conference, Ann Arbour, MI, Association for Consumer Research. Jung, K. J., Park, J. B., Phan, N. Q., Bo, C., & Gim, G. Y. (2018, June). An international comparative study on the intension to using crypto-currency. In International conference on applied computing and information technology (pp. 104–123). Cham: Springer. Karahanna, E., Straub, D. W., & Chervany, N. L. (1999). Information technology adoption across time: A cross-sectional comparison of pre-adoption and post-adoption beliefs. MIS Quarterly, 23(2), 183–213. Kerschner, P. A. (1984). The aged user and technology, In Conference on communication technology and the elderly: Issues and forecasts, Cleveland, OH 1981. Kline, R. B. (2011). Principles and practice of structural equation modeling. New York, NY: The Guilford Press. Koller, M. (1988). Risk as a determinant of trust. Basic and Applied Social Psychology, 9(4), 265–276. Kuisma, T., Laukkanen, T., & Hiltunen, M. (2007). Mapping the reasons for resistance to internet banking: A means-end approach. International Journal of Information Management, 27(2), 75–85. Lee, M. C. (2009). Factors infuencing the adoption of internet banking: An integration of TAM and TPB with perceived risk and perceived beneft, Electronic Commerce Research and Applications, 8(2009), 130–141. Liao, C., Lin, H. N., & Liu, Y. P. (2010). Predicting the use of pirated software: A contingency model integrating perceived risk with the theory of planned behavior. Journal of Business Ethics, 91(2), 237–252.
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238 Serdar Ögel and İlkin Yaran Ögel Littler, D., & Melanthiou, D. (2006). Consumer perceptions of risk and uncertainty and the implications for behaviour towards innovative retail services: The case of internet banking. Journal of Retailing and Consumer Service, 13(6), 431–443. Lu, H. P., Hsu, C. L., & Hsu, H. Y. (2005). An empirical study of the effect of perceived risk upon intention to use online applications. Information Management & Computer Security, 13(2), 106–120. Marsh, H. W., Hau, K. T., Artelt, C., Baumert, J., & Peschar, J. L. (2006). OECD’s brief self-report measure of educational psychology’s most useful affective constructs: Cross-cultural, psychometric comparisons across 25 countries. International Journal of Testing, 6(4), 311–360. Martins, C., Oliveira, T., & Popovič, A. (2014). Understanding the Internet banking adoption: A unifed theory of acceptance and use of technology and perceived risk application. International Journal of Information Management, 34(1), 1–13. Mcgorry, S. Y. (2000). Measurement in a cross-cultural environment: Survey translation issues. Qualitative Market Research, 3 (2): 74–81. Mendoza-Tello, J. C., Mora, H., Pujol-López, F. A., & Lytras, M. D. (2018). Social commerce as a driver to enhance trust and intention to use cryptocurrencies for electronic payments. IEEE Access, 6, 50737–50751. Mendoza-Tello, J. C., Mora, H., Pujol-López, F. A., & Lytras, M. D. (2019). Disruptive innovation of cryptocurrencies in consumer acceptance and trust. Information Systems and e-Business Management, 17(2–4), 195–222. Metin, I., & Yakut, E. (2018). Consumer perceptions towards crypto currencies. ERAZ, 299. Mitchell, V. W. (1992). Understanding consumers’ behavior: Can perceived risk theory help? Management Decision, 30(2), 26–31. Nunnally, J. C. (1978). Psychometric theory. New York, NY: McGraw-Hill. Nunnally, J. C., & Bernstein, I. H. (1994). Psychological theory. New York, NY: MacGrawHill. Ögel, S., & Ögel, İ. Y. (2018). An application on adoption of the use of crypto currency. In B. Tunçsiper & F. Sayın (Eds.), Critical debates in social sciences (pp. 267–281). London: FrontPage. Park, J., Lennon, S. J., & Stoel, L. (2005). On-line product presentation: Effects on mood, perceived risk, and purchase intention. Psychology & Marketing, 22(9), 695–719. Pavlou, P. (2001). Integrating trust in electronic commerce with the technology acceptance model: model development and validation. In AMCIS 2001 Proceedings, Boston, MA. Pavlou, P. A. (2003). Consumer acceptance of electronic commerce: Integrating trust and risk with the technology acceptance model. International Journal of Electronic Commerce, 7(3), 101–134. Peter, J. P., & Ryan, M. J. (1976). An investigation of perceived risk at the brand level. Journal of Marketing Research, 13(2), 184–188. Podsakoff, P. M., & Organ, D. W. (1986). Self-reports in organizational research: Problems and prospects. Journal of Management, 12(4), 531–544. Podsakoff, P. M., Mackenzie, S. B., Lee, J. Y., & Podsakoff, N. P. (2003). Common method biases in behavioral research: A critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5), 879–903. Reavley, N. (2005). Securing online banking. Card Technology Today, 17(10), 12–13. Rogojanu, A., & Badea, L. (2014). The issue of competing currencies. Case study-Bitcoin. Theoretical and Applied Economics, 21(1), 103–114. Schermelleh-Engel, K., & Moosbrugger, H. (2003). Evaluating the ft of structural equation models: Tests of signifcance and descriptive goodness-of-ft measures. Methods of Psychological Research Online, 8(2), 23–74.
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 239
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Sekaran, U. (2003). Research methods for business: A skill building approach (4th ed.). New York, NY: John Wiley. Şencan, H. (2005). Sosyal ve Davranışsal Ölçümlerde Güvenirlik ve Geçerlilik (Birinci Baskı). Ankara: Seçkin Yayınları. Sönmez, A. (2014). Sanal Para Bitcoin. The Turkish Online Journal of Design, Art and Communication – TOJDAC, 4(3), 1–14. Tabachnick, B. G., & Fidell, L. S. (2013). Using multivariate statistics. Upper Saddle River, NJ: Pearson Education. Tan, B. (2002). Understanding consumer ethical decision making with respect to purchase of pirated software. Journal of Consumer Marketing, 19(2), 96–111. Taylor, S., & Todd, P. A. (1995). Understanding information technology usage: A test of competing models. Information Systems Research, 6(2), 144–176. Turan, Z. (2018). Kripto Paralar, Bitcoin, Blockchain, Petro Gold, Dijital Para ve Kullanım Alanları, Ömer Halisdemir Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 11(3), 1–5. Vivo, M., Vivo, G. O., & Isern, G. (1998). Internet security attacks at the basic levels. Communications of the ACM, 32(2), 4–15. Yiu, C. S., Grant, K., & Edgar, D. (2007). Factors affecting the adoption of internet banking in Hong Kong – Implications for the banking sector. International Journal of Information Management, 27(5), 336–351. Zhao, A. L., Hanmer-Lloyd, S., Ward, P., & Goode, M. M. H. (2008). Perceived risk and Chinese consumers’ internet banking services adoption. International Journal of Bank Marketing, 26(7), 505–525.
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Privacy risk
• The chances of using crypto currencies and losing control over the privacy of my payment information are high • My signing up and using of crypto currencies would lead me to a loss of privacy because my personal information would be used without my knowledge • Internet hackers might take control of my checking account if I use crypto currencies
Performance risk • Using crypto currencies might not perform well and create problems with my credit • The security systems built into the crypto currencies are not strong enough to protect my checking account • The probability that something’s wrong with the use of crypto currency is high • Considering the expected level of service performance of crypto currencies, for me to sign up and use, it would be risky • Crypto currencies’ servers may not perform well and thus process payments incorrectly
• The chances of losing money if I use crypto currencies are high Featherman and Pavlou • Using crypto currency subjects my checking account to potential fraud (2003) and Martins et al. • My signing up for and using crypto currencies would lead to a financial loss for me (2014)
Financial risk
Source
Items
Constructs
Appendix Measurement Scales.
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240 Serdar Ögel and İlkin Yaran Ögel
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• If I use crypto currencies, it will negatively affect the way others think of me • My signing up for and using crypto currencies would lead to a social loss for me because my friends and relatives would think less highly of me
Social risk
Taylor and Todd (1995) and Cheng et al. (2006)
Taylor and Todd (1995), Karahanna et al. (1999), and Cheng et al. (2006)
Attitudes toward • Using crypto currencies is a good idea use of crypto • I would feel that using crypto currencies is pleasant currencies • In my opinion, it would be desirable to use crypto currencies • In my view, using crypto currencies is a wise idea
Intention to use • I intend to adopt crypto currencies in my transactions within the next six months crypto currencies • D uring the next six months, I plan to experiment with use of crypto currencies in my transactions • During the next six months, I plan to regularly use crypto currencies in my transactions
Psychological risk • I think that use of crypto currencies will not fit in well with my self-image or selfconcept • The use of crypto currencies would lead to a psychological loss for me because it would not ft in well with my self-image or self-concept
• I think that if I use crypto currencies then I will lose time due to having to switch to a different payment method • Using crypto currencies would lead to a loss of convenience for me because I would have to waste a lot of time fxing payments errors • Considering the investment of my time involved to switch to (and set up) crypto currencies, it would be risky • The possible time loss from having to set up and learn how to use crypto currencies is high
Time risk
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The Interaction Between Perceived Risk, Attitude, and Intention to Use 241
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Chapter 12
Instagram Teachings and Relative Poverty Mine Yeniçeri Alemdar Abstract Introduction: As a type of poverty, relative poverty can be defned as being below the average welfare of society. Basic needs can be afforded, but individuals can’t take advantage of the welfare created by society. Today coding the refection of welfare, sharing experiences has new meanings by new social media means. Instagram is especially preferred in visual sharing because of its flter options, live feed, or story mode. These features help the message sender to increase the effect of the message and the receiver to understand the reality with its different dimensions. It is not shocking that the images of welfare and its indicators are shared increasingly in social networks because storytelling in this media is fed. The visual strengthening is underlining the possession of the owner and the defciency of the non-owner from their perspectives.
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Purpose: This study examines the emotional effects of ideal life images shared on Instagram on other individuals. The aim is to reveal and defne the meaning ascribed to such fractions of life with a visual appeal by people who cannot lead this kind of life. Methodology: In accordance with the Social Learning Theory, the study assumes that people with relative poverty take notice of their own poverty through social media. The study investigates the emotions manifested by individuals who take notice of the things that they lack through social media. Thus, a qualitative study was designed and conducted using a phenomenological approach. The phenomenon of this study is failing to have. The objective of the study is to understand and determine what the individuals who do social comparisons feel they lack. For this purpose, the fundamental research questions of this study are as follows:
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New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
244 Mine Yeniçeri Alemdar RQ1: What are the main categories of Instagram posts that evoke a sense of deprivation in individuals? RQ2: What do glamorous Instagram posts mean to individuals who are above the relative poverty threshold? The data gathered via the in-depth interview technique were analyzed using the computer-assisted qualitative analysis program (MaxqDa 2020). Qualitative content analysis and descriptive analysis were the forms of analysis used in the study. Findings: The fact that there are negative links between passively consuming information on social media and well-being is supported by previous studies. This study exposes the experiences of “failing to have” due to upward social comparison in individuals who are above the relative poverty threshold in Turkey. The categories of shared content that evoke the feeling of defciency in the participants are as follows: Travel/vacation, participation in social life, physical attractiveness, material possessions, and professional/academic career. The participants of the study are individuals who are above the relative poverty threshold for Turkey. The participants want to have “more than what they already have.” For this reason, it can be suggested that the main keyword summarizing the fndings of the study is “more.” The study demonstrates that failing to travel and participate in social life deeply affects the participants and causes them to experience negative emotions. Keywords: Instagram; Social media; relative poverty; social comparison; social learning; envy.
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JEL Codes: A1; A10; A13
INTRODUCTION Relative poverty is defned as earning an income that is enough to survive yet not enough to lead a life that is in line with the overall welfare level of one’s society. The term of relative poverty underlines not being able to afford social needs. These social needs vary from one society to another, or even from one individual to another. As a result of failing to afford social needs, social exclusion may occur. In the digital age that we live in, consumers and the types of consumption are becoming increasingly homogeneous. Social media users learn the forms of consumption from one another through interaction. Users experience identity development and self-presentation through consumption objects. As much as social networks have the ability to bring individuals together, they also have the ability to accentuate differences between individuals. Consumption objects have an impact on the formation of such differences. It goes without saying that communication on social networks is based on consumption factors. Due to a lack of
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Instagram Teachings and Relative Poverty 245 disposable income, poor individuals who are below the general welfare threshold of their society learn what they socially lack through social networks. This form of learning that can be explained via the Social Learning Theory (SLT) and is based on observing the behaviors of others and the results of these behaviors. In this respect, Instagram can be considered a social learning platform. A platform to display wealth for many people, Instagram provides insight into relatively poor individuals about what they cannot possess. It is quite natural for individuals in their poverty to make social comparisons between themselves and others. Notably, upward social comparisons evoke the emotions of incompetency and envy in individuals. Accordingly, the literature review section of the study defnes the terms of poverty and relative poverty and discusses learnings related to social media use. The SLT, social comparisons, and the emotion of envy were also examined. This study investigates the Instagram posts that create a feeling of deprivation and their contents. Thus, it was conducted as a qualitative study.
POVERTY AND RELATIVE POVERTY Poverty is defned as not being able to afford the basic needs that individuals require to maintain their lives. According to Wolff (2015), absolute poverty is defned in terms of lacking the resources that would provide an individual (and family) with the sources of nutrition, clothing, and shelter necessary to succeed in life. (p. 24)
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Later in this defnition, Wolff states that the difference between absolute poverty and relative poverty as: It is compatible with a joyless life without money for leisure and social pursuits, spending everything on the means to “physical effciency.” Hence there is also another well-known notion of poverty, which is even more interesting from the point of view of social equality: relative poverty. (p. 25) The term relative poverty refers to being able to afford basic human needs but not being able to afford social needs. Townsend (1979, p. 31) point out to the effects of socially falling behind the average standards in the society one belongs to with the following statement: Individuals, families, and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary or are at least widely encouraged or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs, and activities.
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246 Mine Yeniçeri Alemdar The term “decent lives” can be elaborated in order to understand the term relative poverty. According to Sen (1980, p. 1), not being able to afford the basic needs for leading a decent life can be deemed as poverty. Here, “the concept of a decent life does, of course, vary from society to society” (as Adam Smith [1776] had noted). The defnition of a decent life or even the basic needs is relative. According to Alcock (1997, p. 70), what lies in the basis of the defnitions of poverty is maintaining one’s life; in other words, the notion of making a living. Alcock (1997) also states that the question of “what life is” should be asked in the statement “possessing enough to maintain one’s life.” Life varies according to the expectations of the individuals, the time, and place and so do their needs. While Sen (1980) defnes the terms of absolute poverty and relative poverty, he underlines the changes in the term basic need and he demonstrates that change using the following example:
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If people are dying of hunger in a famine situation, it is legitimate to see it as a case of acute poverty even without supplementing the analysis of the obvious absolute deprivation by some detailed probe into the relative picture. On the other hand, even if no one goes hungry, but some are terribly deprived compared with others and see their relative deprivation as acute, then it is legitimate to diagnose poverty, even though the criteria here are entirely relative rather than absolute. (Sen, 1980, pp. 1–2) These defnitions explain the difference between absolute and relative poverty. The individuals who experience relative poverty are expected to fail to afford their social needs and they are prevented from participating in social life. Thus, relative poverty brings along social exclusion. According to Habitat for Humanity (2018), relative poverty is sometimes described as “relative deprivation” because the people falling under this category are not living in extreme poverty, but they are not enjoying the same standard of life as everyone else in the country. It can be TV, internet, clean clothes, a safe home (a healthy environment, free from abuse or neglect), or even education. On the whole, poverty is about exclusion. In its most extreme form, it is the inability to access what you need for a decent life. Relatively speaking, in more developed countries, it is being excluded from what constitutes normal daily life: ⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁
Internet to access jobs or public services The proper clothes to fnd that job Paying for education Access to decent housing (respiratory diseases is one of the most common symptoms of poor housing).
Based on these points, the following outcomes can be deduced (Alcock, 1997; Habitat for Humanity, 2018; Poverty Reduction Handbook, 1993; Sen, 1980; Townsend, 1979):
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Instagram Teachings and Relative Poverty 247 ⦁⦁ Relative poverty depends on the level of development of the country. ⦁⦁ The concept of a decent life varies from society to society. ⦁⦁ The defnition of the basic needs varies from society to society, or even from
individual to individual.
⦁⦁ Different people have different needs. ⦁⦁ Relative poverty is a form of social exclusion.
Consumers, who have become digital masses, display behavioral patterns that are similar to one another, and therefore, they act as a unifed community. Relatively poor individuals who cannot be a part of this unifed community, on the other hand, feel ostracized from social life.
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SOCIAL MEDIA AND SLT The defnitions of relative poverty mention that the basic needs may vary from one society to another or even from one individual to another. The increase in the speed of interaction in the current digital age has resulted in the formation of consumer masses that has become gradually more homogeneous with demands and needs similar to one another. The personal social media accounts of these consumers have also become personal stages for them to enjoy the limelight. The metaphor of a stage that is mentioned in Goffman’s (2018) dramaturgy hypotheses is now personal social media accounts. Previous studies indicate that social media platforms provide a platform for identity development and self-presentation. Contrary to real life, social media is a self-managed tool for creating the desired image and can be used as a controlled environment for identity development (Pösteki & Velioğlu, 2014), and in this platform “individuals can depict themselves as they wish” (Erickson, 1996). The fact that the self-presentations in social media are becoming increasingly more similar can be explained by the SLT. SLT is one of the most infuential theories of learning and human development and is rooted in many of the basic concepts of traditional learning. The theory is based on the idea that humans learn how to behave from one another. Individuals may acquire new information or behaviors by observing other people who possess that information or display such behaviors (McCullough Chavis, 2011, p. 472). SLT can be observed in various social environments, in interactions with friends, family members, colleagues, or even strangers. The way social media trends start, gain popularity, or eventually lose their momentum indicates the presence of the SLT on social networks. Thereanent, Stokes and Price (2017) mention that “as visual culture shifts and online social learning proliferates, trends are cycled through at an increasingly rapid rate, and authenticity becomes an increasingly problematic concept.” The theory is based on the idea that individuals learning by observing the behaviors of other individuals and their outcomes. “Learning may or may not result in a behavior change. People are often reinforced for modeling the behavior of others (by social groups or third parties)” (Ormrod, 1999).
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248 Mine Yeniçeri Alemdar The SLT may explain the rapidly spreading trends on social media platforms. Social media users imitate and share the contents that they see from one another.
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Learning “What One Does Not Have” For some people, social media platforms are a tool for displaying their wealth. Unfortunately, this type of glamorous display of wealth causes relatively poor individuals to take notice of the things that they do not have. The things that one can buy and consume are practically unlimited. Moreover, the consumption experiences of the people who have these things are instantaneously displayed via social media. The easy use of smart technologies and mobile phones allows every individual to become the leading actor on their own stage and the roles are mostly about consumption. In his fuid modernity hypothesis, Bauman (2013) mentions that consumerism today is more about self-expression rather than satisfying needs. Moreover, Albert Camus describes the unquenchable thirsts of modern consumers with these words: “People of our times suffer from not being able to possess the World completely enough” (p. 82). Individuals today are judged according to their abilities to become a part of the consuming world. This results in social exclusion for poorer people whose roles as producers and consumers are limited. According to Bauman’s (2004) statement, poor people are seen as “fawed consumers.” Sadly, relatively poor people learn about their shortcomings in consumption through social media. Instagram is a social media platform for visual content including photographs, videos, and live streaming. Special shooting techniques, flters, and lenses increase the visual appeal of the content shared on the platform. For those who cannot afford the wealth indicators that are often shared on the platform (e.g., luxurious houses, vacations, exciting social events, fne dining), such content becomes a reminder of their own poverty. Through visual content, social media platforms provide increasingly more people with insight into what they cannot have. As indicated in the SLT, individuals learn by observing others’ behaviors or the outcomes of their behaviors. Thus, learning about all the things that individuals do not or cannot have may cause them to experience negative or depressing emotions. Numerous studies have been conducted about the negative conditions (physical or mental) resulting from social media use in different domains of science (e.g., health sciences, social sciences). A comparison of physical appearances, body dissatisfaction, eating disorders, drive for thinness, anxiety, depression, loneliness, and dissatisfaction with own life are some of those negative outcomes (Blease, 2015; Cohen & Blaszczynski, 2015; Cohen, Newton-John, & Slater, 2017; Lewallen, 2016; Lin et al., 2016; Lup, Trub, & Rosenthal, 2015; Perloff, 2014; Pittman & Reich, 2016; Tiggemann, Hayden, Brown, & Veldhuis, 2018; Yang, 2016). People who observe other people’s lives on social media platforms make social comparisons between themselves and other users. Upward social comparisons, in particular, are thought to promote feelings of incompetence in individuals.
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Instagram Teachings and Relative Poverty 249 There are two major types of social comparison: Downward social comparison and upward comparisons. In downward social comparison, individuals compare themselves with those who are less fortunate. For this reason, they may fnd themselves grateful to be more fortunate. Upward social comparisons, on the other hand, are the comparisons individuals make with people who live in better conditions than themselves and this type of comparison usually causes negative emotions (Bessenoff, 2006, as cited, Wills, 1991; Gibbons & Gerard, 1989; Wheeler & Miyake, 1992). Making social comparisons through Instagram causes individuals to feel envy or jealousy. In the context of relative poverty, it is quite natural for individuals to see all the things that they do not have and make comparisons as a result of this. Psychological studies have also revealed signifcant correlations between social comparisons and envy and anxiety. While the best, idealized fragments of people’s life rotate like a flm roll on Instagram, the followers who are exposed to this content witness a presumably ideal life which is not theirs. This causes individuals to experience feelings of incompetence. According to Wiederhold (2018), when compared with other social networks, Instagram is a source of physical and bodily discontent (unrealistic expectations, feelings of incompetence, and low self-confdence) for young people. More than 35% of adults in the United States use Instagram and it is reported that the massive amounts of visual content on the platform cause an increase in the levels of anxiety and self-perceived incompetence in the users. This is due to the fact that most people seem to be living their best lives on social networking websites. The fndings of an experimental study with women who are exposed to these types of images (e.g., beauty, ft body images) show that excessive use of Instagram has negative psychological effects. The study indicates a correlation between the beauty, ftness, and travel photos individuals are exposed to and the negative emotion they experience (e.g., poor appearance-related self-perception, anxiety, depressive symptoms, self-esteem, and body dissatisfaction) are related (Sherlock & Wagstaff, 2018). The fndings of another study that aims to discover the link between Instagram use and psychological well-being (Mackson, Brochu, & Schneider, 2019) show that the negative emotions experienced by individuals with anxiety and depression who have Instagram accounts are related to social comparison. The factors that trigger social comparisons are the idealized fractions of life and idealized body images. Regarding this matter, Lewallen (2016) mentions that the ideal body images on social media cause the users to make social comparisons and feel incompetent. The visual content on Instagram may affect some individuals more deeply. A study by Hendrickse, Arpan, Clayton, and Ridgway (2017) indicates that Instagram use can be harmful to people who have a tendency to frequently comparing themselves with others. Idealized images of life posted on social media cause individuals to make social comparisons and making social comparisons becomes a source of envy and jealousy.
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250 Mine Yeniçeri Alemdar
ENVY ON SOCIAL MEDIA Social media use may cause both positive and negative emotions. The focus of this study is the negative emotions that result from social media use. A negative outcome of social media use is depression as mentioned earlier. According to Lin and Utz (2015), depression may occur due to the emotions of jealousy and envy. Different socioeconomic groups witness life conditions that are far better than their own through social media. This witnessing causes a feeling of envy. Besides the poor or relatively poor, individuals who belong to higher socioeconomic groups can also envy one another because there is always a possibility to see a better, more unique, or more luxurious thing on social media. The feeling of envy is related to the emotional moods of individuals. They may experience optimistic or pessimistic envy. Pessimistic envy may lead to a feeling of severe deprivation and depression. The visual appeal of Instagram posts (thanks to the use of flters and lenses) is effective in accentuating the feelings of deprivation. Multiple studies indicate that exposure to glamorous content decreases life satisfaction in individuals through envy (Mukesh, Mayo, & Goncalves, 2014). The feeling of envy resulting from social media use affects the cognitive and emotional well-being of the users (Krasnova, Widjaja, Buxmann, Wenninger, & Benbasat, 2015). Passive social media following, in particular, is seen as a factor increasing the feeling of loneliness (Konnikova, 2013 as cited in C. Mellon), decreasing life satisfaction, and aggravating the feeling of envy. This situation can render social media a stressful environment. Being a passive follower on social media, thinking that you do not have moments worthy of sharing, and as a matter of fact, not being able to share anything, may turn into the source of envy and, later, it can become a stressor.
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METHODOLOGY This chapter is conducted through a qualitative study method, which is the phenomenological approach. Qualitative studies that arise from social or individual problems analyze the data with an inductive reasoning method and create themes or models in order to see the bigger picture related to these problems (Creswell, 2007). The phenomenological approach “focuses on phenomena that we are aware but lack a detailed understanding of ” (Yıldırım & Şimşek, 2011, p. 72). Therefore, the participants need to have experienced the defned phenomenon and be willing and able to refect on this experience (Donalek, 2004). The verbal statements of their experiences regarding the related phenomenon are collected, and in the analysis part of this study, it is suggested to explore the mutual elements about their experiences related to this phenomenon. This type of study is “intended to discover and describe the elements (texture) and the underlying factors (structure) that comprise the experience of the researched phenomenon” (Marques & McCall, 2005, p. 444). The phenomenon of this study is not being able to have.
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Instagram Teachings and Relative Poverty 251 The study is about understanding and describing what the individuals feel that they relatively lack due to upward social comparison. The notion that poverty is relative is emphasized. It is believed that a feeling of poverty can occur even for the people who have disposable incomes and are above the relative poverty threshold. For this purpose, the basic questions of the study are designed as: RQ1: What are the main categories of Instagram posts that evoke a sense of deprivation in individuals? RQ2: What do glamorous Instagram posts mean to individuals who are above the relative poverty threshold?
The Sample of the Study The present study adopted purposeful sampling methods, critical case sampling, and criterion sampling methods together. Critical sampling is based on the idea that “if it happens even here, it could happen anywhere” (Patton, 1990, p. 175). Therefore, it was deemed ftting to include the individuals who are above the limit of relative poverty in the sampling. The effciency of the sample in a qualitative study is not about the frequencies but about including the most suitable individuals as participants in the study (O’reilly & Parker, 2013). In accordance with the purpose of the study, the criteria for including the participants in the sampling were determined as follows: ⦁⦁ Having a digital tool (smartphone, tablet, computer, etc.) ⦁⦁ Having an Instagram account, spending a daily average of two hours on
Instagram
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⦁⦁ Being above the threshold of relative poverty.1
Five participants were interviewed for the study (the data collecting process ended when data saturation was achieved). In qualitative studies, working with a relatively limited number of participants is a necessity to ensure a detailed description of the relevant experiences. When data saturation is achieved and the researcher is content with the answers collected, the data collection process is concluded. Phenomenological studies, in particular, focus on participant experiences and do not aim for generalization. The participants to be included in the sampling should have personally experienced the phenomenon and be willing and able to refect on it (Baker, Wuest, & Stern, 1992; Corben, 1999; Creswell & Poth, 2016; Englander, 2012; McCance & Mcilfatrick, 2008; Merriam & Tisdell, 2015; 1
In poverty studies by using HBS data 50% of the median value of the consumption expenditures per equivalent individual was defned as relative poverty line. For a family of 4, it is/~$1185 (8892 TL). Turkstat’ for Turkey to felds in the data is current. TurkStat discloses poverty data for the previous year in December every year.
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252 Mine Yeniçeri Alemdar Miles & Huberman, 1994; Patton, 2014; Streubert & Carpenter, 1999; Yıldırım & Şimşek, 2011). The saturation of this study was achieved with fve participants.
Data Collection Tool The literature related to the study topic was utilized when preparing the questions for the interview form, which is the data collection tool for the present study. The interview form consists of four main sections. (1) Introduction questions are questions about Instagram use. (2) Questions about satisfaction with life are questions toward understanding the life satisfaction of the participants. (3) These are questions about the categories of poverty and well-being. (4) These are the control questions. A plan as the following was created for data analysis: Firstly, the obtained data set was put through content analysis with thematic coding. For qualitative analysis, a computer-assisted qualitative data analysis software Maxqda 2020 was used. a. Deciphered texts were read by the researcher and the frst thoughts were noted. b. First-level codes were created by the researcher by performing open-coding. c. The categories and themes that are compatible with each other were gathered on the code list. d. A study result model that includes the themes was presented. After the designation of the themes, the participant opinions/statements with descriptive analysis were presented.
Validity–Reliability
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The following methods for obtaining validity and reliability are used for qualitative studies: ⦁⦁ Confrmability (Cope, 2014, p. 89): The answers were sent back to some partici-
pants and their answers were confrmed.
⦁⦁ Diversifcation in the analysis method (Golafshani, 2003, pp. 602–604):
Descriptive analysis and content analysis techniques were used.
⦁⦁ Involving an outside reader (Creswell & Miller, 2000): An outside reader was
included in the study.
⦁⦁ Receiving expert opinion about the method (Yıldırım & Şimşek, 2011): The
opinions of two researchers who are experts in qualitative studies and have overall information about the study topic were sought.
Limitations and Assumptions The fndings of this study are about the specifc features of the sample. The basic limitation of the study is due to the nature of qualitative studies, which is the fact
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Instagram Teachings and Relative Poverty 253 that the results cannot be generalized. However, it can set an example for future studies to be conducted on this topic. The study may also act as a guideline for gaining a better understanding of the results of quantitative studies about Instagram use and well-being. This study can be recreated for different demographic groups and their results may cumulatively help to gain new insights.
ANALYSIS AND RESULTS The data set was analyzed with a computer-assisted analysis program (MaxqDa 2020). The data set was imported into the program and coded via open-coding. Following the frst-level coding, the second-level coding was performed and a coding procedure as shown in Table 1 was created. To better understand the data set, descriptions about the participants provided before the fndings.
Findings The Characteristics of the Participants
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The study included a total of fve participants involving three females and two males. Their ages varied between 35 and 46. Three of them (1F, 2M) work in the private sector; one (F) works in the public sector. One of the participants (F) had to take a break from professional life. All participants were married. Their household incomes were above the relative poverty threshold. The accounts they followed on Instagram mostly belonged to people who they did not know in real life (e.g., celebrities, athletes, business people, travelers, and gourmets). All of the participants previously had at least one vacation abroad but, for the past 15 years, they could not have a vacation abroad (due to the installments of debt they needed to pay). They still could have annual vacations for 10–15 days in Turkey.
Thoughts on Satisfaction with Life (Before the Interview) The participants are generally content with their lives. Table 1. The Literature Serving as a Basis for the Questions on the Interview Form. The Aspects of the Interview Form
Sample Literature
Satisfaction with life
Pavot and Diener (2009)
Emotions resulting from viewing social information of friends on an SNS
Krasnova et al. (2015)
Upward social comparisons
Bessenoff (2006)
Well-being
Bech, Olsen, Kjoller, and Rasmussen (2003)
Source: Authors’ compilation.
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254 Mine Yeniçeri Alemdar Thoughts on Satisfaction with Life (After the Interview) The statements of all the participants regarding satisfaction with life differed before the interview and after the interview, which was one of the notable fndings of the study. The glamorous lives presented on Instagram were a dominant subject in the interview. When the interviews were concluded, the participants were asked about the things that they wished to change in their lives for a second time. The things that the participants wished to change in their lives were their jobs, their positions in the job, and correspondingly, earning a higher income. All the participants needed to work hard in order to meet their needs (rent, loans, school payments, etc.). They all want to travel (abroad), however, they did not have enough disposable income and free time for this. The fundamental questions of the study and the obtained results are presented below. RQ1: What are the main categories of Instagram posts that evoke a sense of deprivation in individuals? The main themes and sub-themes identifed after content analysis are presented in Table 2. RQ2: What do glamorous Instagram posts mean to individuals who are above the relative poverty threshold? To better understand the categories that evoke a sense of deprivation in the individuals, the themes and sub-themes were explained by correlating them with the topics included in the right section of Table 2 (Ability, Assessments, Who owns? What they want to change in their life).
STATEMENTS OF BELONGING TO THEMES Copyright © 2021. Emerald Publishing Limited. All rights reserved.
Theme 1: Travel/vacation The statements of the participants who wish but cannot afford to have a vacation abroad are as the following: P1 “I always pore over other people’s photos from their vacations abroad… I wish I could be the one in those photos…’’ P2 “On social media, I always peep at how people from higher income groups live. I wonder what joys they experience. I do not feel so good about myself compared to the people who can have vacations abroad and live spectacular lives.” P3 “I envy that famous people travel very often. I really envy some of the celebrities I follow on Instagram who share photos from NBA games.” P5 “I really envy the people who ski abroad and share photos from ski resorts. I dream of a winter vacation like this where I can ski with my child.” The limitations in their lives make the participants feel worse when they see such posts. For example:
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Instagram Teachings and Relative Poverty 255 Table 2. Main Themes/Sub-themes and Related Topics. Main Themes/Sub-themes
Relation with the Themes
Travel/vacation -Traveling abroad -Domestic trip
Ability -I Can do -I wish I could
Social life -Fine dining/Gourmet Activities -Cafe/Restaurants -Concerts/Festivals/ Shows -Beaches
Assessments -Positive (Appreciating) -Negative (Jealousy, envy, bad surprise, nervous, sadness) -Ignore
Physical appearance -Fitness * Personal Trainer -Beauty
Who owns? - Meet in real life - Don’t meet in real life - Dislike in real life
Material possessions -Money -House -Car -Caravan -Boat - Maid to help with housework
What she/he want to change in her/his life -Job -More free time -More money
Career/Education -Degree -Good job
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Source: Authors’ compilation.
P1 “If I am at home while the other people are sharing wonderful photos from their vacations, I feel worse. I am unemployed at the moment, so I do not have an income. If I had a job and earned enough income, I could share photos of happiness on Instagram as well. That really hurts me and makes me unhappy.’’ P3 “I feel extremely envious when people share their vacation photos in summer. Especially if I am at work in my work clothes, I envy them.” The people sharing the photos also have an impact on the emotional states of the participants. P1: “When someone I do not like that much shares their travel photos, I feel something beyond envy, I feel jealousy or I could even get angry, annoyed…” P3: “When I saw the luxurious house that Mehmet Okur, the basketball player, rented for summer vacation, I admired him. His success in professional sports is admirable and, therefore, his life in wealth thanks to his success is also admirable…”
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256 Mine Yeniçeri Alemdar P4 “When the people that I do not like much in my work and friends circle visit the countries that I want to visit but cannot and share vacation photos, it deeply annoys me and I lose my nerve.” P5 “My opinion about a photo posted online varies depending on the person who shared it. When people whom I do not like share vacation-travel photos, it can be annoying.”
Theme 2: Social Life Participant statement on not being able to participate in social activities is as follows: P1: “I used to attend social activities frequently. And now, being left outside the social life gives sorrow beyond unhappiness and jealousy. It makes me feel as if I am missing something out of life. At that moment, someone else is feeling a joy that I used to be familiar with. This truly hurts me. But I also can’t stop myself from following their lives on Instagram.” P2: “Social activities in the city where I live are limited. When famous artists visit here for stand-up shows or concerts, the prices of the tickets increase. That’s why I cannot participate in such activities. But when I see posts about concerts or shows on Instagram, I wish that I were there and could watch it from the front row.” P3: “The ticket prices of concerts or stand-up shows are quite high. Yet I see a lot of people flling the performance halls and that annoys me…”
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“One of the topics on social media that I enjoy most is gastronomy trips. I follow gastronomy accounts on Instagram. I get curious about the taste of the food in their photos. I even have a notebook where I note down the countries and the restaurants that I’d like to visit. Maybe one day, I can go there, too…” P5: “In summer months, when I see posts on vacation and social life on Instagram, I feel that there is a life out there that I am missing out… I cannot live that life. Of course, I am aware that not all the things shared on social media are real… But still, it makes me sad to be an outsider to that life.”
Theme 3: Physical Appearance The images of physically attractive people shared on Instagram causes a feeling of envy in the participants. According to the participants, looking physically attractive is related to having a high income and a lot of free time. P1: “Having a better appearance is defnitely something related to one’s income. Being able to buy trendy clothes, doing sports regularly, being able to train with a personal trainer, or being able to visit beauty salons are the privileges enjoyed by those with a high income. Sharing work-out videos with a
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Instagram Teachings and Relative Poverty 257 personal trainer on Instagram became a big trend… When I see this kind of videos of people with attractive bodies on Instagram, I can’t help but envy them.” P2: “People are racing one another to have the best-looking body on social media. When I am exposed to such content, I also want to look better. One should have free time and a high income to be able to look that good…” P3: “People who have great bodies that I see on Instagram work out with personal trainers. They have high incomes and free time. They can invest in themselves. On the other hand, I know that having a ft body is a trend that Instagram created but knowing that still does not stop me from envying them.” P4: “I really envy the people who have enough income for beauty salons and personal care and I get envious when I see the Instagram posts of these people. I would love to work with a personal trainer. Looking attractive on Instagram is related to high income just as it is in real life…”
Theme 4: Material possessions
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The participants described the wealth indicators on Instagram with the following examples: having a villa, a luxurious car, a boat, a caravan, being able to employ a live-in help in the house. All of the participants who stated that they are satisfed with lived expressed their desire to be able to afford such things during the interview. P1: “Decoration is my feld of interest. Design and decoration accounts on Instagram catches my attention. I would like to have a villa and to decorate it myself.” P2: “I would like to buy a boat and a luxurious house. After seeing the luxurious houses on Instagram, I notice the lacking things in my apartment and I ponder over what I could buy and add to my own home.” P3: “I would like to have a house with a backyard like the ones I see on Instagram. I’d also love to get a comfortable Jeep and a luxurious caravan.” “I would like to go to restaurants without thinking about the bill, I would love to try high-quality food and taste the beverages (begins to show the gastronomy accounts that they follow on Instagram).” P4: “I would like to live in a house like those of the celebrities I follow on Instagram and there would also be a luxurious car parked in front of the house.” P5: “I follow my former boss on Instagram. He lives in a villa with a pool and a gym. It would be nice to live in a house like that.”
Theme 5: Professional/Academic Career P1 and P3 express their opinions on individuals sharing posts about their professional or academic careers on Instagram as:
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258 Mine Yeniçeri Alemdar P1: “I really like the posts about the academic careers of the people I know and like in real life. I admire them. I even look into those programs. However, posts about the achievements in their professional careers can make me sad because since I took a break from my career, I can participate less in professional life. I follow the social lives of other people on Instagram closely and I feel very sad about the aspects of the social life that I am missing out.” P3: “When I see the photos of the people who graduate from prestigious and private schools, I envy them… Having a good degree could bring along better career possibilities.”
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CONCLUSION Similar to the studies by Fox and Moreland (2015) and Chou and Edge (2012), the fndings of this study demonstrate that individuals engage in various manners of social comparison through social networking sites (SNSs). Fox and Moreland (2015) express the need for qualitative methods in order to defne the experiences of technology use in more detail and to better explain the fndings of quantitative studies. The fndings of the qualitative study they conducted with this purpose in mind demonstrate that “making social comparisons and envy” is one of the negative experiences that result from social media use. Chou and Edge (2012) conducted a study about how people perceive the lives of others thanks to social media use (Facebook). Their fndings indicate that the participants believe that “life is not fair.” The results of the studies above and the fndings of this study share similarities. The fndings of this study reveal the negative emotions about “not being able to have” in participants who use Instagram and make upward social comparison although they are above the relative poverty threshold. All the participants who had stated that they were content with their lives at the beginning of the interviews started to provide more details about the lives they wished they had and expressed statements starting with “I wish…” at the end of the interview. It was observed that the participants did not only make upward social comparison but also downward social comparison. The answers to the questions about satisfaction with life at the beginning of the interview included statements expressing gratitude for the life they had. In this study, the leading topic creating a sense of incompetence and evoking negative emotions is the desire to travel more. Similarly, in the study of Krasnova et al. (2015) regarding the “Objects of Envy in SNS,” the frst category was [1] Travel and Leisure (Vacations, trips, visits to foreign countries, leisure events and experiences: e.g., concerts, get-together, free time). The present study has similar fndings with the mentioned study (Krasnova et al., 2015). The desire to travel more: The participants of this study can afford to go on vacation in Turkey for 10–14 days in a year. However, they cannot afford to travel abroad. All of the participants had a chance of visiting a foreign country before (10–15 years ago). All of the places that they want to visit are abroad (Prague,
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Instagram Teachings and Relative Poverty 259 Barcelona, San Francisco, the Maldives). They envy the people who go on a vacation in these places and share photos on Instagram. As a result of the envy, the emotions they expressed were mostly negative. Optimistic envy, on the other hand, was seldom expressed. The people sharing travel/vacation photos on Instagram also impact the emotional state of the participants differently. For instance, the participants admire the posts of the people whom they like in real life and get annoyed by the posts of the people they do not like. Thus, the direction of the participants’ emotions depends on who the person experiencing the situation to be envied is. A study by Hill and Buss (2006) indicates that the feelings of envy experienced by individuals are more toward the people whom they know in real life (friends, siblings, etc.) rather than the people they do not know. Unlike that study, the present study indicates that the factor of liking or disliking the people known in real life seemed to determine the direction of the participants’ emotions positively or negatively. Another factor that can affect the formation of the negative emotions is the limitations in life experienced by the participants at the moment when they see the photos. For example, being at the workplace, sitting in the living room of the apartments, and not having any chance to change this situation at that moment deepens the sense of deprivation and incompetence experienced by the participants. As a result, negative emotions emerge. These results of the study provide new explanations to the sub-theme of travel envy in the literature under the theme of social media and envy (Chae, 2018; Krasnova, Wenninger, Widjaja, & Buxmann, 2013). The desire to participate more in social life: Under this theme, the participants mentioned their limitations about attending concerts, theaters, and shows, or visiting private beaches. The desire to participate in more activities in the summer season was expressed by all participants. The participants all mentioned that due to a lack of disposable income and free time, they could not often participate in such activities and this was a source of emotional distress for them. The desire to participate in social activities more often was exemplifed in the context of the pleasures of life. Statements such as “missing something out of life” and “a world which they are not a part of ” indicate the frustration and the fear of missing out that they experience. The fndings of this study are similar to the fndings of the study by Appel, Gerlach, and Crusius (2016). The researchers mention a combination of painful social comparison and envy results in frustration for social media users. The desire to be physically attractive: The participants think that looking physically attractive is related to having high income and free time. Earning a good income is the frst condition to access services to look physically attractive (being able to work out with a personal trainer, being able to visit beauty salons). Seeing good-looking people with ft bodies on Instagram causes the participants to feel envy (thinking “I should also look good”). However, the negative outcomes related to body satisfaction that were present in previous studies (Fardouly, Pinkus, & Vartanian, 2017; Fardouly & Vartanian, 2015) were not present
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260 Mine Yeniçeri Alemdar
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in this study. The participants were all aware that the images presented on social media are just an illusion. Material possessions: The participants mentioned the following wealth indicators: elegantly decorated houses, luxurious automobiles (e.g., jeep), boats, and vacations abroad. The participants experience deep sorrow for not being able to afford these items. This fnding may be related to the socioeconomic features of the participant group. The participants have houses and automobiles. They have steady household incomes but they just do not have luxury items in their lives. A study conducted by Mukesh et al. (2014) reveals that being exposed to the glamorous content shared by other people on social media causes a decrease in the enjoyment of life. It can be stated that the fndings of that study are not exactly valid for the material possessions theme of the present study. The present study provides more explanations about satisfaction with life rather than the enjoyment of life. Career/Education: In this study, only two of the participants (P1, P2) express opinions about their previous education and their present careers. The posts about academic and professional achievements on Instagram brings along a questioning for the participants’ own lives. This fnding bears similarity to the participants’ self-inquiries about what they should change in their lives when faced with the professional/academic success stories of others on social media in a study by Haferkamp and Krämer (2011). Previous studies also indicate a negative correlation between social information consumption on SNSs and emotional well-being. The present study revealed the presence of negative emotional states stemming from upward social comparison even among people who are above the relative poverty threshold for Turkey. It is safe to suggest that the keyword that summarizes the study is “more.” The participants of the study are all individuals who are above the relative poverty threshold for Turkey. Therefore, to them, the word “more” refers to the desire to have more than what they already have.
RESULT MODELS OF THE STUDY
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Source: Authors’ compilation using the qualitative analysis program MaxqDa 2020.
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Instagram Teachings and Relative Poverty 261
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262 Mine Yeniçeri Alemdar
RESULT MODELS OF THE STUDY
Source: Authors’ compilation using the qualitative analysis program MaxqDa 2020.
Acknowledgement
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The study was presented at IV. International Applied Social Sciences Congress 22nd-24th October 2020 and printed as a summary text.
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264 Mine Yeniçeri Alemdar Hendrickse, J., Arpan, L. M., Clayton, R. B., & Ridgway, J. L. (2017). Instagram and college women’s body image: Investigating the roles of appearance-related comparisons and intrasexual competition. Computers in Human Behavior, 74, 92–100. https:// doi.org/10.1016/J.CHB.2017.04.02 Hill, S. E., & Buss, D. M. (2006). Envy and positional bias in the evolutionary psychology of management. Managerial and Decision Economics, 27(2–3), 131–143. Krasnova, H., Widjaja, T., Buxmann, P., Wenninger, H., & Benbasat, I. (2015). Research note why following friends can hurt you: An exploratory investigation of the effects of envy on social networking sites among college-age users. Information Systems Research, 26(3), 585–605. Krasnova, H., Wenninger, H., Widjaja, T., & Buxmann, P. (2013). Envy on Facebook: A hidden threat to users’ life satisfaction? In Proceedings of the 11th International Conference on Wirtschaftsinformatik (WI2013), Universität Leipzig, Germany. ISBN: 978-3-00-041359-9 Lewallen, J. (2016). When image isn’t everything: The effects of Instagram frames on social comparison. The Journal of Social Media in Society, 5(2), 108–133. Lin, L. Y., Sidani, J. E., Shensa, A., Radovic, A., Miller, E., Colditz, J. B., & Primack, B. A. (2016). Association between social media use and depression among US young adults. Depression and Anxiety, 33(4), 323–331. Lin, R., & Utz, S (2015). The emotional responses of browsing Facebook: Happiness, envy, and the role of tie strength. Computers in Human Behavior, 52, 29–38. Lup, K., Trub, L., & Rosenthal, L. (2015). Instagram #Instasad?: Exploring associations among Instagram use, depressive symptoms, negative social comparison, and strangers followed. Cyberpsychology, Behavior, and Social Networking, 18(5), 247–252. https://doi.org/10.1089/cyber.2014.0560 Mackson, S. B., Brochu, P. M., & Schneider, B. A. (2019). Instagram: Friend or foe? The application’s association with psychological well-being. New Media & Society, 21(10), 2160–2182. Marques, J. F., & McCall, C. (2005). The application of interrater reliability as a solidifcation instrument in a phenomenological study. The Qualitative Report, 10(3), 439–462. McCance, T., & Mcilfatrick, S. (2008). Phenomenology. In R. Watson, H. Mckenna, S. Cowman, & J. Keady (Eds.), Nursing research: Designs and methods (pp. 231–242). China: Elsevier. McCullough Chavis, A. (2011). Social learning theory and behavioral therapy: Considering human behaviors within the social and cultural context of ındividuals and families. Social Work in Public Health, 26(5), 471–481. https://doi.org/10.1080/19371918.2011. 591629 Merriam, S. B., & Tisdell, E. J. (2015). Qualitative research: A guide to design and implementation. San Francisco, USA: John Wiley & Sons. Miles, M. B., & Huberman, A. M. (1994). Qualitative data analysis: An expanded sourcebook. California, USA: Sage. Mukesh, M., Mayo, M., & Goncalves, D. (2014). Well-being paradox of social networking sites: Maintaining relationships and gathering unhappiness. In Academy of management proceedings (Vol. 2014, No. 1, p. 14709). Briarcliff Manor, NY: Academy of Management. O’reilly, M., & Parker, N. (2013). Unsatisfactory saturation: A critical exploration of the notion of saturated sample sizes in qualitative research. Qualitative Research, 13(2), 190–197. Ormrod, J. E. (1999). Human learning (3rd ed.). Upper Saddle River, NJ: Prentice-Hall. Patton, M. Q. (1990). Qualitative evaluation and research methods. California, USA: SAGE Publications, Inc.
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Instagram Teachings and Relative Poverty 265 Patton, M. Q. (2014). Qualitative research & evaluation methods: Integrating theory and practice. California, USA: Sage Publications. Pavot, W., & Diener, E. (2009). Review of the satisfaction with life scale. In Assessing wellbeing (pp. 101–117). Dordrecht: Springer. Perloff, R. M. (2014). Social media effects on young women’s body image concerns: Theoretical perspectives and an agenda for research. Sex Roles, 71(11–12), 363–377. Pittman, M., & Reich, B. (2016). Social media and loneliness: Why an Instagram picture may be worth more than a thousand Twitter words. Computers in Human Behavior, 62, 155–167. Pösteki, N., & Velioğlu, Ö. (2014). The transformation in the way the individual presents and positions herself: Selfe identities. In Proceedings of the I. International Communication Sciences and Media Research Congress. First International Communication Sciences and Media Research Congress, Kocaeli. Sen, A. (1980). Levels of poverty: Policy and change Washington, DC: The World Bank; World Bank Staff Working Paper. No. 401. Sherlock, M., & Wagstaff, D. L. (2018). Exploring the relationship between frequency of Instagram use, exposure to idealized images, and psychological well-being in women. Psychology of Popular Media Culture, 482–490. https://doi.org/10.1037/ppm0000182 Stokes, J., & Price, B. (2017). Social media, visual culture and contemporary identity. In 11th International Multi-Conference on Society, Cybernetics and Informatics, IMSCI 2017, pp. 159–163. Streubert, H. J., & Carpenter, D. R. (1999). Qualitative research in nursing: Advancing the humanistic imperative. Tiggemann, M., Hayden, S., Brown, Z., & Veldhuis, J. (2018). The effect of Instagram “likes” on women’s social comparison and body dissatisfaction. Body Image, 26, 90–97. https://doi.org/10.1016/j.bodyim.2018.07.002 Townsend, P. (1979). Poverty in the United Kingdom. London: Allen Lane and Penguin Books. Wiederhold, B. K. (2018). The tenuous relationship between Instagram and teen selfidentity. Cyberpsychology, Behavior, and Social Networking, 21(4), 215–216. https:// doi.org/10.1089/cyber.2018.29108.bkw Wolff, J. (2015). Social equality, relative poverty and marginalised groups. In G. Hull (Ed.), The equal society: Essays on equality in theory and practice (pp. 21–41). London, UK: Lexington Books. Yang, C. (2016). Instagram use, loneliness, and social comparison orientation: Interact and browse on social media, but don’t compare. Cyberpsychology, Behavior, and Social Networking, 19(12), 703–708. https://doi.org/10.1089/cyber.2016.0201 Yıldırım, A., & Şimşek, H. (2011). Qualitative research methods in the social sciences (6th ed.). Ankara: Seçkin Publishing.
WEB Habitat for Humanity. (2018). Relative vs absolute poverty, defning different types of poverty. Retrieved from https://www.habitatforhumanity.org.uk/blog/2018/09/relativeabsolute-poverty/ Konnikova, M. (2013). How Facebook makes us unhappy. Retrieved from https://www. newyorker.com/tech/elements/how-facebook-makes-us-unhappy Poverty Rates of Individuals According to the Poverty Line Method (Turkey-UrbanRural). (2016). Retrieved from http://www.tuik.gov.tr/PreTablo.do?alt_id=1013
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Poverty Reduction Handbook. (1993). The World Bank. Retrieved from http://documents. worldbank.org/curated/en/752551468766240790/Poverty-reduction-handbook Sen, A. (1980). Levels of poverty: Policy and change. Working Paper. No. 401. The World Bank, Washington DC. Streubert,H. J., & Carpenter,D. R. (1999). Qualitative Research in Nursing: Advancing the Humanistic Imperative (5th Ed.). China: Wolters Kluwer Health/Lippincott Williams&Wilkins. TurkStat, Income and Living Conditions Survey Regional Results. (2018). Retrieved from http://www.tuik.gov.tr/PreTablo.do?alt_id=1013
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Chapter 13
Managing Climate Change Risk: A Responsibility for Politicians Not Central Banks Peterson K. Ozili Abstract Purpose: This chapter discusses the need for climate change risk mitigation and why it is not the responsibility of Central Banks to mitigate climate change risk. Methodology: This chapter uses critical discourse analysis to explain why central banks should not have the responsibility for climate change risk mitigation.
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Findings: This chapter argues that the responsibility for managing climate change risk should lie with elected offcials, other groups and institutions but not Central Banks. Elected offcials, or politicians, should be held responsible to deal with the consequence of climate change events. Also, international organizations and everybody can take responsibility for climate change while the Central Bank can provide assistance – but Central Banks should not lead the climate policy making or mitigation agenda. Implication: The policy implication is that the responsibility for climate change risk mitigation should be shifted to politicians who are elected offcials of the people. Also, international climate change organizations or groups can take responsibility for mitigating the climate change risk of member countries. Finally, citizens in a country or region should have equal responsibility for climate change. Climate information should be provided to every citizen to help them prepare for future climatic conditions.
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268 Peterson K. Ozili Originality: This chapter propagates the idea that Central Banks should take a lead role in dealing with the problems of climate change. This chapter is the frst chapter to contest a Central Bank-led climate change risk mitigation agenda. Keywords: Climate change; environment; Central Bank; government; atmosphere; fnancial stability; risk management; climate change risk; fnancial sector; fnancial institutions
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1. Introduction Climate change risk refers to the possible loss, both monetary and non-monetary, resulting from the unfavorable effects of global warming. For instance, climate change events such as severe storms and fooding can damage crops, buildings, infrastructure and assets, which can negatively affect agriculture, fsheries, forestry, health care, events, real estate, offces, tourism, and general business. Emerging climate change events often give rise to climate change risk, and as a result, managing climate change risk has become important The United Nation’s intergovernmental panel on climate change has stated that it is beyond reasonable doubt that human emissions of greenhouse gases are affecting the climate primarily as a result of the combustion of fossil fuels which produces carbon dioxide (CO2). The result is an increase in the amount of CO2 in the atmosphere which affects the balance between incoming and outgoing radiation and thereby the planet’s temperature (Olovsson, 2018). Managing climate change risk requires developing risk assessment and risk management strategies that are appropriate to reduce the unfavorable effects of global warming. Many taskforce and groups have been formed to bring countries together to fnd a collective solution to climate change risk such as the Network for Greening the Financial System,1 the Task Force on Climate-related Financial Disclosures,2 and the UNESCO Climate Change Initiative.3 The European Central Bank (ECB) has also joined the international community in the fght against climate change and its risks. The ECB is working to identify the risks that climate change could present to the European fnancial system and the economy through extreme weather events and uncertainties related to the transition to a low-carbon economy.4 There is also a wide support for managing climate change risk in the academic literature as climate change has dominated much of the environmental science literature (see Burke & Emerick, 2016; Morelli et al., 2016; Obersteiner et al., 2001; Rosenzweig et al., 2007, Stone, Vargo, & Habeeb, 2012; Tol, 2018; Urry, 2015; etc.).
1
https://www.banque-france.fr/en/financial-stability/international-role/networkgreening-fnancial-system 2 https://www.fsb-tcfd.org/ 3 http://www.unesco.org/new/fileadmin/MULTIMEDIA/HQ/SC/pdf/sc_clim Change_initiative_EN.pdf 4 https://www.ecb.europa.eu/ecb/orga/climate/html/index.en.html
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Managing Climate Change Risk 269 Recently, the climate change debate has infltrated the fnancial sector. An emerging debate, supported by the International Monetary Fund (IMF) and other interest groups, advocates that Central Banks should join in fghting climate change risk,5 because extreme climate change events can destroy the assets of fnancial institutions in the fnancial sector which may destabilize the fnancial system (Batten, Sowerbutts, & Tanaka, 2020; Campiglio et al., 2017; Olovsson, 2018). But this calls into question whether Central Banks have the expertise to manage climate change risk, and also raise the question of who should be responsible for managing climate change risk – should it be Central Banks, the international community, elected offcials, politicians, or some remote agency? This chapter discusses and analyze why it is not the responsibility of Central Banks to mitigate climate change risk – even in the fnancial sector. This chapter does not challenge the climate change agenda rather it supports the urgent need for swift action to reduce the risk of climate change. However, this chapter contests the idea that Central Banks should take a lead role in dealing with the problems of climate change. The discussion in this chapter contributes to ongoing debates on how to manage climate change risk (Fünfgeld, 2010, Ozili, 2020a; Kunreuther et al., 2013; Obersteiner et al., 2001). The discussion also contributes to the literature that link increasing climate change events to environmental degradation (Raleigh & Urdal, 2007; Saxon, Baker, Hargrove, Hoffman, & Zganjar, 2005; Wilby, 2007). Thirdly, the discussion adds to the literature that examine the role of climate change in the fnancial sector (Batten et al., 2020; Campiglio et al., 2017; Dlugolecki, 2008; Folger-Laronde & Weber, 2018; Olovsson, 2018; Ozili, 2020b). Finally, the remarks on the responsibility for climate change in this chapter are limited to the most signifcant arguments against a Central Bank-led climate change mitigation process, and the reasons provided in this chapter are intended to stimulate debates for a better solution on responsibility for climate change. The rest of this chapter is structured as follows: Section 2 discusses how climate change events affect the fnancial sector and the role of Central Banks. Section 3 discusses why it’s not the responsibility of Central Banks to manage climate change risk. Section 4 discusses why it’s the responsibility of elected offcials and other stakeholders to manage climate change risk. Section 5 concludes.
2. Climate Change, the Financial Sector, and Central Banking It is important to frst establish the channels through which climate change could affect the fnancial sector and the implication for Central Banks. Batten et al. (2020) identify two types of risks for Central Banks to worry about. The frst risk is a weather-related natural disaster. Such disasters could trigger fnancial and macroeconomic instability if it severely damages the balance sheets of households, corporations, banks, and insurers (Batten et al., 2020). Also, the
5
https://meetings.imf.org/en/2019/Annual/Schedule/2019/10/16/imf-seminar-climatechange-and-central-banks
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270 Peterson K. Ozili direct damage caused by droughts, foods, hurricanes, and heat waves as well as the damage ensuing from rising sea levels can affect frms and businesses, including banks in signifcant ways, and these institutions may face increasing economic risks and fnancial losses in their transition to adapt to a less fossilbased economy (Olovsson, 2018). The second risk is the sudden and unexpected tightening of carbon emission policies, and such policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (Batten et al., 2020). Why Central Bank should get involved in fghting climate change? There is the argument that fnancial institutions grant credit to businesses that emit pollutants into the environment, and by doing so, fnancial institutions also contribute in harming the environment. Proponents of this argument suggest that central banks should implement policies that compel fnancial institutions to reduce lending to such businesses through imposing higher interest rates on such businesses, or through some conditional lending ban which may be lifted when such businesses can provide evidence on the steps they are taking to protect the environment they operate in, and that Central Banks are in the best position to enforce such policies. There is also the macroeconomic argument that macroeconomic policies can help to control climate change risk through the impact of macroeconomic policies on fnancial institutions because Central banks can issue policies that will discourage fnancial institutions from supporting businesses that harm the environment. So, what can Central Banks do about climate change risk? Some studies such as Olovsson (2018) suggest two things Central Banks can do. First, Central Banks can impose additional capital requirement on fnancial institutions that lend to businesses that are exposed to climate change risk. Second, Central Banks can use green quantitative easing that encourage Central Banks to purchase green bonds themselves and then encourage fnancial institutions to purchase bonds from companies with a lower usage of fossil fuels – this is based on the assumption that if Central Banks “lead the way” with green investments, other fnancial agents will then follow the same step (Olovsson, 2018). Batten et al. (2020) suggest that climate-related disclosures by fnancial institutions can help to facilitate an orderly transition to a low-carbon economy if it helps investors in their assessment of fnancial risk exposures.
3. Why It’s Not the Responsibility of Central Banks – The Reasons The previous section showed that Central Banks, by their nature, can play a role in reducing climate change risk. But the idea that Central Banks should take the lead role or responsibility for mitigating climate change risk even in the fnancial sector needs to be challenged. Can Central Banks provide some assistance in fghting climate change risks? Certainly, yes! But is it the responsibility of Central Banks to do so simply because they have the fnancial resources to do so? The answer is no. Below are some justifcations on why it is not, and should not be, the responsibility of Central Banks to fght climate change risk.
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Managing Climate Change Risk 271 3.1. No Control Over Industries That Exploit the Environment Central Banks do not regulate or supervise the businesses and industries whose activities directly harm the environment such as the extractive industries. In other words, Central Banks do not have control over industries whose activities lead to the emission dangerous pollutants into the atmosphere and the environment. Central Banks also do not have the competent expertise in climate change management which would therefore make Central Banks incompetent to fght climate change risk in any capacity even in the fnancial sector. Moreover, the regulators of the extractive industry may feel they are more competent and better positioned to design a sound regulatory framework to manage climate change risk than Central Banks, and they may use political and legal means to oppose a Central Bankled climate change mitigation process. Thus, Central Banks may face opposition and may become unsuccessful if they choose to lead the climate change mitigation policy agenda.
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3.2. Macroeconomic Policies Have No Effect on Climate Change Events Central Banks often use macroeconomic policy tools to manage the economy such as increasing or decreasing interest rates and the level of money supply. Central Banks will be able to justify their effort to mitigate climate change for the fnancial system and the economy if there is the possibility that a change in macroeconomic policy variables can reduce the likelihood of climate change events occurring. But currently there is no known or hypothesized causal relationship that exists between macroeconomic policies and increase or decrease in climate change events. In fact, there is no evidence that a decrease (or increase) in interest rates will lower the probability that an earthquake, a storm or typhoon will occur. A study by Oxford Economics show that a 2 °C increase in global temperatures will cut economic growth by as much as 7.5%,6 however the study did not model the effect of macroeconomic policies on climate change outcomes. Therefore, it is diffcult to establish a causal relationship between macroeconomic policies and the probability of a climate change event occurring. Thus, based on the lack of evidence for a causal relationship between macroeconomic policy making and climate change outcomes, there is no macroeconomic argument that explains how Central Banks can use macroeconomic policies to fght climate change events or its risks.
3.3. Diffculty in Measuring Climate Change Risk Risk that cannot be measured cannot be managed. One common failure in risk management is the mis-measurement of risk, that is, the tendency to measure risk wrongly (Kritzman & Rich, 2002). When risk is measured incorrectly, the risk 6
https://www.bloomberg.com/news/articles/2019-11-13/climate-change-might-hiteconomy-harder-and-faster-than-thought
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272 Peterson K. Ozili information that will be generated and communicated to decision makers will be inaccurate and may mislead them to make bad decisions which can have serious consequences including fnancial loss and loss of reputation of the decision-maker. History is flled with many examples of large corporations that collapsed because they made strategic decisions using inaccurate information generated from a faulty risk measurement, management and reporting process! Just like other risks, climate change risk has to be measured using some risk measurement tools. The diffculty in fnding the right risk measurement tool to measure climate change risk is a major challenge which Central Banks will face if they choose to mitigate climate change risk. Also, given the changing nature of climatic conditions, there is the likelihood that climate change risk may not only be mis-measured, the risk measure may also be overestimated or underestimated, and the resulting risk information may mislead Central Banks to make wrong climate change risk management policies which can lead to reputational damage to Central Banks. For this reason, most Central Banks may avoid mitigating climate change risk due to diffculty in measuring climate change risk.
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3.4. Financial Institutions’ Activities Have an Indirect Impact on the Climate Central Banks know that the activities of supervised fnancial institutions do not have a direct impact on the environment, the atmosphere or climate, and this possibly explains why some Central Banks do not worry about climate change risk at all. Some Central Banks feel that since climate change affects most institutions, not just fnancial institutions, the government should mitigate climate change risk themselves while Central Banks can provide some assistance to the government. Notwithstanding, there is some speculation that if much pressure is put on Central Banks to formulate policies for climate change risk mitigation in the fnancial sector, Central Banks may take one of three options. Firstly, the Central Bank will require supervised fnancial institutions to allocate some risk capital for climate change risk. Secondly, Central Banks may require supervised fnancial institutions to reduce or cut lending to businesses whose activities increase climate change risk to the environment and the atmosphere. Thirdly, Central Banks can include climate change events in their stress testing models for the fnancial sector. The frst policy option may be opposed by supervised fnancial institutions because supervised fnancial institutions do not have control over climate change events and it will not make sense to them to allocate risk capital for climate change events that have not occurred yet and which may not even occur in the near future and for which they have no control. The second policy option propose that lending cuts may be opposed on the ground that such businesses are being discriminated against by the Central Bank for doing the business they were issued a license to do legitimately, and imposing a restrictive lending policy may constitute bad public relations for the Central Bank. The need to avoid negative publicity will make the Central Bank refuse to pursue such policy action when fghting climate change risk in the fnancial sector.
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Managing Climate Change Risk 273 3.5. Climate Mitigation Is Not a Statutory Objective of Central Banks Finally, most Central Banks have a common objective which is to maintain “price stability” and “fnancial system stability,” among others. There is no Central Bank in the world that has “climate change mitigation” or “climate change risk management” as one of its statutory objectives. Based on this, Central Banks may not accept the responsibility to manage or mitigate climate change risk for the economy or in the fnancial sector.
4. Shifting the Responsibility to Others
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4.1. Politicians or Elected Offcials Elected offcials or politicians are appointed by the people to represent their interest in national policy making, and since a large number of the population may be affected by climate change events when they occur, it makes sense for elected offcials or politicians to develop policies to address the increasing threat from climate change to the environment. Politicians should develop the policies and can seek help from private and government agencies in implementing the policies while the Central Bank may provide fnancial assistance to elected offcials to implement the climate change policies. There are six (6) major reasons why politicians or elected offcials are in a better position to develop policies or laws to mitigate climate change risk than Central Banks. (1) Elected offcials or politicians have the power to deploy emergency funding and resources to reduce climate-related damages after climate change events have occurred. (2) Elected offcials or politicians have the ability to persuade, negotiate, and coordinate with the international community to provide solutions to national climate change problems. (3) Politicians have the ability to create special purpose agencies to deal with climate change issues. (4) Only politicians can vote on imposing climate change tax on citizens and businesses as a climate change control policy option. (5) Politicians have the power to impose sanctions on businesses that harm the atmosphere and environment to force them to reduce the emission of harmful substances into the environment. (6) Politicians can easily obtain international expert services to monitor climate change risk before they occur.
4.2. International Climate Change Organizations and Groups Even without politicians, elected offcials or Central Banks being involved, special organizations or international groups may be created for the purpose of crosscountry cooperation and coordination to deal with climate change problems. Such organizations will often require countries to join the organization as members and abide by the rules governing its mandate, and in exchange for membership, the organization will provide joint solutions to the climate change problems of its member countries. Such organizations may be formed as an international organization, taskforce, round-table committee, think-tank or consortium. In such organizations, joint solutions are reached for the beneft of member countries while technical
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274 Peterson K. Ozili assistance is provided to member countries experiencing severe climatic change problems. These organizations or groups, due to their special nature, can obtain funds from international lenders such as the IMF and World Bank to help member countries cope with climate change events, and this is one of the reasons that attract countries to join these organizations or groups.
4.3. A Responsibility for Everyone Another safer policy option to deal with climate change is to make climate change risk mitigation a responsibility for everyone. Governments can encourage citizens: (i) to avoid living in toxic and polluted environment, (ii) to build houses that are resistant to heavy winds, (iii) to discourage residential settlements near the sea or river, (iv) the government should give daily information to citizens about weather conditions in local areas and cities through media broadcasts, and (v) governments should also give reliable forecast about future climate change events to help citizen prepare for severe climatic change events. For corporations, governments can require all corporations to subscribe to climate reporting agencies that generate real-time information on climate change, and corporations can use such information to protect their employees and corporate assets located in areas that are prone to climate change events. Secondly, governments may require all corporations to conduct internal risk assessment on how they would respond to unfavorable climate change events and such assessment should be audited by a competent external auditor, expert or agency appointed or licensed by the government. Companies may also be required to make other climate-related disclosures from time to time. The goal is to ensure that everybody, both businesses and individuals, takes responsibility for climate change.
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5. Conclusion This chapter is a response to recent calls for Central Banks to lead the way in climate change risk mitigation. This chapter discussed whether Central Banks should be responsible for climate change risk mitigation. It identifed fve major reasons why Central Banks should not be responsible for managing climate change risk. Central Banks have no control over the industries that exploit the environment because Central Banks do not regulate these industries and may face opposition from the regulators of extractive industries. There is a weak or no evidence that the macroeconomic policies of Central Banks can reduce the likelihood of the occurrence of climate change events. Central Banks may have diffculty in measuring climate change risk accurately, and climate change risk may be overstated or understated. Central Banks may not worry about climate change risk because the activities of fnancial institutions have an indirect, not direct, impact on the climate. Climate change risk mitigation is not a statutory objective of Central Banks. The policy implication is that the responsibility for climate change risk mitigation should be shifted to politicians who are elected offcials of the people. Also, international climate change organizations or groups can take responsibility for
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Managing Climate Change Risk 275 mitigating the climate change risk of member countries. Finally, citizens in a country or region should have equal responsibility for climate change. Climate information should be provided to every citizen to help them prepare for future climatic conditions. A single institution should not have responsibility for climate change risk management, be it a Central Bank or government agency. Even in an industry, the regulator alone should not be responsible for mitigating climate change risk in the industry – this is because the effects of climate change events are unpredictable and can have far-reaching effects beyond the ability of a single industry regulator. Therefore, there is need for joint collaboration to deal with future climate change problems. Finally, it is important to point out that the use of international or interagency collaboration to deal with climate change problems is at best an experiment which is subject to trial and error, and we can only rely on future research to know whether climate change events have become more or less frequent since the emergence of international climate change groups or organizations.
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References Batten, S., Sowerbutts, R., & Tanaka, M. (2020). Let’s talk about the weather: The impact of climate change on central banks. Bank of England Working Paper No. 603. Burke, M., & Emerick, K. (2016). Adaptation to climate change: Evidence from US agriculture. American Economic Journal: Economic Policy, 8(3), 106–140. Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., & Tanaka, M. (2017). Finance and climate change: What role for central banks and fnancial regulators. Nature Climate Change. Manuscript submitted for publication. Dlugolecki, A. (2008). Climate change and the insurance sector. The Geneva Papers on Risk and Insurance-Issues and Practice, 33(1), 71–90. Folger-Laronde, Z., & Weber, O. (2018). Climate change disclosure of the fnancial sector. Centre for International Governance Innovation, Waterloo. Fünfgeld, H. (2010). Institutional challenges to climate risk management in cities. Current Opinion in Environmental Sustainability, 2(3), 156–160. Kritzman, M., & Rich, D. (2002). The mismeasurement of risk. Financial Analysts Journal, 58(3), 91–99. Kunreuther, H., Heal, G., Allen, M., Edenhofer, O., Field, C. B., & Yohe, G. (2013). Risk management and climate change. Nature Climate Change, 3(5), 447–450. Morelli, T. L., Daly, C., Dobrowski, S. Z., Dulen, D. M., Ebersole, J. L., Jackson, S. T., … & Nydick, K. R. (2016). Managing climate change refugia for climate adaptation. PLoS One, 11(8), 1–17. Obersteiner, M., Azar, C., Kossmeier, S., Mechler, R., Moellersten, K., Nilsson, S., … & Yan, J. (2001). Managing climate risk. Science, 294, 786–787. Olovsson, C. (2018). Is climate change relevant for central banks? Sveriges Riksbank Economic Commentaries, 13. Ozili, P. K. (2020a). Fighting climate change: The policy options for central banks. Ozili, P. K. (2020b). Effect of climate change on fnancial institutions and the fnancial system. In E. Ozen & S. Grima (Eds.), Uncertainty and Challenges in Contemporary Economic Behaviour (pp. 139–145). Bingley: Emerald Publishing Limited.
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Raleigh, C., & Urdal, H. (2007). Climate change, environmental degradation and armed confict. Political Geography, 26(6), 674–694. Rosenzweig, C., Major, D. C., Demong, K., Stanton, C., Horton, R., & Stults, M. (2007). Managing climate change risks in New York City’s water system: Assessment and adaptation planning. Mitigation and Adaptation Strategies for Global Change, 12(8), 1391–1409. Saxon, E., Baker, B., Hargrove, W., Hoffman, F., & Zganjar, C. (2005). Mapping environments at risk under different global climate change scenarios. Ecology Letters, 8(1), 53–60. Stone, B., Vargo, J., & Habeeb, D. (2012). Managing climate change in cities: Will climate action plans work? Landscape and Urban Planning, 107(3), 263–271. Tol, R. S. (2018). The economic impacts of climate change. Review of Environmental Economics and Policy, 12(1), 4–25. Urry, J. (2015). Climate change and society. In Why the social sciences matter (pp. 45–59). London: Palgrave Macmillan. Wilby, R. L. (2007). A review of climate change impacts on the built environment. Built Environment, 33(1), 31–45.
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Chapter 14
Determinants of Nonperforming Loans: A Review of Empirical Evidence Aamir Aijaz Syed Abstract Purpose: The main purpose of this chapter is to thoroughly investigate the diverse literature available concerning nonperforming loans (NPLs) and its determinants by studying and analyzing the empirical studies from 1985 to 2019.
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Design/Methodology: A qualitative approach is being incorporated, and by using content analysis, various previous studies are reviewed and important issues like the objectives, methodology, key fndings, and variables are reported. Findings: The study tries to compile the main fndings from the various studies done concerning NPLs and its determinants. The study shows how various determinants both bank-specifc and macroeconomic affect the banking structure and thus the NPLs, in different countries and at different periods of time. The study also highlights how countries’ banking structure got affected by various economic phenomena like recession, contagious effect of the fnancial crisis, banking Basel norms, and NPL management strategies. Further major issues like data acquisition, lack of data reporting, countries specifc banking conditions, methodologies used in the analysis, scarce resources, and disclosure hindrance which are faced by previous studies were also reported. Originality/Value: As there are very few studies that provide a detailed viewpoint on NPLs and its determinants in this area, this research will provide a concise and detailed framework for the researchers to analyses the diverse literature on NPLs and its determinates.
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278 Aamir Aijaz Syed Keywords: Nonperforming loans; macroeconomic; bank-specifc; review; Basel norms; international banking; GMM; VECM; content analysis JEL Codes: E2; E3; G21
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1. Introduction Banks are considered as the main fag bearer of any economy, they help in channelizing funds from the public and help in mobilizing those savings for the development of an economy. A healthy banking structure serves as a paradigm for the successful development of a country. Contrary to this if the banking structure of a country is not good then that will consequently affect the economic structure of a country (Ali & Daly, 2010). This can be seen from the various economic slowdowns which took place in different countries of the world due to weak banking structure (Inekwe, 2013). Countries around the world have faced various fnancial crises from time to time, some of the prominent crisis which took place in different parts of the world is like Savings and loan crisis of United States which resulted into the failure of 747 out of 3,234 savings and loan association of United States due to failure of Non-repayment in 1980s and 1990s, similarly Finnish banking crisis took place in 1991–1993 because of economic disturbance and banking specifc problems, resulting in government takeover of the banks and providing monetary assistance to banks. Venezuela crisis is also another example of banking failure which resulted in the closure of 17 out of 49 commercial banks representing 53% of system assets (Berge & Boye, 2007). Asian fnancial crisis of 1997 is another big crisis which resulted due to excessive foreign debt, and currency devaluation resulted in overextension of credit in real-estate sector and resulted in economic meltdown due to contagion effect and lastly one of the most prominent crises which took place in the history of banking is the global fnancial crisis of 2007–2012 which resulted in the collapse of large fnancial institutions, bailing out of large banks, and slowing down of world economy (Umar & Sun , 2018). The main conclusions which we can draw from these crises are that economic disturbance and banking structure are highly correlated if any untoward incident happens in the economy than that will affect the banking structure and vice versa (Espinoza & Prasad, 2010). It has also been found that high lending by banks toward different sectors and negative sector-wise growth blocks banks’ money thus resulting in banking failures and affecting economic growth negatively (Fofack, 2005). The reasons which are attributed to bank failures are their lending pattern and non-recovering of dues within the stipulated time period. Nonperforming loans (NPLs) are considered as the main reason for banking failure around the world. We can see that different countries are suffering from this problem like Russia, Ukraine, India, Pakistan, Greece, etc. Thus, the purpose of this chapter is to collect the diverse literature available on NPLs and its determinants covering banks’ specifc and macroeconomic determinants and also to provide a comprehensive framework suggesting appropriate remedial measures for the same.
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Determinants of Nonperforming Loans 279
2. Research Design 2.1. Need of the Study NPLs are considered a serious threat to banking structure as well as it acts as a trigger point for the onset of fnancial crisis which we can see from the various previous fnancial crisis like the Asian fnancial crisis, Finnish crisis, Sweden fnancial crisis, etc. IMF economists (Laeven & Valencia, 2008) depicted the various banking crisis between 1970 and 2007. Systematically, banking crisis is defned as when country banking or fnancial industry experiences a large number of defaults in repayment of dues which led to a large number of nonperforming assets (NPAs) and a huge reduction in banking capital base. Although various studies have been conducted on NPLs and its determinants, there is no comprehensive study that provides a detailed overview of determinants affecting NPLs and the overall comprehensive fndings which cover the strategies to overcome NPLs, which is the main objective of this detailed study. Knowledge about macroeconomic and bank-specifc determinants of NPAs and implementation will be helpful to the regulators to take policy-oriented remedial steps.
2.2. Objectives of the Study The specifc objective of the study is: ⦁⦁ To provide a comprehensive and detailed up-to-date review of all the literature
covering the NPLs and its determinants.
⦁⦁ To analyze the pattern of previous researchers, the methods they have used and
fndings they have suggested related to NPLs and to also to cover the remedial measures they have recommended to overcome this menace.
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2.3. Source and Methodology To achieve the objective of this study, this chapter has employed a model of Qualitative approach using the content analysis framework given by Mayring (2000, 2008). Referring to Mayring (2008), one may distill four main steps forming the process model of (qualitative) content analysis (cf. Kassarjian, 1977; Krippendorff, 1980; Mayring, 2000): 1. The material to be analyzed is delimitated and the unit of analysis is defned (material collection). 2. Formal characteristics of the material are assessed, providing the background for subsequent content analysis (descriptive analysis). 3. Structural dimensions and related analytic categories are selected, which are to be applied to the collected material (category selection). 4. The material is analyzed according to the (analytic)dimensions (material evaluation).
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280 Aamir Aijaz Syed In reference to the above four steps, a thorough and comprehensive review of the previous empirical literature is conducted, detailed of which are summarized in Table 1. Article published in various reputed journals and indexes were explored, these include Elsevier, Emerald, Wiley, SSRN, JSTOR, Science direct, Repec Archive, Google Scholar, and Research gate profle. Apart from that, references cited in published articles were also explored along with working papers and government reports. In addition to the above, published studies which relate to NPLs and its determinants were also reviewed. Managerial Finance, Global Business Review, Journal of Risk Finance, Delhi Business Review, Asian Journal of Accounting Research and Qualitative Research in Financial Markets, and other journals were also explored to gather the information. These journals provide the admirable work of various scholars worldwide, which ultimately helps the researchers to conduct their work conveniently. Moreover, cross-country studies and reports of various government agencies were also incorporated which gives more insight on NPLs and country-specifc strategies to overcome NPLs issues. An exhaustive review is being done to come up with the main implications relating to NPAs around the world. Hence, by applying a critical and interpretive approach through content analysis of the literature, important measures like methods of research, time period, main fndings, objective, and conclusion were reported. This study brings a strong model for the researchers by compiling and analyzing the empirical literature from 1985 to 2019.
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3. Critical Analysis and Findings The banking sector has gone through a huge transformation both in terms of regulation and business competition, entry of foreign players into the domestic market and the urge of increasing market size has made banks more prone to different types of risks. NPLs are one of the major issues from which different banks are suffering. NPLs reduce the lending capacity of banks and it also hampers banks’ proftability by unnecessarily creating negative pressure on the bank balance sheet. The impact of NPLs on banking structure can also be seen from the different fnancial crisis which has taken place around the world, and these crises have either led to bank closure or liquidity crunch in the banks. NPLS of banks are also get affected by various macroeconomic and bank-specifc factors like growth rate, unemployment, infation, bank’s capital adequacy ratio, bank’s credit to deposit variation, etc. Various studies have been done which have tried to study the determinants of NPLS and their impact on banking structure which have been compiled in Table 1. The major issues and restraints have been identifed through a detailed review of previous literature.
3.1. Content Analysis and Appraisal The main factors which are considered during the content analysis of empirical literature are summarized below:
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Country and Period of Study
2,470 commercial bank of the United States during 1979–1985
Large commercial bank of the United States from 1984 to 1987
US banks from 1985 to1994.
Author
Keeton and Morris (1987)
Sinkey and Greenawalt (1991)
Berger and De Young (1997)
Loan quality, Cost effciency, Bank capital
Lending rates, volatile funds, high-interest rate
NPLs net of charge-offs, Economic growth, Sector wise growth
Variables
Findings showed that micro factors like lending rates, volatile funds, high-interest rate positively affect the commercial bank’s NPAs
The fndings revealed that local economic conditions and bad sector-wise performance are the reasons for mounting NPLs
Findings
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(Continued)
Granger causality Cost effciency may be an techniques: they important indicator of future formulate possible problem loans and problem banks mechanisms, namely “bad luck,” “bad management,” “skimping,” and “moral hazard,” relating effciency and capital adequacy
Linear regression tool
Linear regression tools
Methods
Country-Specifc Review
Table 1. Empirical Studies Related to NPLs and Their Determinants for Risk Management.
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Determinants of Nonperforming Loans 281
Brazilian banking sector Gross domestic product (1994–2000) (GDP), spread, interest rate, and unemployment
Nishimura et Japanese banking sector Long-term relationships al., (2001) from 1990 to 2000 between banks and entrepreneurs
Chu (2001)
Credit provision, credit losses, and bank credit
Saurina et al., Spain (Banco de (2000) Espana)
Variables Credit growth and default loans
Country and Period of Study
Government reports and surveys
VAR (Vector Autoregression) model
Government and Bank report
Survey and reports
Methods
Country-Specifc Review
Keeton (1999) Big commercial banks of the United States from 1982 to 1996
Author
Table 1. (Continued)
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The study suggested that a major portion of the loan which is given during the economic boom becomes bad loans as the economy shows a receding trend
The study concluded that from out of all the macroeconomic factors, GDP, spread, interest rate, and unemployment are the most infuential factor for the problem of the Brazilian loan
They analyzed that during the boom period credit disbursement is high; loans are provided without considering the quality of credit thus this results in high default during the downturn period
Findings from the study show that a high amount of credit with low credit standards helps in the accumulation of higher default loans
Findings
282 Aamir Aijaz Syed
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Spanish commercial and saving bank during 1985–1997
Loan loss provision of Austria banks during 1990–2001
Indian commercial banks in 2003
The Spanish banking sector from 1984 to 2003
Salas and Saurina (2002)
Kalirai and Scheicher (2002)
Ranjan and Chandra (2003)
Jimenez and Saurina (2003)
GDP growth, high real interest rates, and lenient credit terms
Credit, bank size induced risk preferences and macroeconomic shocks
Interest rate, market confdence, industrial production, stock market
GDP, capital ratio, bank size, and market power
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Dynamic model and a panel data set
Panel regression model
Value at risk methodology (VAR)
Panel data approach
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(Continued)
This study attributes the latter to disaster myopia, herd behavior, and agency problems that may entice bank managers to lend excessively during the boom period
The fndings from the analysis show that higher costs of credit give rise to NPAs, on the other hand, factors like the horizon of maturity of credit, better credit culture, favorable macroeconomic and business conditions lead to a lowering of NPAs
Results suggested that decline in the stock market, Market confdence, rise in short-term interest rates and a sluggish industrial production adversely affect the loan loss provision of Australian banks
The fndings revealed from the study that the above variables have a profound effect on the bad loans whereas differences in the bank size and institutional framework also affect the bad loan scenario of Spanish banks
Determinants of Nonperforming Loans 283
Variables
Findings
Empirical models based Analyzing both the household on panel regression and the enterprise sector author concluded that development in the interest rate and employment sector assist in the reduction of problem loans in the Nordic banking sector
Economic growth, employment, interest rate
Berge and Boye (2007)
Nordic banking sector covering the period from 1993 to 2005
Bank size, Macroeconomic Panel regression analysis The fndings showed that the size shocks, and conditions of of banks and the maturity period credit of loans have a longing effect on the NPL situation of private commercial banks in Bangladesh
The detailed analysis shows infation unemployment is the early sign which shows that the credit portfolio is going to worsen
Ahmed (2006) Bangladesh private banks during 2006–2011
Impulsive response and unrestricted VAR approach
Fixed and Random OLS They were on the opinion that government shareholding induces political lobbying whereas private ownership favors corrupt private owners
Methods
GDP, Unemployment, infation
40 Taiwanese commercial Government and private banks during 1996–1999 shareholding on the NPA
Country and Period of Study
Country-Specifc Review
Baboucek and Czech banking Jancar (2005) structure coverin g the period from 1993 to 2003
Hu et al. (2004)
Author
Table 1. (Continued)
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284 Aamir Aijaz Syed
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Greek banking sector over the period 2003– 2009
Malaysian banking structure from 2007 to 2009 – monthly basis
Louzis et al. (2011)
Sakiru et al. (2011)
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Industrial production, producer and lending rate
Macro, GDP growth, Unemployment rate, Lending rates, Sovereign debt Bank-specifc factors, Return on the equity Solvency ratio
The study utilized the ARDI approach for analysis
Dynamic panel data methods.
(Continued)
The conclusion draws from the study revealed that the lending rate has a positive infuence on NPA
Loan problems are explained mostly by macroeconomic variables (real GDP growth rate, unemployment rate, interest rates, and public debt). They are also explained by some bank-specifc factors such as performance and effciency indicators
The fndings suggested that macroeconomic variable like the GDP, infation have a signifcant impact on the NPAs
GDP, infation, market size, Autoregressive Integrated loan growth Moving Average (ARIMA) models and multivariate (ARDL)
Banking structure of Barbados from 1996 to 2008
The study confrms that cyclic fuctuations have a signifcant effect on loan loss provisions and new bad debts
Greenidge and Grosvenor (2009)
A static and dynamic panel approach
The author concluded that bad management is the reason for higher default loans and the regulatory body should focus on managerial effciency to enhance the fnancial stability and this measure will also help in the reduction of NPLs
Economic cycle
Podpiera and Czech banking covering Cost effciency, Granger causality, Weill the period from 1994 to management discipline, and Dynamic GMM (2008) 2005 productivity of banks
Quagliariello Italian banking sector (2007) period from 1985 to 2002
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Determinants of Nonperforming Loans 285
Country and Period of Study
Variables
GDP, unemployment, OLS regression analysis lending rate as macroeconomic variable and return on equity, solvency ratio, bank size as banking variable
Hyun Jung and Zhang (2012)
US banking sector focusing pre and postrecession period from 2002 to 2006 and from 2007 to 2010
GDP growth rate, infation, ARDL panel approach capital adequacy, bank lending rate, saving, bank size, ROA
Swamy (2012) Indian banking sector using panel data from 1997 to 2009
Univariate regressions
Methods
Country-Specifc Review
Vogiazas and Romanian banking Monetary aggregates, Nikolaidou sector during 2001–2010 interest rates, fnancial (2011) markets, infation, GDP, unemployment
Author
Table 1. (Continued)
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In the pre-fnancial crisis period, the study found as the solvency ratio, ROE, lending rate, GDP growth rate, and unemployment rate negatively affect NPAs
The study found that real GDP growth rate, infation, capital adequacy, bank lending rate, and saving growth rate had an insignifcant effect; whereas loan to deposit ratio and ROA has a strong positive effect but bank size has a strong negative effect on the level of NPLs
The fndings revealed that macroeconomic variables like unemployment, GDP, infation, and Greek crisis specifc variables have a signifcant contribution to the credit risk of the Romanian banking system
Findings
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Albanian banking system from 2002 to 2012
Regression Analysis
Default loan in the Interest rate, household sectors of 50 unemployment, growth, provinces of Spain from infation 1984 to 2009
Blanco and Gimeno (2012)
OLS technique
10 commercial banks of Economic growth, infation, Data collection from Nepal Questionnairepolitical condition 140 workers who are in based the loan portfolio
Bhattarai (2016)
Pearson ProductMoment Correlation Coeffcient
The interest rate in the OLS regression model total loan, credit growth, infation rate, real exchange rate, and GDP
The variables used were size, access to long-term funds, interest rates, GDP growth rate, and infation rate.
Inekwe (2013) Nigerian banking sector GDP growth during 1995–2009
Iva (2013)
Commercial banks in Turkey for a sample of 18 banks from 2003 to 2012
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(Continued)
The fndings revealed that the increase in unemployment is the main driver of default loan in Spain during the period from 2007 to 2009 and also the fall in the interest rate during 2008 contributed to moderating the upward path of default ratios in 2009
The result from the study shows that energy crisis, political disturbance, budgetary constraints are the main reasons for increasing NPLs in Nepal commercial banks
The study shows a positive correlation between GDP growth and NPLs which is quite contrary to previous literature
The fnding reveals a positive association of loan growth and real exchange rate, and a negative association of GDP growth rate with NPLs
The fnding reveals that bank size, access to the long-term loan and infation rate have a signifcant positive impact on the bank`s lending behavior but, interest rates and GDP are insignifcant
Determinants of Nonperforming Loans 287
Net interest margin, bank Generalized method of size, loan growth, GDP, moment technique infation, and exchange rate
Boakye-Adjei Ghana banking sector (2015) during 1998–2009
OLS regression technique
Economic growth, interest rate, infation, unemployment
Data collection from 152 respondents and the statistical method employed, crosssectional survey design
Methods
Ivana Tomas Croatia covering the Žiković (2015) period from 4Q2001– 1Q2014
Variables Interest rate, GDP, the concentration of lending activities, bank’s loan supervision capacity and economic condition
Country and Period of Study
Country-Specifc Review
Viswanadham National Bank of (2015) Commerce, Tanzania during 2008–2012
Author
Table 1. (Continued)
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Study shows that big banks are affected both by banking specifc and Macro specifc variables whereas for small banks banking variables are more important as compared to macro variables
The fndings show that the economic cycle is a prominent factor affecting both the sectors. Unemployment ratio is a signifcant reason for corporate default loans and interest rate plays a mixed response, in the long run, NPL
Findings revealed that interest rate, GDP, bank loan supervision capacity, and economic condition infuence the level of NPLs. However, the results did not suggest that concentration of lending activities increases the level of NPLs
Findings
288 Aamir Aijaz Syed
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Umar and Sun (2018)
Ordinary least square, Granger causality test
Chinese banks spanning GDP growth rate, effective Generalized method of from 2005 to 2014 interest rate, infation rate, moment technique foreign exchange rate, type of bank, bank risktaking behavior, ownership concentration, leverage, and credit quality
Marouf and Algerian banking sector GDP, money supply and Guellil (2017) from 1980 to 2014 political stability
Adjusted regression model
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(Continued)
Findings show that GDP growth rate, effective interest rate, infation rate, foreign exchange rate, type of bank, bank risk-taking behavior, ownership concentration, leverage, and credit quality are signifcant determinants of NPLs in Chinese banks
The results further show that credit risk had a positive relationship with money supply and political stability whereas a negative relationship with the growth rate
Findings show fnancial crisis are the reasons for overdue loans and apart from that quality of bank management also helps in lowering the overdue loans in the Russian fnancial sector
Overdue loans and corporate loan
Evgeniya Vasileva (2016)
Russian banking sector using bank-level data during 1990–2009
Findings revealed that bankspecifc factors and the ratio of loans to total assets were the most important factors that affect NPLs positively. Concerning the macroeconomic factors, they found that economic growth and infation rate have a negative and signifcant effect on NPLs
Khaled Subhi Jordanian banking GDP, Infation, Bank Panel data regression Rajha (2016) sectors during 2008–2012 effciency, Interest rate, approach Proftability, the total asset of banks
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Determinants of Nonperforming Loans 289
Country and Period of Study
The panel of developed countries from 1980 to 1994
Fofack (2005) Banking and the fnancial crisis among the Sub Sahara African nation during 1990
DemirgüçKunt and Detragiache (1999)
Cross-Country Review:
Author
Table 1. (Continued)
Economic growth, real Econometric and interest rate, exchange rate, causality analysis net interest margin, and interbank loans
Multivariate logit econometric model
Methods
Country-Specifc Review
GDP, infation, Interest rate, Balance of payments
Variables
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The variables like economic growth, real interest rate, exchange rate, net interest margin, and interbank loans show a signifcant relation with NPLs among the Sub African countries. The increase in problem loan is highly attributed to macroeconomic volatility and refects the vulnerability of undiversifed African economies, which remain heavily exposed to external shocks
The result suggests that the bank crisis is the result of the slowdown in the macroeconomic environment or other words when growth is slow whereas infation is high. The study also points that interest rate and adverse balance of payments also aggravate the problem of the banking crisis
Findings
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OECD and non-OECD (2001–2005)
Bohachova (2008)
Capital adequacy, infation Linear mixed model
65 countries and Banking sector BCP assessment results covering the period from performance and quality 1998–2002 of supervision and regulation as prescribed by Basel
Richard Podpiera (2006)
Vector autoregression (VAR) and Vector auto-correction model (VECM).
Credit and economic Loan standards, policy and conditions on the panel reforms data of US and Canada (1968–2000)
Lown and Morgan (2006)
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(Continued)
The author fnds out that the OECD country tends to hold a higher capital ratio during the boom period contrary to NonOECD countries. The fndings also suggest that during the expansion phase of the business cycle bank tend to generate more loss asset because of higher credits similarly higher infation generate higher capital ratios
The fndings suggested a positive and signifcant relationship between banking supervision and NPLs and interest margin after giving due consideration to economic factors and fnancial control variables
The authors also tried to fnd the relationship between loan standards, policy, and its infuence on the output. The study points out that credit shocks can be a driver of economic instability and stability and it has procyclic effects
Determinants of Nonperforming Loans 291
Espinoza and GCC banking system Prasad (2010) during 1995–2008
Interest rate and growth rate
Credit growth rate, CAR, real GDP growth rate, ROA, the loan loss reserve to total loan ratio, diversifcation, private monitoring
MENA countries during 2002–2006
Boudriga et al. (2009)
Variables Household debt and their linkages with fnancial instability
Country and Period of Study
Victor autoregression model
Pooled regression approach
Panel regression
Methods
Country-Specifc Review
Jappelli & US, UK, European Marco (2008) countries, 2008 onwards
Author
Table 1. (Continued)
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After a comprehensive analysis, they found that the high-interest rate increases NPLs but not signifcantly
The result shows that the credit growth rate is negatively related to problem loans and Capital adequacy ratio is positively signifcant
On the whole, the evidence suggests that insolvencies tend to be associated with greater households’ indebtedness, supporting the fnancial fragility hypothesis. The panel data on insolvencies show that European countries that experienced relatively fast debt growth also featured larger increases in insolvency rates
Findings
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Macroeconomic variables and credit
De Bock and 25 Emerging countries Demyanets during 1996–2010 (2012)
Vector autoregression panel
GDP, Infation, VAR unemployment, interest rate
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(Continued)
The study highlights that economic growth, exchange rate, and loan growth are the major signifcant variables of the problem loans.
The fndings point out that NPL plays a signifcant link between credit risk disturbance and macro-fnancial vulnerabilities. The results confrm that slower growth, higher unemployment or falling asset prices is linked with debt service problem and result in rising NPLs
The structural and The same set of macroeconomic approach reduced-form variables display different default approach. rates for both countries. GDP, short-term interest rates, and total debt explain default risk for two economies Compared to Australia, the US economy is much more susceptible to adverse macroeconomic shocks
Nkusu (2011) 26 advanced countries and covering the period from 1998 to 2009
Ali and Daly Australia and the United GDP, Interest rates, (2010) States for 14 years (the Industrial production, frst quarter of 1995 to Debt-to-GDP ratio the second quarter of 2009)
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Determinants of Nonperforming Loans 293
Greece, Ireland, Portugal, Spain, and Italy (GIPSI), spanning the period from the frst quarter of 1997 to the third quarter of 2011
Castro (2013)
Unemployment, Growth rate of GDP, Interest rate (the long-term interest rate, the real interest rate, and the spread between the long and short-term interest rates), Overall credit growth, Growth rate of the share price indices, Quarterly housing price index
Greece, Italy, and Spain GDP, unemployment, and from 2004 to 2008 interest rate in the macro segment and return on assets, loan loss reserve as banking variables
Messai and Jouini (2013)
A dynamic approach to account for the time persistence in the credit risk structure
Pooled regression method
7 Central and Eastern Loan growth, real GDP Fixed Effect Model European countries from growth rate, market interest 2007 to 2012 rate, Unemployment, and infation rate
Methods
Skarica (2013)
Variables
Country and Period of Study
Country-Specifc Review
Author
Table 1. (Continued)
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Banking credit risk is signifcantly affected by GDP growth, housing price indices, unemployment rate, interest rate, credit growth, real exchange rate, and the recent fnancial crisis
Findings revealed that loans vary negatively with the growth rate of GDP, the proftability of banks’ assets, and positively with the unemployment rate, the loan loss reserves to total loans, and the real interest rate
The fnding reveals as GDP growth rate and the unemployment rate has a statistically signifcant negative association with NPLs with the justifcation of rising recession and falling during expansions and growth has an impact on the levels of NPLs
Findings
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France and Germany during 2005–2011
Chaibi and Ftiti (2015)
Dynamic panel model
GDP, the budget defcit Generalized Method of (FISCAL), public debt, the Moments (GMM) unemployment, loans to deposits ratio, return on assets and return on equity and capital adequacy ratio
NPLs of Euro zone’s banking systems for 2000–2008, 14 countries panel
Makri et al. (2014)
GDP, interest rate, unemployment, exchange rate, loss provision, and ineffciency
GDP, unemployment, Dynamic Pooled interest rate, return on regression assets, loan loss provisions, and loan loss reserves to total loan.
Messai and 85 banks of three Jouini (2013) countries (Greece, Italy, and Spain) pre-subprime crisis period, i.e., 2004–2008
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(Continued)
The fndings show that all the macroeconomic variables like GDP, interest rate, unemployment, and exchange rate affects NPLs except infation among both the countries. Bank specifc determinants reveal that for French banking system loan loss provision and ineffciency are more accountable and for German banks bank leverage is accountable
The study utilized the difference GMM estimation and found as real GDP growth rate, return on assets and Return on Equity (ROE) ROE had negative whereas lending, unemployment, and infation rate had a positive signifcant effect on NPLs. However, ROA & loan to deposit ratio, infation, and budget defcit did not show any signifcant impact on NPL ratio
The result from the study shows that problem loans varies negatively with the growth rate of country, proftability, and positively with unemployment, loan loss reserve to total loan, and interest rate
Determinants of Nonperforming Loans 295
Country and Period of Study
28 European Union countries for the period 2001–2013
75 countries covering the period from 2000 to 2010
South Asian countries covering the period from 1997 to 2012
31 countries on panel data for 15 years
Author
Angela and Irina (2015)
Beck (2015)
Shahidul Islam and Nishiyama (2016)
Vasilis Siakoulis (2017)
Table 1. (Continued)
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Fiscal measures, Unemployment, GDP, infation, interest rate
Bad management, cost ineffciency, income diversifcation, bank size; industry concentration ratio, infation, and GDP
Gross Domestic Growth, share price, exchange rate, and lending rates.
The empirical fndings suggest that growth, unemployment, and domestic bank credit are the major determinants of NPLs. The study also confrms that public fnances are important constituent for mitigating NPLs menace
Findings
The fndings suggested that the bad selection of borrowers and bad moral hazard between bank management and depositors are the main reasons for higher NPAs among the south Asian countries Linear panel model and Fiscal measures which assist in the GMM reduction of Unemployment and upliftment of economic growth also assist in the reduction of NPLs
Generalized method of moment technique
Lagged effect regression Using a year lagged affect, the model fndings show explanatory power for variables like Gross Domestic Growth, share price, exchange rate, and lending rates
Generalized method of moment technique
Methods
Country-Specifc Review
Growth, unemployment, domestic bank credit
Variables
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296 Aamir Aijaz Syed
Staehr and Uusküla (2017)
Panel Quarterly data GDP, infation debt, current Dynamic panel of European Union account balance, and real regression countries covering the house prices period from 1997 to 2017
Return on assets, return on ARDL and coequity, real exchange rate, integration modeling money supply, growth of external debt, loan to asset ratio, loan to deposit ratio, and commodity prices
Nikolaidou Credit risk of 5 Sub and Vogiazas Saharan African (2017) countries (Kenya, Namibia, South Africa, Zambia, and Uganda)
(Continued)
The fndings suggest that macrofnancial and macroeconomic factors are very signifcant in ascertaining NPAs. GDP, lower infation, and lower debt are signifcantly substantial for NPLs and show a negative relationship with problem loans.
The fndings suggested that an increase in money supply help in reducing NPAs, and for South Africa and Uganda, bank-specifc variables are more signifcant as compared to Kenya and Zambia where country-specifc variables are more profound
Impulsive response and The fndings suggested that higher VECM credit growth and economic growth may facilitate lower NPLs in the short run whereas, in the long run, the effect of these variables dies off
Credit growth, Economic growth, unemployment, infation
Anastasiou et Panel data of EU al. (2016) countries
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Determinants of Nonperforming Loans 297
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Sensitivity analysis along with the regression model
The fndings reveal that NPLs are positively associated with fnancial development measured as (private credit by banks to GDP ratio, implying that banking sectors with greater fnancial development (via greater fnancial intermediation and foreign bank presence) experience higher NPLs
Pakistan covering the Proftability, operating Random and fxed effects Results show that the operating period from 2005 to 2017 effciency, capital adequacy through STATA software effciency and proftability and income diversifcation indicators have a negative association with NPLs but were statistically signifcant, while capital adequacy and income diversifcation have a negative association with NPLs but were statistically insignifcant
Foreign bank presence (fnancial liberalization), private credit by banks to GDP ratio (fnancial intermediation), and bank deposit to GDP ratio (size of the banking sector)
Khan et al(2020)
Findings
6 regions world
Methods
Ozili (2019)
Variables
Country and Period of Study
Country-Specifc Review
Author
Table 1. (Continued)
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298 Aamir Aijaz Syed
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Determinants of Nonperforming Loans 299 3.1.1. Sample/Respondent Criteria. Review of different previous studies show that majorly the studies are based on secondary data source collected generally from central banks of different countries, World Bank database, Bank scope, while some of the studies are also based on primary data collected generally from questionnaire and personal interviews. The main element of respondents are generally bankers and people who are working at senior positions in various international organizations like World Bank, International Monetary Fund, etc. Bankers who are working on the credit division of banks have also collaborated in some of the previous research. 3.1.2. Variable Discussed in Previous Studies. Researchers have generally explored those determinants which generally affect NPLs, some of the studies have incorporated just bank-specifc variables like credit policy, capital adequacy ratio, credit to deposit ratios, lending rates, the relationship between banks and entrepreneurs, proftability ratios, etc., while some have incorporated macroeconomic factors like the growth rate of the country, unemployment rate, infation, interest rates, ownership in banks, political conditions, household consumption, etc. whereas some of the studies have incorporated both the determinants, that is, bank-specifc and macroeconomic variables. Most of the studies have also highlighted the major challenges banks are facing and the strategies they are employing to overcome these hurdles. 3.1.3 Research Methods Employed. The analysis of NPLs and its determinants is done using a dynamic panel approach in nearly most of the papers. The analysis is done using time series data of different variables and countries covering different time periods. Descriptive analysis is done to show the variations among the data and values over the period of time. Major of the studies have incorporated structural equation modeling taking NPLs as dependent variables and host of other factors as independent variables. The methodology studies used are regression modeling, Vector Error Correction Model (VECM), Autoregressive Distribution Lag (ARDL), Impulsive Response System, Generalized Method of Moments (GMM), Value at Risk Methodology (VAR), Autoregressive Integrated Moving Average (ARIMA), Fixed and Random OLS, and Sensitivity analysis. Some other techniques which are used by researchers are survey analysis, structural interview, impulsive response, and Granger Causality. 3.1.4. Signifcant Contribution in Previous Research. Banks all over the world are suffering from the problem of NPLs. These NPLs hamper the productivity of banks and also create a negative pressure on the economic structure of the country, as we can see from the example of Greece, Russia, and even India struggling with NPAs of more than 9% of their total loans. Moreover, different countries are spending considerable time and resources in overcoming this issue either by capital infusion in banks, writing off NPLs, developing strategies for overcoming NPLs, and by establishing various agencies and law tribunal to speed by the recovery process. The analysis of the review literature covers studies from almost all parts of the world. Researchers have vivaciously tried to fnd out the reason for NPL menace. Various studies have pointed out that bank failures are the reason for the fnancial crisis, and after every fnancial crisis, researchers have tried to fnd out
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300 Aamir Aijaz Syed the main reason for bank failures. Majority of the studies like Keeton and Morris (1987), Chu (2001), Salas and Saurina (2002), Jimenez and Saurina (2003), Louzis et al. (2011), Swamy (2012), Žiković (2015), Skarica (2013), Ozili (2019), and Hashem.(2018) shows that the main reason for increasing NPLs is macroeconomic factors like the growth rate of the country, infation growth, unemployment, unhealthy competition, market confdence, industrial production, political disturbance, wars, recession, and exchange rate volatility. Studies have also explored the bank-related variables which led to an increasing credit default. The main bank-specifc factors which are explored in previous literature are increase competition among banks, bad bank management, high-interest rates, bank proftability ratios, cost effciency, the relationship between banks and entrepreneurs, bank size, credit growth, interbank loan, quality of supervision and regulation by the bank as quoted by Berger and De Young (1997), Sinkey and Greenawalt (1991), Nishimura et al., (2001), Podpiera and Weill (2008), Hyun Jung and Lei (2012), and Umar and Sun (2018). Moreover, studies have also highlighted that economic boom promotes higher credit growth which turns into default during recessionary phases apart from that government holding promotes political lobbying and which ultimately leads to higher long disbursement due to undue pressure from political parties (Hu, Li, & Chiu, 2004). Studies have also addressed that market-based economies like France and others are more prone to credit risk as compared to the bank-based economy like Germany (Chaibi & Ftiti, 2015). Many studies like Nkusu (2011), Berger and De Young (1997), Baboucek and Jancar (2005), Fofack (2005), Syed and Aidyngul (2020), Syed (2020), and Ozili (2019) have also highlighted various measures which can be used for overcoming NPLs. The main measures which are suggested in various previous literature are the creation of better Asset Management Company (AMC) like that are in China which assisted in reducing NPL from 20% in 1995 to less than 1% in 2017, Speedy tribunal and courts for default loans, stringent measures for loan defaulters like barring them from fying outside the country which is present in some European countries, political holds on banks to be reduced, market-based competition among bankers for meeting targets need to be minimum, implementation of strict Basel norms for capital adequacy, Stress testing and forecasting by the supervisory authority, banking management needs to be monitored, more powers to central banks, securitization, loans to be deal with situation-specifc models, loan approval position need to be on a rotational basis, less investment in risky securities and realtime monitoring on loans need to be done. Studies have provided various measures based on their country-specifc conditions, along with that certain cross-countries’ studies have been also explored where researchers apart from competitive analysis also presented the risk classifcation of NPLs and their risk management strategies.
4. Recommendation of the Study Based on the above review and discussion, the following recommendation is provided to bankers and researchers.
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Determinants of Nonperforming Loans 301 4.1. Recommendation to Researchers Almost all the studies have covered macro and bank-specifc determinants of NPLs, but in major of the studies, the variables are mostly repetitive so researchers can opt for new variables that are mostly ignored in previous studies. ⦁⦁ Basel Implementation across the world is going in progress so what impact Basel 1, II, and III have on NPLs can also be explored and compared over the years. ⦁⦁ Even after so many studies and report NPLs are still rising, so remedial measures and their success level toward reducing NPLs can be a new area which new researchers can cover. ⦁⦁ Researchers have studies NPLs at an aggregate level but NPLs classifcation into category wise like education loan, home loan, an auto loan can also be done and comparative analysis can be done. ⦁⦁ Securities that are more prone to risk can also be explored along with their quantum of risk, which will provide a safe platform for bankers at the time of loan disbursement. ⦁⦁ Countries which have reduced their NPL considerable can also be analyzed and their strategies can be implemented or suggested to countries facing huge default loan issues.
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4.2. Recommendation to Bankers/Policymakers Macroeconomic conditions of a country should be properly scrutinized before large or long-term loan disbursement as chances of default will be higher when economic conditions are not favorable. ⦁⦁ During the time of boom in the economy, extra caution has to be taken and only after proper scrutiny investment has to be done in different securities to reduce the chances of repeating sub-prime crisis like situation. ⦁⦁ Banks need to maintain and keep adequate capital to overcome any unforeseen situation like Canada and Australian bank practices. ⦁⦁ The bank needs to be given more power, and political infuence need to be reduced. ⦁⦁ Unnecessary target-based banking needs to be scrutinized. ⦁⦁ In place of a large number of banks, few banks to be maintained which are highly competent and capitalized. ⦁⦁ Basel implementation need to be quick and comprehensive (Kaur & Kapoor, 2015). ⦁⦁ The line of authority for loan disbursement needs to be clear so that the person directly involved in loan clearance can be tracked. ⦁⦁ Better Asset Management Companies need to be formed which are professionally managed. ⦁⦁ Tracking of loan has to be continuous. ⦁⦁ Strict norms to be formed for repetitive offenders. ⦁⦁ Insolvency proceeding need to be quick.
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Fig. 1. Comprehensive Model Based on Literature Review. A Comprehensive Framework of Determinants and Suggestive Remedial Measures are shown in Fig. 1.
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5. Conclusion This chapter has examined vast literature focusing on the issue of the NPL, by incorporating both macroeconomic and bank-specifc factors. Study shows that economic and bank-specifc situation always hinders the repayment capacity of borrowers and thus increasing the chances of default. As bad loans are the major cause of fnancial distress and fnancial crisis, thus a proper analysis of factors is a must and along with this, the review also incorporates the fnding and strategies in the form of recommendation to the banks and policy reformers. This chapter also provides future scope for further research on the above topic which will beneft the future researcher.
6. Practical Implication for Asian Countries Asian countries are facing the threat of banking downfall and falling growth rates due to various reasons like Banking low proftability due to NPLs, trade wars, geopolitical challenges, and political concerns (Jacob Dahl). Many researchers, academicians, and policymakers are researching NPL issues and their management strategies in different countries and Asia as well. Thus, this chapter will be very helpful for the researchers, policymakers, and academicians who are working in this area. First, this chapter provides a complete and comprehensive review of
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Determinants of Nonperforming Loans 303 all the previous papers relating to NPLs, aiding researchers in not only fndings the variables but also helping them in choosing the right methodology for conducting their research in this feld. Secondly, this chapter helps policymakers in fndings the main determinants which are affecting NPLs including both macroeconomic and bank-specifc, along with that this chapter also helps them in fnding suitable strategies that are used by different countries in controlling their NPLs through the fndings of different papers. Thirdly, this chapter help academician in fndings the research gap so that they can further explore the unexplored domain of this topic, and lastly, this chapter also provides a comprehensive model continent wise showing major determinants which are affecting NPLs along with suitable remedies based on previous literature and author contribution, thus further enriching the above topic and providing a signifcant contribution in the feld of banking and risk management will be useful for Asian business apart from other countries.
Acknowledgment This research received no specifc grant from any funding agency in the public, commercial, or not-for-proft sectors.
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306 Aamir Aijaz Syed Quagliariello, M. (2007). Banks’ riskiness over the business cycle: A panel analysis on Italian intermediaries. Applied Financial Economics, 17(2), 119–138. Rajha, K. S. (2016). Determinants of non-performing loans: Evidence from the Jordanian banking sector. Journal of Finance and Bank Management, 4(1), 125–136. Ranjan, & Chandra. (2003). “Non-Performing Loans and Terms of Credit of Public Sector Banks in India”: An Empirical Assessment, Reserve Bank of India Occasional Papers Vol. 24, No. 3, Winter 2003 Report: Annual Report 2013, the World Banks. Sakiru et al. (2011). The impact of macroeconomic variables on Islamic banks fnancing in Malaysia. Research Journal of Finance and Accounting, 2(4), 22–32. Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203–224. Siakoulis, V. (2017). Fiscal policy effects on non-performing loan formation. Working Papers 224. Bank of Greece. Sinkey, J. F., & Greenawalt, M. B. (1991). Journal of Financial Services Research, 5, 43. https://doi.org/10.1007/BF00127083 Skarica, B. (2013). Determinants of non-performing loans in Central and Eastern European Countries. Working Paper 18. Banco de Espana, Spain. Staehr, K., & Uusküla, L. (2017). Forecasting models for non-performing loans in the EU countries, No wp2017-10, Bank of Estonia Working Papers. Bank of Estonia. Swamy, V. (2012). Impact of macroeconomic and endogenous factors on non-performing bank assets. The International Journal of Banking and Finance, 9(1), 27–47. Syed, A. A. (2020). Does banking effciency, regulation, and operations affect banking performance in South Asia: dynamic correlated model approach. Front. Appl. Math. Stat. 6, 38. doi: 10.3389/fams. Syed, A. A., & Aidyngul, Y. Macro economical and bank-specifc vulnerabilities of nonperforming loans: A comparative analysis of developed and developing countries. Journal of Public Affairs, e2414. Umar, M., & Sun, G. (2018). Determinants of non-performing loans in Chinese banks. Journal of Asia Business Studies, 12(3), 273–289. Vasileva, E. (2016). The determinants of non-performing loans in Russia: An adjusted model. Thesis, National Research University Higher School of Economics. Viswanadham, N. B. (2015). Determinants of NPLs in commercial banks: a study of NBC bank Dodoma Tanzania. International Journal of Finance & Banking Studies, 4(1), 70–94. Žiković, T., Žiković, S., Arbula Blecich, A. (2015). The drivers behind household and corporate non-performing loans ratio: The Case of Croatia. Privredna kretanja i ekonomska politika, 24(2 (137)), 7–35.
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Chapter 15
Managing Climate Change Risk: The Policy Options for Central Banks Peterson K. Ozili Abstract Purpose: This chapter discusses some policy options that central banks may fnd useful in dealing with climate change risk in the fnancial sector. Methodology: This chapter uses discursive analysis to suggest policy options which central banks can use to deal with the risk of climate change in the fnancial sector. Findings: Five policy options are proposed in the chapter, which includes: imposing a climate change capital surcharge; impose a fxed-rate risk capital – based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and requiring fnancial institutions to relocate their important assets to areas less prone to climate change events.
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Implication: Several policy experiments are needed to identify the best policy option that works best for each country while taking into account the unique fnancial sector, fnancial system, and climate change history of each country. Originality: Central banks play an important role in regulating the fnancial sector and in managing its inherent risks, yet there are no studies that suggest policy solutions to help central banks and other fnancial sector regulators deal with the risk that climate change poses to the fnancial sector. This chapter suggests policy options that central banks can use to deal with the risk that climate change poses to the fnancial sector. Keywords: Climate change; fnancial risk; fnancial institutions; fnancial system; fnancial sector; banks; capital surcharge; climate change risk; climate bank; bank regulation JEL Codes: G21; G28 New Challenges for Future Sustainability and Wellbeing, 307–318 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211016
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308 Peterson K. Ozili
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1. Introduction The chapter discusses the policy options that central banks may fnd useful in dealing with the risk of climate change. There is a general consensus that climate change events have a disastrous effect on human life and on businesses (Kellogg, 2019; Ramanathan et al., 2019). This has led many individuals, organizations, and governments to seek ways to deal with the increasing climate change risk in the World.1 Before now, the fnancial sector was considered to be immune from climate change events. But given the possible reduction in banks’ proft and the potential loss suffered by banks following the destruction of the assets of banks’ clients and customers during hurricanes, thunderstorms and typhoons, central banks are now being pressured to assess and evaluate the impact of climate change events on the fnancial sector as a whole. In the fnancial sector, climate change events have an indirect effect on fnancial institutions, at least in theory, for instance, climate change events can lead to: loss or damage of physical collateral, disruption to the operations of fnancial institutions, disruption to the business of banks’ customers, increase in insurance claims and liabilities due to climate-related damages, increase in insurance premiums, harsh working conditions for employees in the fnancial sector, and the potential loss of offce branch networks (Ozili, 2020a). Businesses affected by climate change events may not be able to meet their loan obligations to fnancial institutions which may affect the proftability and stability of the fnancial institutions that lend money to the affected businesses. For this reason, central banks and bank supervisors have been under pressure to formulate policies to reduce the effect of climate change on fnancial institution in the fnancial sector. So far, only few Central banks have issued policy statements on climate change such as the Bank of England2 and the Bank of Canada,3 and most of the policy statements issued by these two central banks are narratives or descriptive caution to fnancial institutions under their supervision. Other central banks have been reluctant or slow in fghting the risk that climate change pose to the fnancial sector (Brunnermeier & Landau, 2020; Ozili, 2020b), for two reasons: (1) most Central banks think that the risk that climate change pose to the fnancial sector are non-systemic in nature, and therefore, do not require signifcant supervisory response and action and (2) some Central bankers believe that climate change risk cannot be accurately measured or quantifed, and risk that cannot be measured or quantifed cannot be managed. This study is important because climate change risk has the potential to become systemic, and managing systemic risk in the fnancial sector is important to central banks. Central banks are the only institution with the authority 1
A consensus was reached in the 2016 Paris Agreement. The 2016 Paris Agreement within the United Nations Framework Convention on Climate Change deals with greenhouse-gas-emissions mitigation, adaptation, and fnance. 2 https://www.bankofengland.co.uk/knowledgebank/climate-change-why-it-mattersto-the-bank-of-england 3 https://www.bankofcanada.ca/2019/05/opening-statement-160519/
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Managing Climate Change Risk 309 to require fnancial institutions to proactively conduct risk assessment on the impact of climate change risk on fnancial institutions’ activities and operations. The authority (and discretion) that Central banks have in regulating fnancial institutions puts them in the best position to set up policies aimed at mitigating climate change risk. In this chapter, some policy solutions are presented on how Central banks can mitigate climate change risk. The policy solutions expressed in this chapter makes two contributions to the literature. First, the discussion in this chapter contributes to ongoing policy debates on how to reduce the risk that climate change pose to corporations including fnancial institutions (see Battiston, Mandel, Monasterolo, Schütze, & Visentin, 2017; Campiglio et al., 2018; Furrer, Hamprecht, & Hoffmann, 2012, etc.). Secondly, the viewpoints expressed in the chapter contribute to the literature that examine the effect of fnancial regulation and supervision on regulated fnancial institutions (see Demirguc-Kunt, Laeven, & Levine, 2003; Goodhart, Hartmann, Llewellyn, Rojas-Suarez, & Weisbrod, 2013). Extending the debate to climate change, this chapter explores the kind of policies that will help fnancial institutions remain safe during climate change events. Finally, the policy ideas expressed in this chapter are important and relevant to fnancial sector regulators, bank supervisors, banking academics, climate change academics, and climate change scientists. The rest of the chapter is organized as follows. Section 2 presents the literature review. Section 3 discusses the policy options and Section 4 concludes.
2. Literature Review
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2.1. Climate Change: Origins On the origin of climate change, Ramanathan et al. (2019) argue that human activity has made modifcations to the land, the oceans, and the atmosphere, and those changes have damaged the environment and disrupted the planet’s climate. Kellogg (2019) argue that human activity, particularly the use of fossil fuel, has induced a signifcant change in the climate, leading to a signifcant warming of the Earth’s surface for the next 50 years. Korell, Auge, Chase, Harpole, and Knight (2020) show that there is need to conduct experiments that alter the local climate, and measure community-level response and ecosystem-level response to climate change, to help us understand how future ecosystems will respond to climate change. In their study, they synthesized data from 76 studies that manipulated the climate and measured plant community responses. They fnd that most climate change experiments do not correspond to model-projected climate scenarios for their respective regions, which implies that it may be diffcult to predict the response of plant biodiversity and ecosystem functions to climate change. Altieri and Gedan (2015) analyzed the severity of climate change, and found that 94% of dead zones are in regions that will experience at least a 2 °C temperature increase by the end of the century. Poole et al. (2019) examine how air pollution affects the weather and climate change. They show that air pollution from fossil fuel burning and traffc-related emissions can alter respiratory defense mechanisms
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310 Peterson K. Ozili and work synergistically with specifc allergens to worsen asthma in susceptible people. They suggest that community efforts can help to reduce air pollution, thereby reducing greenhouse gas emission and improving air quality.
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2.2. Climate Change in the Financial Sector Carney (2015) analyzes the effect of climate change on the fnancial sector, and shows that climate change will expose the fnancial sector to three main risks. (1) Physical risks – the impact today on insurance liabilities and the value of fnancial assets that arise from climate- and weather-related events, such as foods and storms that damage property or disrupt trade. (2) Liability risks – the impact that could arise tomorrow if parties who have suffered loss or damage from climate change events seek compensation from those they hold responsible. (3) Transition risks – the fnancial risks which could result from the process of adjustment toward a lower-carbon economy (Carney, 2015). Doran and Quinn (2008) analyze nearly 6400 10-K flings by S&P 500 companies, to determine whether there are climate change-related disclosures by corporations in the stock market. They fnd that there was high level of non-disclosure of climate change risks by corporations. Only about half of the executives believe climate change is a social issue that affects shareholder value in the next fve years. 76.3% of surveyed corporations failed to even mention climate change in the required securities and exchange commission (SEC) flings which investors relied on. Doran and Quinn (2008) further argue that the fact that the large majority of S&P 500 companies neglect to even mention climate risk demonstrates the fundamental failure to implement securities law and protect investors in capital markets. They suggest that the SEC should provide standardized guidance to corporations on reporting requirements for climate risk disclosure. Dafermos, Nikolaidi, and Galanis (2018) use a stock-fow-fund ecological macroeconomic model to analyze the effects of climate change on fnancial stability. They place emphasis on the impact of climate change damages on the price of fnancial assets and the fnancial position of frms and banks. They fnd that climate-induced fnancial instability can adversely affect credit expansion and reduce the level of economic activity. They also fnd that climate change damages can lead to portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Finally, they observe that, by destroying the capital of frms and reducing their proftability, climate change is likely to gradually deteriorate the liquidity of frms, leading to a high default rates that could negatively affect the fnancial and non-fnancial sector. Battiston et al. (2017) fnd that the direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. They suggest that an early and stable climate-policy framework would allow for smooth asset value adjustments. Campiglio et al. (2018) argue that the primary responsibility for managing the transition to a low-carbon economy rests with governments, and that even though the government may seek collaboration with Central banks, such cooperation will not require a modifcation of Central banks’ mandate. On the other hand,
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Managing Climate Change Risk 311 Monti (2009) argue that the impact of extreme weather events, including climate change and global warming, can be reduced through a proactive role of governments in direct and continuous collaboration with the private sector especially insurance companies, reinsurance companies and other fnancial sector participants. Zobaa (2005) argue that climate change does not only affect communities and societies but also companies in the fnancial sector, and that the insurance industry and other institutional investors have begun to take climate and CO2 emission risks into consideration in their insurance premium and investment decisions.
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2.3. The Central Bank and Risk in the Financial Sector There are many risks in the fnancial sector. Most risks are correlated with each other, and the correlation among risks requires an integrated approach in managing risk rather than managing risk in silos or separately (Cornett & Saunders, 2003). Depending on the type of fnancial institution, some risk will be more important than others (Hull, 2012). For banks, the important risks are credit risk, operational risk, liquidity risk and market risk, while Fintech businesses tend to worry more about operational risk and liquidity risk. Regulators require banks to identify and manage their risk effectively because poor risk management may lead to poor performance (Brunnermeier, Crockett, Goodhart, Persaud, & Shin, 2009). Central banks are most often the regulator of all fnancial institutions in the fnancial sector in most countries (Goodhart, 2011), and as a result, achieving fnancial system stability is one of its main mandates as well as maintaining price stability (Ferguson, 2003). Central banks manage risks in the fnancial sector by issuing out regulations that sets the licensing requirements for a company to engage in fnancial services business, set the minimum regulatory capital requirements, imposing activity restriction on fnancial institutions when necessary, demand higher levels of regulatory capital when necessary, imposing severe penalties to discourage fnancial institutions from breaking the rules, and conducting risk-based supervision of the activities of fnancial institutions. In addition to these, the role of central banks is expected to change as new risks emerge in the fnancial sector (Goodhart, 2011). One of such risk is climate change risk.
3. The Policy Options 3.1. Impose a Climate Change Capital (CCC) Surcharge Central banks should impose a climate change capital (CCC) surcharge on all fnancial institutions under its supervision. The CCC surcharge is the amount of risk capital that fnancial institutions should set aside for their exposure to businesses whose activities pollute the environment and the atmosphere or climate. The CCC surcharge should be kept with the central bank or the fnancial regulator in a country, and the expectation is that the CCC surcharge will be used to minimize the damage to fnancial institutions caused by unfavorable climate change events when they occur, and to help the affected fnancial institutions recover from unexpected and unfavorable climate change event.
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312 Peterson K. Ozili To adopt this policy approach, supervisors will need to measure the climate change risk assets (CCRAs), the climate change impact (CCI) ratio, and the CCC surcharge of a fnancial institution. The CCRA is the weighted average of the sum of the CCRAs under at least four (4) scenarios or determinants. The CCC surcharge of a fnancial institution, which is a percentage of the CCRA, is the amount of capital a fnancial institution should set aside to mitigate climate change risk. The CCI ratio is simply the ratio of the asset-at-risk if a climate change event occurs as a proportion of the fnancial institution’s total risk assets in the geographical area. The CCI ratio is expressed as:
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CCI ratio = CCRAs / total risk assets Under this policy approach, a fnancial institution will be required to assign a climate change risk weight to all its physical and tangible assets using a specifed methodology. To determine the risk weight, four major factors should be taken into consideration alongside other national considerations: (i) the history of climate change events that have occurred in the geographical area where the fnancial institution’s assets are located, (ii) the current number of industrial activities in the geographical area that are environmentally destructive, (iii) the availability of, and number of, emergency response agencies in the geographical area, and (iv) the amount of free funds (excluding cash reserve ratio) owned by the fnancial institution. Consider a hypothetical example. Consider a small bank, Rohm Bank, located in California in the United States. Rohm Bank operates under a regional banking license which means that all the assets of Rohm Bank are located in a specifc region – California. Assume that the collateral owned or kept by Rohm Bank are also located in the same geographical area where the bank’s assets are located, therefore, the valuation of Rohm Bank’s assets will also include the value of all collateral assets in Rohm Bank’s possession in the geographical location. Also, assume that the total value of the Rohm Bank’s assets is $14 million. The climate change risk weights are derived from assessing the bank’s exposure to climate change events using four scenarios or determinants using the methodology shown in Table 1.
3.2. Impose a Fixed-rate Risk Capital Secondly, Central banks can use a fxed-rate risk-capital policy. Central banks may impose a fxed-rate risk capital (e.g., as a percentage of Tier 2 capital) on all fnancial institutions under its supervision. The risk capital will act as capital to mitigate climate change risk when it materializes. The fxed rate may be 2.5% of Tier 2 capital or 1% of Tier 2 capital depending on a rate determined by the bank supervisor or Central bank. Taking into account a practical example. Consider a bank that has a Tier 1 capital of $50,000,000. Assume that Tier 2 capital is 33.3% of Tier 1 capital and a climate change fxed-rate charge of 12.5 is
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(i) Low risk (0–5) (ii) Moderate risk (6–20) (iii) High risk (above 20) (i) Low risk (0–5) (ii) Moderate risk (6–10) (iii) High risk (above 10) (i) Low risk (rated “0.5” if current free fund is signifcantly greater than that of previous year) (ii) Moderate risk (rated “4.5” if current free funds are materially the same as that of previous year) (iii) High risk (rated “8.5” if current free funds is materially lower than that of previous year) (i) Low risk (above 5) (ii) Moderate risk (3 to 4) (iii) High risk (0–2)
10-year history of climate event (i.e. number of recorded climate change events) in the area.
Free funds owned by the Rohm Bank
Number of emergency response team in the area
Methodology
Extent of, or number of, environmentally destructive activities by businesses in the geographical area
Scenario (or Determinant)
Table 1. Measuring Climate Change Capital (CCC) Surcharge for Rohm Bank.
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1
8.5
2
7
Number (Rating)
0.9
0.8
0.2
0.5
Risk Weight (0.1 to 0.9, i.e., low to high)
$12,600,000
$11,200,000
$2,800,000
$7,000,000
CCRAs
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– – – –
Average CCRA
Total risk asset
CCI ratio
Climate change capital surcharge (CCC) = 10% of CCRA
–
–
–
–
–
Number (Rating)
–
–
–
–
–
Risk Weight (0.1 to 0.9, i.e., low to high)
$840,000
0.6 or 60%
$14,000,000
$8,400,000
$33,600,000/4
CCRAs
Notes: CCRA = risk weight multiplied by total risk asset value. Climate change risk weight is derived using a set of quantitative and subjective criteria based on knowledge of the geographical area and knowledge of Rohm bank’s balance sheet.
–
Methodology
Total CCRAs divided by number of scenarios
Scenario (or Determinant)
Table 1. (Continued)
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314 Peterson K. Ozili
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Managing Climate Change Risk 315 imposed on banks by the national supervisor or the Central Bank. The fxed-rate risk capital of the bank will be: Tier 2 = 0.333 × $50,000,000 = $16,650,000 Fixed-rate risk capital = 12.5% × tier 2 capital Then, the fixed-rate risk capital = 0.125 × $16,650,000 = $2,081,250 Whichever fxed-rate charge is adopted, the fxed-rate charge should be kept with the fnancial institution not the regulator. This allows the fnancial institution to internalize the cost and risk of climate change events. The Tier 2 fxed-rate charge may be used by fnancial institutions to meet their minimum regulatory capital requirement when a climate change event has not yet occurred. But when a climate change event occurs, the fxed-rate risk capital cannot be used in the computation of minimum regulatory capital ratio but must be used to minimize losses or damages to the assets of fnancial institutions after climate change events have occurred. Central banks should monitor fnancial institutions to ensure that the fxed-rate risk capital is set aside by fnancial institutions under its supervision.
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3.3. Reduce Lending to Industries Whose Activities Destroy the Environment and Climate The third approach is to use lending restriction to businesses in industries whose activities hurt the environment and the climate. The Central bank may require fnancial institutions to reduce lending to industries whose activities degrade the immediate environment they operate in – such as the mining industry, petroleum industry, etc. This can be achieved in two ways: (i) by lending to such businesses at a higher interest rate or (ii) by deducting a climate penalty charge from the total loan value before disbursing the loan to the customer. Lending to businesses in such industries can be reduced to a minimum to pressure them to put in measures to protect the environment they operate in. Any bank that fails to reduce their loan exposure to companies in these industries may be sanctioned by the supervisor. Also, an outright loan ban may be placed on companies whose activity degrade the environment in a signifcant way, and the company has failed to put in place measures to minimize harm to the immediate environment which could affect members of the community. Such ban can pressure businesses in these industries to design internal mechanisms and policies to reduce harm to the environment and the climate.
3.4. Create a Climate Bank Another policy option for Central banks is to set up a climate bank. A climate bank is a bankruptcy-remote entity and a special purpose entity jointly owned by all fnancial institutions including the Central bank. Each participating fnancial institution will contribute an agreed amount of capital to the climate bank, which will be used to help a fnancial institution recover from damages to the
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316 Peterson K. Ozili fnancial institution’s assets when unfavorable climate change events occur. As a bankruptcy-remote entity, the failure of all participating fnancial institutions will not lead to the failure of the climate bank because the payout to each fnancial institution is limited to the capital contributed by each participating fnancial institution. Also, a certain amount of capital can be given as loan to affected fnancial institutions at the discretion of other participating owners who may require interest on the premium capital (a form of loan) subject to the payment of interest. Finally, each participating owner may be required to review their capital contribution to the climate bank from time to time, and may be required to replenish any defcit in their capital contribution from time to time. A climate bank structure is a superior model compared to the insurance contract arrangement. This is because, in an insurance company setting, climate change is likely to increase costs for companies in the insurance industry because of increased claims related to extreme weather events, which are intermittent and unpredictable. Moreover, if the payout costs are deemed to be too costly and unproftable for insurance companies, insurance companies can stop offering policy cover for climate change events, preferring to offer only traditional insurance policies. In contrast, the climate bank model is similar to a mutual fund model in which every owner (fnancial institutions) contributes their own funds to the climate bank. The major difference is that a distressed fnancial institution can use their funds (which comes at no cost to them) and can also use the funds or capital of other owners subject to the payment of interest on the borrowed capital.
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3.5. Relocate Important Assets to Areas Less Prone to Climate Change Events Finally, Central banks can require fnancial institutions to have an emergency asset relocation policy. Central banks can ensure that fnancial institutions relocate their important assets away from cities that are prone to unfavorable climate change events such as mudslides, earthquake, typhoon, landslides, etc. The downside of this approach is that moving a fnancial institution’s assets away from climate change prone areas to safer areas may reduce the level of economic activity in communities that suffer from climate change events, and could trigger a recession in such communities. For this reason, the emphasis here is that all fnancial institutions can relocate their “important assets,” not “all assets,” to cities that are less prone to unfavorable climate change event. Only the important assets should be relocated to a safer location. For example, small bank branches and customer service centers should not be relocated while the Headquarters of a fnancial institution and its information system infrastructure warehouse may be relocated to areas that are less prone to unfavorable climate change events.
4. Conclusion This chapter discussed some policy options that central banks may fnd useful in dealing with the risk of climate change in the fnancial sector. The chapter suggests fve policy options which includes: imposing a CCC surcharge; impose a
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Managing Climate Change Risk 317
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fxed-rate risk capital – based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and, requiring fnancial institutions to relocate their important assets to areas less prone to climate change events. It is important to ensure that fnancial institutions remain safe during climate change events and Central banks have a role to play in ensuring the safety and soundness of the fnancial institutions under their supervision, and for this to happen, new banking regulations will increase in the coming years, and climate change regulation is one of them. In the future, bank supervisors may impose stricter or lighter rules based on the peculiarities of the fnancial sector and the climate change history in each country. After formulating a climate change policy, implementation should follow. When implementing a climate change policy in the fnancial sector, Central banks may speed-up or delay the implementation of climate change policies, and there should be enough time to adjust to new and existing climate change policies. The implication of these policy options is that it will compel fnancial institutions to exercise a great deal of caution in lending to businesses that harm the environment in a signifcant way. Such policies will also help in making businesses accountable for the environment they operate in. Through such policies, fnancial institutions will be able to pressure their customers to design internal mechanisms and policies to reduce the harm their activities cause to the environment and the climate. Future research can investigate, empirically, the effect of specifc climate change events on the stability of major fnancial institutions. Future research is also needed to explore the possibility for self-regulation of climate change risk by fnancial institutions in the fnancial sector. This will lead future research to investigate whether fnancial institutions should develop their own internal policies to tackle climate change risk (i.e., micro or self-regulation) or the Central bank should develop a one-size-fts-all policy on climate change risk for all fnancial institutions.
ACKNOWLEDGMENTS None.
REFERENCES Altieri, A. H., & Gedan, K. B. (2015). Climate change and dead zones. Global Change Biology, 21(4), 1395–1406. Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., & Visentin, G. (2017). A climate stress-test of the fnancial system. Nature Climate Change, 7(4), 283. Brunnermeier, M., Crockett, A., Goodhart, C. A., Persaud, A., & Shin, H. S. (2009). The fundamental principles of fnancial regulation (Vol. 11). ICMB, Internat. Geneva: Center for Monetary and Banking Studies.
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318 Peterson K. Ozili Brunnermeier, M. K., & Landau, J. (2020). Central banks and climate change. VOX CEPR Policy Portal. Retrieved from https://voxeu.org/article/central-banks-and-climatechange. Accessed on January 15, 2020. Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., & Tanaka, M. (2018). Climate change challenges for central banks and fnancial regulators. Nature Climate Change, 8(6), 462–468. Carney, M. (2015). Breaking the Tragedy of the Horizon–climate change and fnancial stability. Speech given at Lloyd’s of London, 29, 220–230. Cornett, M. M., & Saunders, A. (2003). Financial institutions management: A risk management approach. NY: McGraw-Hill/Irwin. Dafermos, Y., Nikolaidi, M., & Galanis, G. (2018). Climate change, fnancial stability and monetary policy. Ecological Economics, 152, 219–234. Demirguc-Kunt, A., Laeven, L., & Levine, R. (2003). Regulations, market structure, institutions, and the cost of fnancial intermediation (No. w9890). Cambridge, MA: National Bureau of Economic Research. Doran, K. L., & Quinn, E. L. (2008). Climate change risk disclosure: A sector by sector analysis of SEC 10-K flings from 1995–2008. North Carolina Journal of International Law and Commercial Regulation, 34, 721. Ferguson, R. W. (2003). Should fnancial stability be an explicit central bank objective. In Challenges to central banking from globalized fnancial systems (pp. 208–223). Washington, DC: International Monetary Fund,. Furrer, B., Hamprecht, J., & Hoffmann, V. H. (2012). Much ado about nothing? How banks respond to climate change. Business & Society, 51(1), 62–88. Goodhart, C. A. E. (2011). The changing role of central banks. Financial History Review, 18(2), 135–154. Goodhart, C., Hartmann, P., Llewellyn, D. T., Rojas-Suarez, L., & Weisbrod, S. (2013). Financial regulation: Why, how and where now? Abingdon, UK: Routledge. Hull, J. (2012). Risk management and fnancial institutions, + Web Site (Vol. 733). NJ: John Wiley & Sons. Kellogg, W. W. (2019). Climate change and society: Consequences of increasing atmospheric carbon dioxide. Abingdon, UK: Routledge. Korell, L., Auge, H., Chase, J. M., Harpole, S., & Knight, T. M. (2020). We need more realistic climate change experiments for understanding ecosystems of the future. Global Change Biology, 26(2), 325–327. Monti, A. (2009). Climate change and weather-related disasters: What role for insurance, reinsurance and fnancial sectors. Hastings W.-Nw. J. Envt’l L. & Pol’y, 15, 151. Ozili, P. K. (2020a). Effect of climate change on fnancial institutions and the fnancial system. In E. Ozen & S. Grima (Eds.), Uncertainty and Challenges in Contemporary Economic Behaviour (pp. 139–145). Bingley: Emerald Publishing Limited. Ozili, P. K. (2020b). Managing climate change risk: A responsibility for politicians not Central Banks. Poole, J. A., Barnes, C. S., Demain, J. G., Bernstein, J. A., Padukudru, M. A., Sheehan, W. J., … & Cohn, J. R. (2019). Impact of weather and climate change with indoor and outdoor air quality in asthma: A Work Group Report of the AAAAI Environmental Exposure and Respiratory Health Committee. Journal of Allergy and Clinical Immunology, 143(5), 1702–1710. Ramanathan, V., Aines, R., Auffhammer, M., Barth, M., Cole, J., Forman, F., … & Press, D. (2019). Bending the curve: Climate change solutions. California: The Regents of the University of California. Zobaa, A. F. (2005, June). Climate change risks and fnancial sector. CA: In IEEE Power Engineering Society General Meeting (pp. 2945–2950). IEEE.
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Chapter 16
Symmetric and Asymmetric Infuence of Macroeconomic Variables on Stock Prices Movement: Study of Indian Stock Market Aamir Aijaz Syed Abstract The objective of this chapter is to study the symmetric and asymmetric impact of macroeconomic variables on the Indian stock prices (SPs) of the Bombay Stock Exchange index. This chapter further investigates whether the asymmetric impact of macroeconomic variables on SP is due to the impact of any tail events like the global fnancial recession. An autoregressive distribution lag and non-autoregressive distribution lag approach is used for the full sample covering the period from January 2000 to June 2019 and later this sample is further subdivided into before and after the crisis period to study the variations in result.
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The fndings show that macroeconomic variables and SP have a symmetric relation in the long run whereas an asymmetric relationship in the short run when the whole sample is analyzed. However when data are segregated into “before and after” crisis period this relationship turns to be asymmetric in long run too, meaning that in the long run, the negative and positive changes in a macroeconomic variable do not affect SPs similarly. Keywords: Nonlinear ARDL; stock prices; global fnancial crisis; asymmetry; economic reforms; symmetric impact JEL Codes: E32; E44; G21; F62
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320 Aamir Aijaz Syed
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1. Introduction Over the years, it has been found that stock markets can be reviewed as a yardstick for measuring the performance of any economy. Economic reforms and disturbance can be easily gauged through stock market fundamentals. These concepts have motivated both researchers and academics to study the interrelation between stock price (SP) movements and macroeconomic variables. Furthermore, fnancial crises have also inspired researchers to examine the interrelation between stock market performance and economic disturbances. Different theories like effcient market hypothesis, have been employed to study the impact of macroeconomic variables on SPs movements whereas many researchers like Yang et al. (2014), Mohiuddin.(2008), Hondroyiannis (2001) also explored the effect of variables like infation, growth rate, unemployment, and industrial index on price movement, but these studies have not provided a congruous result. The main drawback of some of the previous research was that few studies have assumed time series to be linear and have just evaluated the symmetric effect by employing normal cointegration techniques such as linear autoregressive distribution lag (ARDL approach) whereas others have just evaluated the asymmetric impact. As Anoruo (2011) argues that the time series is nonlinear in nature, and thus to evaluate the hidden cointegration as proposed by Yoon (2002), this study has employed and tested both linear and nonlinear aspects of underlying variables using non-autoregressive distribution lag (NARDL approach). Another limitation of previous studies was that they have not analyzed the effect of the fnancial crisis on the asymmetric behavior of variables under study. Chang.(2018) extends previous literature by studying the asymmetric impact of Macroeconomic variable on SPs of Pakistani stock exchange by using monthly data. Bahmani-Oskooee and Saha (2016) also worked on a similar area through taking economies like Mexico, Korea, Japan, Canada, and Brazil. This study replicate the work of Chang.(2018) and Bahmani-Oskooee and Saha (2016) by incorporating similar work about the fastest emerging economy India, since the result of developed countries varies with the result of developing countries. This study explores the impact of Interest rate (Irate), industrial production index (IIP), real effective exchange rate (REER) and consumer price index (CPI), on the SP of Indian stock exchange, apart from investigating the symmetric and asymmetric change in underlying variables due to fnancial distress, by segregating the data into before and after the crisis period. Fig. 1 shows the time series plots of macroeconomic variables namely Log of consumer price (LNCPI), Log of Interest rate (LIN), Log of Industrial Production index (LIIP), Log of Real exchange rate (LREER), and Log of stock market index (LSTK), from the graph we can see that during the period of the fnancial crisis (2008–2010) there is a larger variation in the dependent and independent variables (IVs). This study focuses on the Bombay Stock Exchange (BSE) of the Indian stock market as this is represented as one of the most volatile markets (Arora & Srivastava, 2019). The prime reasons for market volatility are economic, political
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Fig. 1. Data Trend Between the SP Index and Macroeconomic Variable of Bombay Stock Exchange. *Author Prepared.
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 321
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322 Aamir Aijaz Syed and industry-specifc movements apart from global disturbance which we can see from the fgures of SENSEX during the fnancial crisis when Sensex reached to the fgure 8891.61 in 2009 from the 20286.99 in 2008 (Arora, 2019; Tripathi & Ramanathan, 2005). This drop‐in SENSEX further encourages studying how macroeconomic factors affect SPs during fnancial before and after the crisis period. To achieve the objectives, this study employs both linear and nonlinear methods as these methods give more robust results as it considers hidden cointegration, unlike Johansen cointegration & Eagle-Granger. This model is also benefcial as it can work with any order of integrated variables like 0 and 1 and it also works on a small sample size (Lahiani et al., 2016). Linear ARDL model fndings for the whole sample show that the Interest rate has an inverse relationship with SPs whereas industrial productivity and CPI have a direct and signifcant relationship with SPs. This same relationship holds during the before crisis period except for exchange rate which is also a signifcant factor and affect negatively to SP movement and lastly the fndings of after crisis period also confrms the same relationship as those of the whole sample in the long run with SP movement except for exchange rate which shows an insignifcant relation with SPs movement. To check the asymmetry, NARDL model is employed both on a short period and long period on all the three sections, and fndings show that interest rate and exchange rate have an asymmetric effect on SPs both before and after the crisis, industrial productivity in the pre‐crisis and whole period only. Consumer price has an asymmetric effect on the before crisis only. Whereas the interest rate and exchange rate have an asymmetric impact on SP during the after crisis period and Consumer price during the before crisis period. The overall study suggests that the investor needs to consider this asymmetric nature of variable before making short‐term investments along with giving due consideration to fnancial distress. Investing without considering fnancial distress may give factitious results, along with that sample period, asymmetric and symmetric responses of variables also needs a proper consideration The remaining part of the chapter is organized as follows. Section 2 discusses the literature review, Section 3 discusses data methodology, Section 4 discusses the result of ARDL and nonlinear ARDL model and last section represents the concluding remarks.
2. Literature Review Various studies have been conducted on studying the relationship between macroeconomic variables and SPs. In this section, the chapter provides a concise literature review on the above relationship, and following that, the hypothesis has been framed accordingly.
2.1. Infation and SP Movement Various studies have been conducted on studying the relationship between SP movement and infation, some studies provided a positive relationship whereas
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 323 some researchers have given a negative infuence of infation on the SP movement. Some of the studies which have stated a positive infuence of infation on SPs are Ibrahim (2003) and Ibrahim and Aziz (2003); whereas in studies by Schwert.(1981), Fama (1981), and Mukherjee and Naka (1995), a negative association between infation and SP movement is presented. Mukherjee and Naka (1995) using the cointegration technique on the sample of the Tokyo Exchange Index stating that infation has a negative association with SP. A study done by Geetha. (2011) using the Johansen Cointegration technique on the sample of Malaysia, the United States, and China stated a long-run relationship among the above variables but there is no short-run relationship for Malaysia and the United States whereas for China, it exists. Although studies by Dritsaki (2005) and Delgado et al. (2018) projected a unidirectional relationship between SP and infation, other research done on the above relationship are Valcarcel (2012), Boucher (2006).
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2.2. Interest Rate and SP Interest rate is also taken as a key determinant for stock performance as it plays an active role in fnancial and monetary decision-making. Most of the previous studies like Trivoli (1991), Spyrou (2001), Zahid (2010) concluded an inverse relationship between the two variables. Certain countries have also presented a mixed relationship among the two variables like Nasseh and Strauss (2000) which concluded that SP has a positive cointegration with short-term interest rate compared to long-term interest rate. Senthil Kumar (2013) studies the long-term impact of repo rate on the stock market performance of 14 Indian banks and concluded that in the long-run interest rate adversely affect stock performances. Otieno et al. (2017) studied the association of lending rate, T‐bills, and stock market return using Autoregressive Fractionally Integrated Moving Average (ARFIMA), whereby the fndings suggested that in the short-run treasury bills and lending rates affect inversely to the stock market returns suggesting favorable macroeconomic condition as a precursor of the prosperous stock market. Similar works related to the above relationship are Akbar, Ali, and Khan (2012), Kganyago and Gumbo (2015), and Jawaid and Anwar (2012).
2.3. Exchange Rate and SPs A lot of research has been done focusing on the relationship between SP movement and exchange rate volatility after the East Asian Crisis, providing mixed results. Hussain and Qayyum (2006) conducted a study on four South Asian countries using the VAR model on monthly data, fndings suggest that there is no long-run association between the two variables in India and Pakistan. However, for Bangladesh and Sri Lanka, a bidirectional relationship exists among the two variables. Some recent studies have also explored the above relationship like Ajaz et al. (2017) and Delgado et al. (2018) which also reconfrms either way the relationship between the two variables using the fact that as when the domestic currency falls local goods become cheaper which increases the stock prices of export-oriented frms and negatively affects the prices of importing frms.
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324 Aamir Aijaz Syed Anshul and Biswal (2016) conducted a similar study using GARCH to explore the relationship between SPs and exchange rate fuctuations, whereby the fndings supported the earlier studies that depreciation in Indian currency causes a fall in Sensex stock market. Other studies that have reviewed the above relationship include Charles et al. (2011), Walid et al. (2011), and Mechri (2019).
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2.4. Industrial Productivity Index and SPs Industrial production is an important part of economic development as it not only helps in income generation but also provides employment opportunities. Various studies have examined the impact of industrial production on SP movement. Nwaolisa.(2017) studies the impact of industrial productivity index on SPs using Johansen cointegration and Ramsey reset test on the monthly panel data and fndings of the study suggested the industrial production has a positive infuence in the long on the SPs of Nigerian stock exchange which also supports the fndings of Strauss (2000). Pramod Kumar and Puja (2012) also explored the similar relationship among SPs and macroeconomic variables including IIP on Indian data using vector auto correction model and fndings suggested a bidirectional causality between industrial productivity and stock market which also strengthens the fndings of Singh (2010). Other studies that have covered the above relationship include Kuosmanen et al. (2015) and Peiró (2016). Although all of the above studies have examined the relationship among SPs and macroeconomic variables like consumer price, industrial productivity, interest rate and exchange rate, they have ignored the nonlinearity aspect of time series. However, there are few studies like Chen (2007) and Naifar et al. (2013) which do have considered nonlinearity of time series but they suffer from the limitations, such as by having not compared the result of linearity with nonlinearity and they have also ignored the pre and post impact of fnancial crisis. So to remove the above limitation, this study further extends the work of Bahmani-Oskooee and Saha (2016) and Chang.(2018) in terms of fastest emerging developing country, like India. This study is unique in its context because frstly it studies the asymmetric effect of the above variables in context to a developing country like India, Bahmani‐Oskooee and Saha (2015). Secondly, it also explores the pre and post effects of the fnancial crisis and their impact on macroeconomic variables by segregating the data into before and after the crisis period along with comparing the results of ARDL and NARDL methods. This study has focused mainly on the Indian stock market as this is one of the most promising and capitalized markets along with being volatile. Fig. 1 indicates a large variation in the stock market and macro variables during the period of the global fnancial recession. The above graphs also depict that before the crisis period stock market and interest rate were rising but after the crisis the stock market became fat whereas interest rates still showed the upward trend and similar is the case with REER and SP. However, in 2012–2013, Fig. 1 shows that the stock market is showing a downward trend whereas REER is showing an increasing
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 325 trend. Overall it shows that both the Indian stock market and macroeconomic variables do not move in the same way, which further motivates them to explore the asymmetric relationship. To state the purpose of the above study, following hypothesis are framed: H0: Does exchange rate effect SPs asymmetrically. H1: Does interest rate effects SPs asymmetrically. H2: Does consumer price effects on SPs asymmetrically. H3: Does industrial productivity effect SPs asymmetrically.
3. Research Objective, Data Design, and Method 3.1. Research Objective The objective of this chapter is to formulate a model to study the factors affecting the SP movement of the Indian Stock Exchange. This research studies two forms of the relationship among SP movement and macroeconomic factors, i.e., symmetric and asymmetric. This study further checks the short-run and long-run cointegration among the dependent and IVs.
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3.2. Source of Data and Techniques This study uses monthly data covering the period from January 2000 to June 2019 and includes 232 observations. As the sample size is small this study has used the NARDL model, which is best suited for small data. Furthermore, the data are segregated into before and after the crisis period, that is, from January 2000 to December 2007 and January 2008 to June 2019. Data for all macro economic variables like CPI, REER, IPI, and Irate are collected from International Financial Statistics, IMF database. IPI is also used as a proxy for the Gross domestic product due to unavailability of monthly data, and T‐bills have been used in place of the interest rate. Furthermore, all IVs are taken as indexes with 2010 as base year Chang (2018). Finally, data of BSE have been collected from BSE offcial website. Following the work of Chang.(2018), all the variables are converted into the log.
3.3. Methodology This study has used ARDL method given by Pesaran et al. (2001) and NARDL method as suggested by Shin et al. (2014), as these methods provide a robust result when data set is small and variables are mixed integrated, that is, I(0) and I(1). To check the asymmetries present in the data, NARDL method is used as this method provides the best results after jointly checking the cointegration and asymmetry of the data. Moreover, it also considers hidden cointegration (Shahzad et al., 2017). The only thing which needs to be considered before applying ARDL or NARDL is that none of the variables is of the second order of integration and to check this Augmented Dicky–Fuller is used.
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326 Aamir Aijaz Syed An extension of ARDL is NARDL, and thus we provide the basic form of unrestricted error correction linear ARDL method:
p−1
q −1
i =1
i =1
∆ yt = αο + ∑bi ∆ yt−i + ∑ci ∆ x t − i + ρ yt−1 + θ xt −1+ et−1
(1)
where xt vector of regressors, yt dependent variable; αο intercept; Δ shows variables are in difference; bi, ci represent short-run coeffcient; p and q represent restricted lags and et shows error term. In the ARDL method, we check whether the variables are cointegrated or not using upper and lower bound values. The null hypothesis is no cointegration against the alternative hypothesis that there is cointegration. The Upper bound value considers variable is of I(1) order of integration whereas lower bound value considers that variables are of I(0). As in our study, some variables are of I(1) and some are of I(0) so we can consider both the lower and upper bound values, and using F‐test which is mentioned in the below tables, we can accept or reject the null and alternative hypothesis. Auto regressive distribution lag method assumes dependent variable and all exogenous variables have a symmetric response. The method which we have in our research is as follows: p−1
q1
i =1
i =0
q2
∆ LnSPt = a0 + ∑ bi ∆ LnSPt−1 + ∑ ci ∆ LnCPI t−1 + ∑ c2,i q3
∆ LnIPI t−1 + ∑ c3,i ∆ Lnlratet−1 + i =0
i =0
q4
∑c
4,i
∆ LnREERt−1 +
i =0
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pLnSPt−1 + θ1LnCPI t−1 + θ2 LnIPI t−1 + θ3 LnIratet−1 + θ4 LnREERt−1 + e t Here, Ln represents natural log; SP shows stock price of SENSEX 30 index, IPI indicated Ind. Productivity, CPI represents consumer price; Irate shows interest rate, REER fnally represents exchange rate. Shin et al. (2014) used following asymmetric long-run equilibrium model for checking the asymmetric relationship:
yt = β + xt+ + β− xt− + e t (2)
where β+ and β− represent the long-run asymmetric coeffcients; ei and xt show error term vector regressors, respectively. Combining Eqs. (1) and (2), we can derive asymmetric ECM which is mentioned below:
p−1
q −1
i =1
i =1
∆yt = a0 ∑bi ∆yt−i + ∑( ci+ ∆xt+−i + ci− ∆xt−−i ) + ρ yt−1 + (3) θ + xt+−1 + θ− xt−−1 + et
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 327 where θ+ = ρβ− and θ+ = ρβ− are short-run adjustment for positive and negative shocks. The NARDL method is used in the similar way as linear auto regressive distribution lag is used. Initially, error correction model is estimated through OLS than the asymmetric long-run relationship is explored using bound test along with checking the null hypothesis of no-cointegration by considering upper and lower bounds. Finally, asymmetric and the symmetric effect is checked on exogenous variable both for the short-run period and long-run period employing Wald test. The NARDL model employed in the research is as follows: p−1
q1
q2
∆ LnSPt = a0 + ∑bi ∆ LnSPt−1 + ∑c1,+i ∆ LnCPI t+−1 + ∑c1,−i ∆ LnCPI t−−1 + i =1
q3
∑c
+ 2,i
i =0 q6
∑c i =0
− 3,i
∆ LnIPI
+ t −1
i =0
q4
+ ∑c ∆ LnIPI − 2,i
i =0
− t −1
i =0
q5
+ ∑c ∆ LnIrate + 3,i
+ t −1
+
i =0
q7
q8
i =0
i =0
∆ LnIratet−−1 + ∑c4,+i ∆ LnREERt+−1 + ∑c4,−i ∆ LnREERt−−1 ρLnSPt−1 +
θ1+ L nCPI t+−1 + θ1− LnCPI t−−1 + θ2+ L nIPI t+−1 + θ2− L nIPI t−−1 + θ3+ L nIratet+−1 + θ3−LnIratet−−1 + θ4+ L nREERt+−1 + θ4−LnREERt−−1 + e t Ln = Natural Log, IPI+, IPI−, CPI+, CPI−, REER+, REER−, Irate+ and Irate−, and are of positive and negative variation of IVs.
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4. Results/Discussion To study symmetric and asymmetric behavior of the stock market and macroeconomic determinants, we have used linear ARDL and NARDL approach based on the literature of previous studies. The precondition for applying ARDL and NARDL is that variables have to integrate either level or frst order and no variable should be of the second order of integration. To check the level of integration, Augmented Dicky–Fuller test is used. The result of the test shows none of the variables is of second-order integration which we can see from Table 1. As none of the variables is of the second order of integration we proceeded with our analysis Using four lags nonlinear and linear models are estimated, which are described in Eqs. (2) and (8). Akaike information criteria are used and by employing different lags on the variables the model which describes the lowest AIC value is chosen and given in the tables, i.e., from 2 to 7. Discussion on the results of both ARDL and NARDL models of each table is summarized in the following way. a) Tables 2 and 3 cove the whole sample. b) Tables 4–7 cover the results before and after the crisis period. Table 2 shows the result of the ARDL model in three parts, the frst part provides a short-run result which shows exchange rate, interest rate, productivity
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328 Aamir Aijaz Syed Table 1. Augmented Dickey–Fuller Test Results. Whole Sample Panel A (India)
p‐value I (0)
LnCPI
Pre-Crisis
p-value I(1)
p-value I(0)
p-value I(1)
0.62
0.00*
0.45
LnIIP
0.23
0.00*
LnIrate
0.14
0.00*
LnREER
0.88
0.00*
Post-Crisis p-value I(0)
p-value I(1)
0.00*
0.23
0.00*
0.32
0.00*
0.74
0.00*
0.03
0.00*
0.16
0.00*
0.11
0.00*
0.32
0.00*
* 5% level of signifcance, January 2000 to June 2019 represents the whole period,
January 2000 to December 2007 shows before crisis period and the data from January 2008 to June 2019 represents after crisis period. Source: Author’s calculation.
Table 2. Whole Period ARDL Results. Lags
Section A: Short-run Variables 0
1
2
3
Δ in SP Δ in REER
0.85(1.16)** −0.34(−1.45)**
Δ in Irate Δ in IPI
0.34(2.13)*
Δ in CPI
−0.05(−2.54)***
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Section B: Long-run Ln REER
Ln Irate
Ln IPI
Ln CPI
C
−0.22(−0.11)
−1.32(2.14***) 0.43(.86**) −0.32(−1.43*)
7.43(0.23)
ECMt‐1
Wald (Joint Sig) Adj. R2
RESET
LM
−0.006(0.00***)
5.25***(Bound) 0.61
10.22
3.1
Section C: Diagnostics
Notes: The above table shows the result of ARDL covering the whole sample from 2000 to 2019. SP, Irate, REER CPI, and IPI show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented. **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET, and LM are used to predict model ftness and specifcation. Source: Author’s calculation.
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 329 index and infation as a signifcant factor which affects the SP. The second part shows that interest rate, industrial productivity, and infation are an important determinant affecting SPs. The third part shows the result of various diagnostic tests which are essential to check before applying ARDL. As cointegration is a precondition for applying ARDL, the Wald test and the ECM is used. The Wald test F value is 5.25 which is above the critical value, hence there exists a long-run cointegration as proposed by Pesaran et al. (2001). As ECM result also shows a negative and signifcant value which further substantiates that the variable has a long-run cointegration. To check the serial correlation, the lagrange multiplier (LM) test is used, and as the value of the LM test is less than at 5% level of signifcance, we can conclude that the data has no serial correlation. Furthermore, RESET and R2 are used to check whether the model is ft or not, the R2 value is 0.61 hence we can say that the model is ft whereas the value of RESET is more than the critical value of 3.8 thus we can conclude that the model is not specifed. As the above model suggests that in the short period of time Irate, REER, CPI, and IPI are signifcant factors whereas in the long period of time Irate and IPI and CPI are signifcant factors, meaning that with 1% increase in industrial productivity, SPs increase by 0.43% and vice versa but to substantiate whether the increase in industrial productivity affects SPs accordingly as the decrease in IPI, we opt to go for the NARDL method. Table 3 describes the results of the NARDL model which checks whether the decrease in exogenous variables affects SP in the same way as the increase in the exogenous variables, by segregating the variables into negative and positive shocks. Results show that an increase in interest rate signifcantly affects SP whereas SP is not signifcantly affected by the fall in interest rate during the short run. Whereas both increase and decrease in CPI and IPI have an inverse relation with SP, confrming the asymmetric effect on the SP. Results show whether the analysis is done on the whole sample exogenous variables having an asymmetric effect on the SP in the short period whereas in the long period variables have symmetric effect as in the long-run exogenous variable are not affecting the SP. The main reason may be that in the long-run investors have suffcient time and information thus they behave more logically and rationally compared to the short-run period. Our model satisfes the condition of long-run cointegration as the value of F statistic is more than critical value along with this, test results of ECM also substantiate the previous fndings as the value is signifcant. Other diagnostic tests like LM suggest that data has no serial correlation apart from that RESET test value also confrms that the model is perfectly ftted. R2 fgure of NARDL test is 0.76 which is more than ARDL value which is 0.61 stating that the model is better ftted as compared to the ARDL method. The Pre-crisis result is described through Tables 4 and 5. Table 4 shows the results of ARDL model which suggests that in the long run, IIP and CPI affects positively to SP movement and on the other hand Irate have a negative relationship with SP, whereas NARDL models show that all the variables have an asymmetric result in the long period of time except interest rate.
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330 Aamir Aijaz Syed Table 3. NARDL Result for the Whole Time Period. Lags
Section A: Shortrun variables 0 Δ in SP
1
2
0.23(2.34**)
0.02(0.05)
−
−0.32(−0.24)
0.05(0.06)
0.05(0.06)
+
−1.23(−1.24)
0.35(0.43)
0.35(0.42)
Δ in REER Δ in REER −
−0.49(−1.56*) 0.38(1.49*)
−0.14(−0.46)
+
0.28(1.49*)
0.06(0.28)
0.33(1.23)
Δ in Irate‐
−0.12(−0.34)
0.06(0.32)
−0.13(−0.28)
+
Δ in IPI Δ in IPI
−0.12(−0.47)
−0.33(−1.48*) −0.20(−1.00)
−
1.32(0.54*)
−1.44(−0.34*) −1.03(−0.88)
+
−0.42(−0.34*) 1.45(1.34)
Δ in Irate Δ in CPI Δ in CPI
0.14(0.10)
Section B: Long‐run Ln SP
Ln REER−
Ln REER+
Ln IPI−
Ln IPI+
−0.32(−3.14***)
0.23(0.41)
0.34(0.44)
−0.26(−1.24)
−0.24(−1.34)
Ln Irate−
Ln Irate+
Ln CPI−
Ln CPI+
−0.01(−0.22)
−0.09(−1.11)
1.32(0.28)
0.03(0.04)
F
ECMt‐1
Adj. R2
RESET
LM
1.44*
−0.12***
0.76
1.56
2.4
Joint Sig.(Bound) Ln REERSR
Ln IPISR
Ln IrateSR
Ln CPISR
10.52***
0.38(0.60)
2.03(0.02**)
−0.01(−0.67)
0.64(0.35)
Ln REERLR
Ln IPILR
Ln IrateLR
Ln CPILR
−0.06(0.88)
−0.14(0.90)
0.35(0.42)
0.31(0.56)
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Section C: Diagnostics
Notes: The above table shows the result of NARDL covering the whole sample from 2000 to 2019. SP, REER, Irate, CPI, and IPI show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented. Moreover positive and negative signs are used in the long run to show any asymmetric effect on SP. In section C, diagnostic test results are shown, subscript SR and LR show short-run and long-run Wald test asymmetry and bracket in section C shows p‐values and signifcant value show an asymmetric relationship. *, **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET and LM are used to predict model ftness and specifcation.
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 331 Table 4. ARDL Result for the Pre‐crisis Period. Lags
Section A: Shortrun Variables 0
1
2
3
Δ in SP 2.00(1.18*)
Δ in REER Δ in Irate
1.86(1.48*)
−0.84(−1.92***)
−0.20(−1.43*)
Δ in IPI Δ in CPI
−2.45(−3.14***)
Section B: Long-run Ln REER
Ln Irate
−0.11(−0.05***) −87(−2.14***)
Ln IPI
Ln CPI
C
1.43(3.86***) 2.32(3.43***) −6.43(−0.23)
Section C: Diagnostics ECMt-1
Wald (Joint Sig)
−0.034(0.00***) 5.11***
Adj. R2
RESET
LM
0.61
1.02
1.12
Notes: The above table shows the result of ARDL covering the pre‐crisis period from 2000 to 2007. SP, Irate, IPI, CPI, and REER show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented.
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*, **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET and LM are used to predict model ftness and specifcation.
Lastly, post-crisis results are shown through Tables 6 and 7, Table 6 shows that in the long period of time CPI and IPI directly impact SP movement whereas interest rate inversely affects SP. The fndings of Table 7 show that during a short period of time Irate has an asymmetric impact on SP; on the other hand, IPI, CPI, and REER have a symmetric impact. In the long run except for CPI, all three variables have an asymmetric impact on SP during the post‐crisis period. Our results are consistent with the fnding of Bahmani-Oskooee and Saha (2016) and Chang (2018) when we have taken the whole period of time, whereas it changes when data are divided into before and after crisis period due to the aftereffects of the fnancial crisis as suggested by (Fratzscher, 2009).
5. Conclusion Various studies have investigated the relationship between macroeconomic variables and SP using variables like CPI, IIP, and exchange rate but the majority of
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332 Aamir Aijaz Syed Table 5. NARDL Result for the Pre-crisis Period. Lags
Section A: Short-run variables 0
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Δ in SP Δ in REER− 0.86(0.85) Δ in REER+ −1.73(−1.24) −1.49(−2.56**) Δ in IPI− + 0.58(1.49*) Δ in IPI − 99.12(2.34**) Δ in Irate Δ in Irate+ 0.05 (0.14) Δ in CPI− −3.32(−2.54**) Δ in CPI+ −2.42(−2.34***) Section B: Long-run Ln SP −0.44 (−2.14***) Ln Irate− 87(1.22*) Section C: Diagnostics F 2.44* Joint Sig. 16.84*** Ln REERLR −0.80 (0.001***)
Ln REER− 4.23(1.41)
1
1.23(5.34***) 0.32(2.00***) −2.05(−1.06) 4.35(1.43) −1.48(−3.49***) −1.14(−3.46***) 0.04(.18) 0.43(2.23**) −6.6(−1.32**) −0.33(−1.28) −21.44(−4.34***) 2.45(1.34*)
Ln REER+ 6.34(1.44)
Ln Irate+ Ln CPI− −0.59(−3.11***) −10.32(−1.28*)
ECMt-1 −0.76(0.08*) Ln REERSR −1.38(0.02*) Ln IPILR −0.14(0.04**)
2
Adj. R2 0.56 Ln IPISR −2.03(0.02**) Ln IrateLR 1.35(0.12*)
Ln IPI− Ln IPI+ −0.006(−0.005) 0.24(1.34) Ln CPI+ −0.03(−0.14)
RESET 3.4 Ln IrateSR 2.29(0.02**) Ln CPILR −1.31(0.06*)
LM 0.75 Ln CPISR −3.64(0.03**)
Notes: The above table shows the result of NARDL covering the pre-crisis period from 2000–2007. SP, CPI, REER, Irate, and IPI show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented. Moreover positive and negative signs are used in the long run to show an asymmetric effect on SP. In section C, diagnostic test results are shown, subscript SR and LR show short-run and long-run Wald test asymmetry and bracket in Panel C shows p values and signifcant ‐ value show an asymmetric relationship. *, **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET and LM are used to predict model ftness and specifcation. Source: Author’s calculation.
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 333 Table 6. ARDL Result Post-crisis Period. Lags
Section A: Short-run Variables 0
1
2
3
Δ in SP Δ in REER −0.34(−1.45*)
Δ in Irate Δ in IPI Δ in CPI
2.05(3.54)***
Section B: Long‐run Ln REER
Ln Irate
Ln CPI
C
−1.22(−0.41)
−0.32(−1.44***) 0.73(1.86**)
Ln IPI
2.32(4.43***)
−0.33(−0.03)
ECMt-1
Wald (Joint Sig) Adj. R2
RESET
LM
−0.14***
13.25***
2.45
0.33
Section C: Diagnostics 0.48
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Notes: The above table shows the result of ARDL covering the post-crisis period from 2008 to 2019. SP, CPI, Irate, REER, and IPI show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented.
*, **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET and LM are used to predict model ftness and specifcation. Source: Author’s calculation. the studies have either assumed symmetric relationship or have used the whole sample period. This study has extended the work of Bahmani‐Oskooee and Saha (2015) and by replicating the study of Chang (2018) trying to fnd out how symmetric and asymmetric relationship changes between macroeconomic variables and SPs. This study takes into account the affect in India, by further dividing the data into before and after the crisis period. The Autoregressive distribution lag model shows for the whole sample Irate has an inverse relationship with SP, whereas industrial productivity and consumer price have a direct and signifcant relationship with SP. Whereas during the before crisis period, the above variable holds the same relationship except for exchange rate which is also a signifcant factor and affect negatively to SP movement and lastly the fndings of the post‐ crisis period also hold the same relationship as those of the whole sample in the long run with SP except for exchange rate which shows an insignifcant relationship with SPs in the long period of time.
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334 Aamir Aijaz Syed Table 7. NARDL Result Post-crisis Period. Lags
Section A: Shortrun variables 0
1
2
0.13(1.34)
Δ in SP −
−1.24(−1.85)
1.12(0.56)
+
1.73(2.24)
−0.05(−0.06)
−0.16(−0.42)
−0.02(−0.03)
Δ in REER Δ in REER −
Δ in IPI
+
0.18(0.49)
−0.04(−0.18)
−
−0.12(−0.71)
−0.05(−0.32)
+
Δ in Irate
0.15 (1.14*)
0.13(0.28)
Δ in CPI+
3.32(1.54)
4.42(1.34)
1.42(1.34)
0.45(0.07)
Ln REER−
Ln REER+
Ln IPI−
Ln IPI+
−0.48(−5.14***)
−3.23(−3.41***)
0.34(1.44)
0.02(0.15)
0.24(0.54)
−
+
Δ in IPI
Δ in Irate
+
Δ in CPI
Section B: Long-run Ln SP
+
Ln Irate
Ln Irate
Ln CPI−
Ln CPI
0.04(0.22)
−0.39(−1.11**)
−0.32(−0.28)
1.03(1.14)
F
ECMt-1
Adj. R2
RESET
LM
1.44**
−0.76***)
0.66
3.4
8.75***
Joint Sig.
Ln REERSR
Ln IPISR
Ln IrateSR
Ln CPISR
6.84***
−1.8(.04**)
−0.83(.32)
−1.29(0.07*) 0.64(0.43)
Ln REERLR
Ln IPILR
Ln IrateLR
Ln CPILR
−1.80(.001***)
1.4(.06*)
1.35(0.05**)
−0.31(−0.46)
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Section C: Diagnostics
Notes: The above table shows the result of NARDL covering the post-crisis period from 2008 to 2019. SP, REER, IPI, CPI, and Irate show SP, interest rate, exchange rate, infation, and industrial productivity. Value in bracket represents t value and only signifcant coeffcients are presented. Moreover, positive and negative signs are used in the long run to show an asymmetric effect on SP. In Section C, diagnostic test results are shown, subscript SR and LR show short-run and long-run Wald test asymmetry and bracket in section C show p-values and signifcant value show an asymmetric relationship. *, **, and *** represent rejection of null hypothesis at 10%, 5%, and 1%, respectively. ECM and WALD are used to check cointegration and R2, RESET and LM are used to predict model ftness and specifcation. Source: Author’s calculation.
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 335 To check the asymmetry, the NARDL model is applied both on a short period and long period and on all the three panels the result shows that Irate and REER has an asymmetric effect on SP both before and after crisis period; IPI in the pre-crisis and whole period only and Consumer price has an asymmetric effect in the pre-crisis only. In a long period of time, REER and Irate have an asymmetric impact on SP during the after crisis period and Consumer price during before crisis period. Thus for policy formulation based on asymmetric behavior of variable, the sample period needs proper consideration. Lastly, all the diagnostic test shows that NARDL is more suitable and enjoys a better ft as compared to the ARDL method and in addition, the CUSUM test is attached as Annexure, which also confrms data stability.
6. Managerial Implications This study aims to guide the managers in making strategic decisions while keeping in mind the macroeconomic factors that affect SP movements both in the short-run and long-run. The short-run investor becomes more perplexed due to sudden changes and lack of suffcient information whereas in the long time frame investors make more rational decisions due to time suffciency. This work will also help the investors in making share sell and buy decisions based on the economic conditions of the country keeping in mind the symmetric and asymmetric movement of SP indices. This work is also applicable to investor’s decision-making in developed and developing countries apart from understanding the implications of fnancial crisis on the SPs movements.
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7. Limitations This study is limited to selected macroeconomic factors like infation, industrial productivity, exchange rate and interest rate and their impact on the SP movement. Thus, giving further scope for incorporating other factors like foreign investments, trade defcit, oil prices, spill over, etc. that may affect SP movements. This study also provides a platform for cross country analysis based on a similar model.
Acknowledgment The authors are grateful to the anonymous referees for their extremely useful suggestions to improve the quality of the chapter.
Funding Sources This chapter has not received any funding from any source.
Confict of Interest The author declares no confict of Interest
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336 Aamir Aijaz Syed
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Symmetric and Asymmetric Infuence of Macroeconomic Variables 339
Annexure: ARDL CUSUM Stability Test Results.
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Chapter 17
Do Investment Funds Care About the Environment? Evidence from Faith‐based Funds Tehmina Khan and Peterson K. Ozili Abstract Purpose: Ethical investing is considered to be the pinnacle of embedding environmental considerations in investing. Environmental considerations form a major part of corporate social responsibility (CSR), and CSR is considered to have a positive effect on investment returns. The purpose of this chapter is to assess the degree of environmental considerations embedded in faith-based funds investment criteria. The comparative analysis between principles and practice through faith-based investing is undertaken.
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Design/Methodology: Prospectuses of selected faith-based mutual funds and other information around investment strategies provided on the Funds’ websites have been analyzed in detail. Content analysis has been undertaken in order to evaluate the existence and types of environmental related criteria demonstrated by the Funds. The criteria are compared to the faith principles on environmental responsibility. Findings: It is generally assumed that CSR requirements form the premise of socially responsible investing. The authors fnd that faith-based investing criteria are narrowly defned and that they represent biases which do not promote environmentally responsible investing. Implications: The major implication is that inspite of the availability of faith-based environmental responsibility principles, faith-based funds represent a case of economic returns prioritization over environmental considerations. Environment accountability principles that exist need to be promoted regularly so that they become an essential element of every day decision-making including faith-based economic decision-making.
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342 Tehmina Khan and Peterson K. Ozili Originality:This study contributes to the debate on ethical investing from the perspective of faith-based mutual funds. Keywords: Faith-based investing; environmental responsibility; CSR; investing; mutual funds; investment funds
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1. Introduction There is a presumption that faith-based socially responsible investing would encompass environmental responsibilities criteria in relation to portfolio selection (Boasson, Boasson, & Cheng, 2006; Kaye, 2017). Economically dominant religions have been selected for analysis as their investment portfolios are of substantial amounts and they could have material impacts on business. In addition, they have been selected to test whether economic rationality (Deetz, 1992; Jones, 1996) remains dominant over environmental responsibility principles. The research question addressed is: Are religious (if expressed in religious principles) and societal expectations for environmental responsibilities embedded in investment selection criteria of Faith-based funds? The key objective is to test the generalization in previous literature that socially responsible investing promotes corporate social responsibility (CSR), specifcally implementation of environmental responsibilities by corporations. This chapter adds to the sustainability accounting literature on CSR, specifcally environmental responsibility literature (Quattrone, 2004) from a religious principles perspective (as in Kamla, Gallhofer, & Haslam, 2006). It provides a critical evaluation of faith-based investment criteria. This study also contributes to the literature that examines the impact of investing on society (Boasson et al., 2006; Renneboog, Ter Horst, & Zhang, 2008; Sparkes & Cowton, 2004). The chapter is structured as follows. In Section 2, the meaning of socially responsible investing and its relationship with CSR are explored in detail. The consideration of corporate environmental accountabilities as part of CSR is also highlighted. Select religious principles which form the theoretical foundation around faith-based accountabilities for the environment are presented in Section 3. The research method and data analysis are presented in Section 3, followed by the discussion of results in Section 4 and conclusions in Section 5.
2. Conceptual Framework 2.1. Socially Responsible Investing and CSR 2.1.1. Socially Responsible Investing. Socially responsible investing includes considerations of environmental and social concerns in investment policies (Friedman & Miles, 2001). There is an underlying presumption that socially responsible investing has a major role to play in promoting the development of CSR (Owen, 1990). On the other hand, motivations for selecting socially responsible investments (SRIs) have included as a major factor greater economic returns, stable performance and lesser total risk (Herremans, Akathaporn, & McInnes,1993).
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Do Investment Funds Care About the Environment? 343 Measures of CSR, which socially responsible investors are supposed to evaluate, have been described as corporate disclosures on elements that are important considerations in society (Freedman & Jaggi, 1986; Freedman & Wasley, 1990; Teoh & Thong, 1984). These considerations are supposed to include green initiatives (Shane & Spicer, 1983; Simpson & Power, 2005; Stevens, 1984). Socially responsible investing has been described as being at the stage of maturity (Sparkes & Cowton, 2004). Maturity is explained as comprising of complexity and the entry of socially responsible investing in mainstream investment practices. Socially responsible investing is assumed to oblige and infuence companies to address CSR issues (Sparkes & Cowton, 2004) including environmental issues (Eilbert & Parket, 1973). There are multiple reasons for investors to infuence companies to address CSR issues. One of these reasons is that companies with sustainable development strategies attain higher valuations in the fnancial markets (Lo & Sheu, 2007). Although socially responsible investing is expected to be a departure from investors’ sole consideration of the companies’ fnancial performances and is anticipated to include expectations for social responsibility performances (Booth, Moores, & McNamara, 1987), better CSR performances is ultimately positively impacting for investment purposes as well. Socially responsible funds are funds that are based on multiple social criteria,
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typically environmental performance, enlightened personnel policies, avoidance of relations with repressive regimes and absence of involvement in armaments manufacture, alcohol or tobacco products. (Gray, Owen, & Maunders, 1988, p. 11) 2.1.2. Corporate Social Responsibility. CSR is “a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders…” (European Commission, 2001). It is also “the responsibility of enterprises for their impacts on society” (European Commission, 2011, p. 6). CSR encapsulates processes that would allow the integration of social, environmental, ethical, human rights, and consumer concerns in business operations and strategies. In accounting literature, responsibilities toward the environment are classifed as a critical element of CSR (Belal & Cooper, 2011; Epstein & Freedman, 1994; Teoh & Thong, 1984; Tsang, 1998). Detailed disclosures are considered to be important for demonstrating CSR and for Socially Responsible Investing decision-making (Verschoor, 1998). Stakeholders including investors’ information needs are a primary initiative for reporting and transparency (Belal, 2002; Gonella et al., 1998, Zadek, Evans, & Pruzan, 2003; Gray, 2001; Owen, Swift, & Hunt, 2001). Environmental issues turn out to have as much to do with the social and ethical concerns of the communities in which the company works as, say, the biophysical effects of production. (Zadek, Evans, & Pruzan, 2013, p. 3) The impact of organizational characteristics on environmental reporting as social disclosure (Adams, 2002) has been considered by Edwards (1998), Cowen,
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344 Tehmina Khan and Peterson K. Ozili Ferreri, and Parker (1987), Deegan and Gordon (1996), Hackston and Milne (1996), Trotman and Bradley (1981), Adams (2002), and Gray (2002). Waddock (2004, p. 9) has defned CSR to be a focus on corporate citizenship: “strategies and operating practices a company develops in operationalizing its relationships with and impacts on stakeholders and the natural environment.” According to Capriotti and Moreno (2007), CSR is based on the commitments and relationships disclosed by corporations to meet economic, social, and environmental duties. A similar multiple focus of the meaning of CSR has been presented by Frederick, Post, and Davis (1992) as the corporation being held accountable for actions that impact people, communities, and the environment in which the communities or people reside. Branco and Rodrigues (2006) state that CSR is related to complex issues such as environmental protection, social, and organizational factors. Faith-based investing is a type of socially responsible investing. Socially responsible investing is expected to promote CSR and is supposed to refect it in its disclosures. Other literature has presented a choice between social or environmental agendas classifed as ethical investment (Sparkes, 2008). CSR corporate strategies have been expressed as either “environmental sustainability” or “community involvement” (Renneboog et al., 2008). In this body of literature there is an expectation from investors’ evaluation of a “certain type of corporate social performance” (Hockerts & Moir, 2004, p. 86). Balabanis, Phillips, and Lyall (1998) point out that a particular CSR aspect that is focused on by the investment Fund depends on the stance that is taken by its investors. Social responsibility can range from “simple maximisation of profts, to satisfaction of stakeholders’ needs, or fulfllment of social contractual obligations, fulfllment of a frm’s needs, and achievement of a social equilibrium etc.-depending on the stance taken” (Balabanis et al., 1998, p. 27). CSR criteria as used by Socially Responsible investors can mean many different things to different people (Sethi, 2003) as CSR’s operational meaning is “supremely vague” (Smith, 2013, p. 3). Hockerts and Moir (2004) have classifed SRIs as: SRIs that seek CSR-focused investments driven by an expectation that greater responsibility will lead toward greater fnancial returns. And SRIs that implement avoidance: they divert from specifc industries (Sharfman, 1996). There is a substantial debate around what constitutes SRI practices (Lewis & Mackenzie, 2000; McLachlan & Gardner, 2004; Sparkes, 2001). Socially responsible investing may preclude environmental accountabilities and may yet be classifed as SRIs. Faith-based investing which is a type of socially responsible investing is also defned as ethical investing (Davis, 1967). For an ethical investor, CSR as expected and as implemented in investment decisions implies a change from rational, effciency, means focused approach to value-laden, adaptive response to the values of the external society (Belkaoui, 1980; Mahapatra, 1984) and its expectations (Frederick et al., 1992). Socially responsible investing that includes environment considerations, for the purpose of this research, is defned in two ways. Firstly, as investing that comprises environment-based exclusion or inclusion criteria. From this perspective, environmental accountability is the recognition of the responsibility (based
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Do Investment Funds Care About the Environment? 345 on religious principles) of identifying corporate environmental impacts and including these in exclusion or inclusion criteria. The second aspect of socially responsible investing is implementing answerability from corporations around environmental impacts. This factor would be assessed in the form of disclosures in prospectuses around justifcations for selecting or deselecting investments as a result of corporate environmental action or lack of action based on requirements imposed by the Fund. The existence of environmental accountability investment criteria is evaluated frstly to determine whether faith funds accept environmental responsibility societal expectations, and secondly to assess if the environmental accountability selection criteria are implemented. Religion-based organizations play a crucial role as they infuence in many societies [and] are still signifcant contributors to social philosophy and debate, advocates of social justice, major deliverers of social welfare services, centres of community activity, and contributors to economic activity. (Parker, 2002, p. 72) Certain religious sects have far greater economic and or political infuences compared to others. For example members of the religion of Judaism, Episcopalianism (a branch of Christianity), Scientology, Christianity, Hinduism, and Islam have been found to accumulate most economic wealth and infuence (Gilbert, 1998; Grabmeier, 2000; Said, 2013). Religions may form
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general conceptualisations of the relationship between social systems and the natural system as a basis for enhancing the visibility and comprehensibility of organisational actions with respect to their environmental implications. (Dillard, Brown, & Marshall, 2005, p. 82) Faith-based funds restrict investments based on religious principles. These principles include exclusion and inclusion criteria, as “the practice of…the communication of a set of values, of ideals of expected behaviour, of what is approved and disapproved…[which] involves communicating notions of what should happen” (Roberts & Scapens, 1985, p. 448). Responsibility for the environment can only be accepted if the environment is considered to be useful in some way, as recognized in the religious principles (Ahrens, 1996).
2.2. Faith-Based Environmental Accountabilities 2.2.1. Christianity. As far as accountability specifcally for the external environment is concerned, the attitudes toward environmental accountability seem to be more inclined toward faith in perpetual progress, human dominance over all the animals, God’s design of earth solely for human beneft and rule (Jackson, 2014). There is a focus on human separation from the environment, human being’s status closer to God (White, 1967). White (1967) goes so far to suggest that from the
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346 Tehmina Khan and Peterson K. Ozili
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Christianity perspective, the underlying belief (that works against any accountability for the environment) is God’s will for human exploitation in an indifferent manner. According to White (1967), there is no consideration or accountability for how the environment is destroyed or consumed. White quotes a Christian government offcial stating that “when you’ve seen one redwood tree, you’ve seen them all.” He points out events in history that have been driven by the desire to subdue and eliminate ancient paganism that considered all elements of the environment being comprised of spirits and that required respect for the spirits. On the contrary, there is a value system in Christianity referred to as Franciscanism which is more supportive of environmental accountability. Saint Francis of Assisi is considered the heavenly patron of those who promote ecology (cf. Apostolic Letter Inter Sanctos: AAS 71 [1979], 1509f in Sorrell, 1988) in Christianity. Saint Francis offers Christians honest and deep respect for the integrity of the environment. Saint Francis invited all of creation – animals, plants, natural forces, Brother Sun, and Sister Moon – to give honor and praise to God. Franciscansim offers the unity between all of God’s creation and requires every Christian to work toward constructing peace between humans and all of God’s creations (Sorrell, 1988). From this perspective, the onus is on the followers of this belief system to implement decisions and actions required to create and maintain harmony necessary for the survival of humankind. There also a relationship established in Franciscanism between harmony with the environment and peace within: the achievement of the satisfaction of the soul through undertaking accountability for the environment. The milestone progress in Roman Catholic teachings toward accountability for the environment took place in 1990 with the frst papal statement on accountability for the environment was made by Pope John Paul II (1990). The main aspects of the statement that demonstrate accountability for the environment include: The recognition that there is a lack of respect and expansive plundering of natural resources, associated with a decline in the quality of life. He pointed toward a new awareness for the environment that needs to be developed and encouraged with co-ordinated solutions driven by a morally coherent view of the world. Recently, Pope Francis released an encyclical on climate change and the environment. In the encyclical, Pope Francis emphasized greater environmental accountability. The key elements included in the encyclical are: phasing out of fossil fuels (this would include fossil fuel investing as well), criticism of economic interests’ dominance over broader interests, and criticism of manipulation of information to achieve self-centered objectives. He encouraged investing in community projects and reducing consumption as well as undertaking informed, decisive actions to reduce environmental impacts (Vaughan, 2015). On the one hand, there seems to be a perspective of environment’s purpose to be subjugated to the will of human kind, for it to be utilized to meet humankind’s (endless) needs (a view dominant in old theology). On the other hand, the view that humans need to reduce their negative impacts on the environment is also present (derived from St Francis’s teachings evolved into new Christian environmental
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Do Investment Funds Care About the Environment? 347 theology). Examples of contemporary Christian theology supporting greater accountability for the environment have stemmed from concepts such as eco-feminism (McFague, 1987; Ruether, 1992) and eco-justice (Anderson, 1976). The Christian mystics of the eleventh to thirteenth century Germany wrote an environmental centered philosophy as follows: “Everything in the environment, the sum total of heaven and earth becomes a temple and an altar, for the service of God” (Hildegard of Bingen, cited in Fox, 1994, p. 306). This mystic philosophy and other eco-centric Christian theological considerations have been developed by Cobb and Griffn (1976) based on the underlying principle that the environment is a sacred creation of God which requires human stewardship of the natural resources that God has created. Human beings are asked to take on the responsibility and stewardship. This stewardship is expected to be evident in investment criteria of Christianity faith-based funds. 2.2.2. Islam. Kamla et al. (2006) have presented a conceptual framework of Islam which includes respect for all the elements of the environment. According to Islamic principles, the Muhtasib is the person who was (as practiced many centuries ago) and even today responsible for ensuring that business is not harming the community through pollution, waste, and emissions. The Muhtasib had a social role of accountability, where this accountant was answerable in relation to business actions and impacts as well as society’s wellbeing. From a self-accountability perspective, the concept of Akrah (accountability) in Islam is understood as follows: Islam teaches that God will one day judge for how responsibilities have been discharged. There is a strong suggestion of a link between society’s wellbeing and the health of the environment. Sadar (1984) points out that the Quran emphasizes that human is related to the environment and that humankind’s abilities to control the forces of the environment should not be exploited “for the unrighteous desire for domination” (Sadar, 1984, p. 23). Islam requires accountabilities for the impacts on the environment from not only offcials (muhtasibs) but from all Muslims. There are also suggestions of continuous accountability in Islam, expressed as a continuous concern and consideration by every individual of the impacts of their actions. Haider (1984) has described this continuous form of accountability as an environment of responsibility toward the self and toward God. The key values that need to be taken into account in Islam include conservation of resources, reduced or no wastage and the striving toward the development of solutions that should beneft both human kind and the environment. 2.2.3. Hinduism. In Hinduism, the respect for other species is based on the principle of reincarnation and also the belief that plants possess divine powers and the responsibility for implementing protective measures from their destruction rests with humanity (Dwivedi, 1996). This point is further emphasized as an important form of accountability which can be exercised through the connection to the self, through the recognition of inter relationships and inter dependencies between members of the natural world; and the acceptance that human beings are a part of the natural community. In Hinduism, the responsibility for sensitivity and respect and non-violence toward the natural world rests in the concept of dharma. Dharma has been
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348 Tehmina Khan and Peterson K. Ozili defned as moral duty, right action, compliance with the truth including the truth to living the right way, without destroying the natural environment (Bhatt, 1989). The other infuence on enforcing responsibility for the natural environment rests with the concept of Karma. Karma is defned as an individual’s fate or destiny which is infuenced by one’s actions (Jayasinghe & Soobaroyen, 2009) toward the natural environment. The concept of punishment exists in the belief system as an endless destiny of re incarnation into painful lives, never achieving nirvana (absolute blessedness) until dharma is practiced (Dwivedi, 1996). 2.2.4. Judaism. Rabbi Troster (2012) has provided an account of the form of accountability toward the environment in Judaism. The Rabbi has derived his teachings from the Wisdom tradition which comprises of the books of Proverbs, Ecclesiastes, Job, multiple Psalms (Old Testament), Dead Sea Scrolls, the New Testament, and rabbinic literature. According to the Wisdom tradition, Creation is the primary source of happiness for human beings. Happiness can be achieved by imitating the order of Creation and its associated values. The main focus is the link between accepting accountability for the environment and true happiness. Happiness is defned as the fourishing of an individual’s inner satisfaction/peace and the attainment of the understanding of the meaning of life. It does not include the attainment of personal pleasure through economic gains. There is a duty to understand how the natural world works and the responsibility to use this knowledge to undertake “prudential” behaviors (6:6-11 in Rabbi Troster, 2012). In Judaism, there is the ideology of tikkun olam (the responsibility to repair the world) (Benstein, 2006). A famous quote from the Ecclesiastes has also been referred to in Judaism to promote accountability for the caring of the physical environment which is as follows: “Consider God’s doing! Who can straighten what He has twisted?” (Eccles 7:13 in Harvey, 1976). When the Holy Blessed One created the frst Adam, God showed Adam all of the trees of the Garden of Eden and said: “See My works, how lovely they are, how fne they are. All I have created, I created for you. Take care not to corrupt and destroy My world, for if you ruin it, there is no one to come after you and put it right” (Eccles, Rabbah 7 in Harvey, 1976). The key words in this quotation are to “take care.” The onus is placed on all followers of Judaism to accept and undertake the responsibility to ensure that corruption and destruction of the environment does not occur. There is also a warning that the damages that are caused by human kind to God’s creation cannot be reversed. Rabbi Troster (2012) does point out that 2,000 years of displacement of the Jews from their land has caused an attitude of lack of care for the physical environment. This long time frame of lack of connectedness to the land has caused Jews to focus more on the soul (the rewards in the afterlife) rather than the physical. There is also a deep belief in Judaism in devine hash-gacha or that too much worry is a sign of not enough faith. There also seems to be a split accountability for trees specifcally as follows: you are not to bring ruin upon its trees… for from them you eat, them you are not to cut down, you know that they are not trees for
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Do Investment Funds Care About the Environment? 349 eating, them you may bring to ruin and cut down. (Deuteronomy 20:19-20 in Vogel, 2001) Also, “He who kills the mother and off-spring on one day is considered as if he destroyed the species” (Nahmanides (1194–1270), a medieval Jewish commentator in Vogel, 2001). There is selective destruction of the natural world that is allowed in Judaism theology and there also exists selective accountability for the preservation of species that would beneft humankind and that is required for the sustainability of human kind. The accountability for the natural environment is driven more by anthropocentric rather than eco-centric considerations. The economically productive use of natural resources is not considered wasteful in Judaism (Vogel, 2001). As Vogel (p. 359) has stated “if the transformative use of any raw materials, including fruit-bearing trees, will produce more proft than using it in its present form, its transformative use is permitted.”
3. Research Method and Data Analysis
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There are two types of funds: mutual funds (funded by shareholders and professionally managed) and exchange-traded funds (those that track an index, a commodity, bonds or a basket of funds and are traded like common stock) (Chamberlain, 2013; Investopedia, 2015). At present, there are predominantly faith-based mutual funds (Kathman, 2012) in existence. The MutualFunds database has been used to identify the faith-based funds and their related investment selection criteria. Nine faith-based mutual fund families have been identifed (Scatizzi, 2010) and are in Table 1. Other sources for confrming the sample include Randall (2009), Scatizzi (2010), and Smith (2015). Israeli Mutual Fund has been added to the list as a result. Please note that the database did not identify faith-based funds based on Hindu principles. The sources of information analyzed include the Funds’ prospectuses, annual reports in some instances and the Funds’ websites accessed via the Exchange Traded Funds database.
3.1. Prospectuses Since majority of the funds analyzed are managed by institutions based in the United States, the summary/statutory prospectuses that have been made available via the MutualFunds.com database based1 on the legal requirements in the United States have been analyzed. The purpose of undertaking the analysis is to evaluate whether “green,” environmental, social investing information is present in the prospectuses or on the websites of the faith-based funds. The summary prospectus which is not mandatory at present is expected to be 3–4 pages in length (Robertson & Kelly, 2009) while the statutory prospectus which is provided on the Fund’s website can be hundreds of pages long. Information, in
1
http://mutualfunds.com/funds
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350 Tehmina Khan and Peterson K. Ozili Table 1. Faith-based Mutual Funds – Headquarters in the United States/Israel. Name of Fund
Religious Principles
Total Asset Value in US Dollars 2014/2015
LKCM Aquinas Funds
Catholic
51.5 million 2015
Ave Maria Fund
Catholic
250 million 2015
New Covenant Funds
Presbyterian (Bible centered)
425.47 million 2014
Guidestone Funds
Protestant (Christian)
US$ 1.34 billion 2015
MMA Praxis
Mennonite Principles (Christian)
223.2 million
Thrivent Financial
Lutheran ( Christian)
US 105 Billion (end of 2014)
Steward Mutual Funds
Christian
848.69 million
Timothy Plan
Judeo-Christian
700 million-2013 (Smith, 2013)
Amana Funds
Islamic
34.35 million 2014
AMIDEX35^TM Israel Mutual Fund (HQ-Israel)
Jewish
US 16 Billion
plain English, necessary to make an investment decision is required in the statutory prospectus under Form N-1A (SEC, 1998) and includes investment objectives and principal strategies: specifc types of securities in which the Fund invests and any policy that the fund uses to concentrate investments in an industry or group of industries.
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3.2. Content Analysis Content analysis of the Funds’ websites has been undertaken. This is due to the following reasons: frstly, statutory prospectuses are required to be disclosed on the Funds’ websites by SEC. Secondly, content analysis of an entity’s website disclosures that may include multiple forms of reports is an established data collection technique (see as implemented by Jose & Lee, 2007; Herring, 2009; Frost, Jones, Loftus, & Laan, 2005; Guthrie & Farneti, 2008; Khan, 2013). A mechanistic analysis that applies disclosure volumes and frequencies (Beck, Campbell, & Shrives, 2010; Guthrie, Petty, Yongvanich, & Ricceri, 2004) has been avoided. Rather, an interpretive approach that requires the attainment of understandings (Aerts, 2005; Beck et al., 2010) has been adopted. For this purpose, both manual and coded searches in NVIVO12 were undertaken. The following keywords were used to select sections in the prospectuses to identify environmental responsibility criteria used for selection of investments: selection criteria, screening, exclusion, avoidance, fund classifcations, environment, nature, emissions, impacts, environmentally responsible.
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Do Investment Funds Care About the Environment? 351 A detailed analysis for Christian-based faith funds is provided as majority of the mutual funds selected are Christian principles based funds (Table 1). One fund from the list based on Judeo-Christian values is considered under Judaism and another one under Islam. The Israeli mutual fund is also covered briefy. A brief description of progress toward Hinduism-based social investing is provided.
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3.3. Data Analysis 3.3.1. LKCM Aquinas Funds. The Fund follows the Socially Responsible Investment Guidelines developed by the United States Conference of Catholic Bishops (USCCBs). There are two main principles of Stewardship under the Guidelines: the frst Principle requires the exercise of responsible fnancial stewardship over the economic resources, implying a reasonable rate of return on the investments. Principle 2 requires the exercise of ethical and social stewardship in the investment policy. The investment policies (criteria) include: Protection of human life: The Fund requires the absolute exclusion of companies that participate in or support abortion. USCCB has stated that it would direct investments in companies that promote equal pay and promotion opportunities for women and invest in pharmaceutical companies that sell life sustaining drugs in economically disadvantaged countries. USCCB does not invest in companies that appeal to prurient interest in sex or that incite sexual excitement. It avoids investment in companies that engage in military weapons production. USCCB prohibits investing in companies that manufacture, sell, or use anti-personnel land mines. It is working on recommending and supporting shareholder resolutions to promote generous wages, worker safety, affordable housing, and banking. The USCCB Guidelines support activities to “preserve the planet’s ecological heritage, addressing the rampant poverty in the poorest nations, redirecting development in terms of quality rather than quantity in the industrial world [and] creating environmentally sensitive technologies” (United States Conference of Catholic Bishops (USCCBs), 1991). In addition, USCCB encourages investment in businesses that undertake initiatives for energy conservation and that are involved in the development of renewable and clean energy resources. It requires companies to report on social, environmental, and fnancial performances. The types of investments that LKCM Aquinas Funds has identifed in its prospectus (LKCM, 2015) under investment strategies include 80% of net assets in equity securities of small companies (market capitalization between $600 million and $4.5 billion). The main criterion is investment in companies with above-average growth in revenue and potential for above-average capital appreciation. The characteristics of the companies that LKCM looks for include high proftability levels, strong balance sheet, competitive advantages, strong market share, and strong valuation. As far as the practice of socially responsible investing is concerned, the Fund states that it screens companies based on the criteria set forth in the USCCBs Guidelines. It has stated that it undertakes dialogue with companies whose
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352 Tehmina Khan and Peterson K. Ozili practices confict with the Guidelines and that it could “potentially” “attempt to” exclude securities that are not willing to change their policies and practices within a reasonable time frame. 3.3.2. Ave Maria Catholic Values Fund (AVEMX). The fund screens according to parameters set up by a board comprised of Catholic professionals. Investments in companies that involve abortion or pornography, companies that contribute to planned parenthood or that offer non-marital benefts are not allowed. Eighty per cent of the Fund’s equity investments need to meet the religious criteria. The key determinants in the selection criteria include typical fnancial measures. The Fund asserts to practice morally responsible investing using the core values and teachings of the Roman Catholic Church. The Catholic Advisory Board uses two avoidance criteria: companies that are involved in the practice of abortion and companies that are anti-family, defned as companies that are involved in pornography or that have policies that “undermine the Sacrament of Marriage” (p. 3). There is no cap on market capitalization of companies that are invested in and the Fund is attracted to emerging markets (Ave Maria Mutual Funds, 2015). There is no mention of green criteria relating to the selection of investments in AVEMX’s prospectus. 3.3.3. New Covenant Fund. This fund’s selection criteria exclude companies that are involved in gambling, alcohol, or frearm sales. The fund offers an average gain of 4.8%. Banking institutions form a major part of the portfolio, as well as the energy sector. Companies in the investment portfolio include ConocoPhillips (COP) and ExxonMobil as well as consumer products companies including Procter and Gamble (Randall, 2009). Socially responsible investing is mentioned as a unique feature of New Covenant Funds on its website. The investment criteria described by New Covenant include exclusion criteria as well as positive screening criteria that include Environmental, Social and Governance Screening. Strong environmental practices are expected from companies by New Covenant. The investment objectives and strategies are consistent with the social-witness principles as adopted by the General Assembly of the Presbyterian Church. Investments in military-related activities and production, tobacco and companies that are involved in human rights violations are prohibited. In addition, the funds do not invest in companies that derive revenues from alcohol, gambling, and tobacco, and in companies in the weapons industry. The portfolio of the trust comprises of a large number of US-based fnancial institutions (New Covenant Funds, 2014). As disclosed in the New Covenant Funds N-CSR form annual report (New Covenant Funds, 2015), the Fund’s investments are in these sectors: Information technology, consumers discretionary, fnancials, health care, industrials, energy, materials, consumer staples, telecommunication services, cash deposits, and utilities. It appears that contrary to New Covenant’s assertion that it expects environmental responsibility from companies, “environmental factors and disclosure [have] no mainstream decision relevance” (Campbell & Slack, 2011, p. 59). 3.3.4. Guidestone Funds Guidestone Funds has more than $1 billion in assets. It does not invest in gambling, pornography, alcohol, and tobacco stocks. Its focus
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Do Investment Funds Care About the Environment? 353 is on large market capitalization growth stocks including Apple, Google, and Visa (Randall, 2009). As disclosed on Guidestone’s website, the fund is found on the principles of integrity and excellence. The main investment objective as disclosed in the prospectus (Guidestone Funds, 2015) is to attain the highest total return over time in the form of capital appreciation and income. The fund invests in natural resource industries including companies that engage in discovery, development, distribution, or production of natural resources. There were no exclusion criteria mentioned in relation to Natural Resources investments. 3.3.5. MMA Praxis Mutual Funds. The Fund is run according to the Mennonite Principles (Randall, 2009). The Fund follows a Christian Stewardship philosophy and excludes companies associated with alcohol, tobacco, gambling, abortion, nuclear energy, and weapons manufacturing (Social Funds, 2015). According to Social Funds, MMA Praxis seeks companies with positive records or achievements in environmental performance. Praxis has invested in the Swedish Export Credit Corporations fve year green bond (Everence, 2015a). The funds generated from the Bond are used to fnance exports of Swedish environmental technology to promote climate friendly projects around the world. Other MMA investments have included purchase of US dollar denominated World Bank green bond and bonds in solar and wind installations. The prospectuses contain information about the various funds, associated risks, fees and expenses. The key Stewardship investing principles also include community involvement and environmental stewardship (Everence, 2015b). Green bond investing is highlighted in the annual report by the President of the Fund. Main industries that are invested in include metal and mining, oil, gas, paper, and forest products (Everence, 2014). Although there is evidence of some effort to promote “green,” environmentally responsible investing by Praxis, investments “contradict the very ruison d’itre of these investment products” (Laan & Lansbury, 2004, p. 21). 3.3.6. Thrivent Financial. Thrivent Financial is a not-for-proft and a Fortune 500 fnancial services organization. It is a fraternal beneft society which provides insurance to its members and is required to undertake social, intellectual, charitable, religious projects for the beneft of the members and the public (Thrivent Financial, 2015). The top 10 holdings include investments in companies from these sectors: pharmaceuticals, information technology companies, retail, hospitality, telecommunications, plastics, fnancial institutions, aviation, and electronics (Thrivent Financial, 2015). Mutual Funds comprise of conservative and aggressive funds and include stocks and bonds. Thrivent’s 2014 annual report comprised of an overview of the economic conditions, factors impacting the Fund’s performance and the future outlook in relation to the Fund’s performance. The Fund asserts that it combines fnancial expertise with Christian values of faith and stewardship. Companies in which the investments are undertaken include energy companies for example Exxon Mobil and materials companies including the Dow Chemical Company (Thrivent Mutual Funds, 2014). There is approximately $31 million invested by this Fund in the Energy sector as common stock. The investment principles found on the website are categorized under “Living Generously” (Thrivent Financial, 2015). The main purposes of investing include
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354 Tehmina Khan and Peterson K. Ozili helping families and churches. There is no information provided about environmental, green criteria, or investments. 3.3.7. Steward Mutual Funds. The Fund applies Christian values and exclusively avoids investments in companies that attain a signifcant portion of their revenue from abortion, alcohol, gambling, pornography, and tobacco (Capstone Asset Planning Company, 2015). The prospectus (Capstone Asset Planning Company, 2014) has information about the investment objective, fees and expenses, principal investment strategies, risks, performance, specifc information about these factors for the four different types of funds, information about the sale of the funds, tax information, buying, selling, redeeming, exchanging and distribution information in relation to the shares as well as fnancial highlights. Information about socially responsible investing is provided. The avoidance criteria are re-emphasized in the prospectus with no mention of green, environmental criteria. 3.3.8. Timothy Plan Funds. Timothy Plan uses Biblical Principles to select companies to invest in. It has $700 million in managed assets. The selection criteria require exclusion of companies involved in abortion, planned parenthood, pornography, homosexual agenda, alcohol, tobacco, gambling, lifestyle and entertainment. 845 companies have been excluded from the Timothy Plan Fund based on these criteria. There is a hall of shame with a list of companies and reasons for excluding the companies from investing. None of the exclusion criteria include environmental concerns or factors. No “green” selection criteria are provided in the prospectus. In the statement of Additional Information (Timothy Plan, 2015b), it is mentioned that purchase of oil, gas or other mineral leases, rights or royalty contracts or exploration development programs will not be undertaken but the Funds may invest in debt instruments or securities of companies which invest or sponsor these ventures. 3.3.9. Amana Funds. Amana Funds is classifed as a socially responsible large cap growth fund that invests according to Islamic Principles (Halal investing). It avoids companies that are involved in alcohol, pornography, and gambling; it avoids companies that have high leverage (U.S. News & World Report, 2015). The fund does not invest in companies that pay or receive interest (Randall, 2009). Its average return is 2.9% per year. Generally, in relation to Islamic principles based investing, green projects funded by sukuk or Islamic bonds (green sukuk) for investments in clean energy, mass transit, water conservation, forestry and low carbon technologies are being considered (Climate Bonds, 2014; Khazzam,2015). They are not available yet. 3.3.10. Hindu Heritage Endowment. Socially responsible investing is not a key consideration by Hindus (Elfman, 2005). Elfman (2005) has briefy referred to Satguru Bodhinatha Veylanswami who is the leader of the Saiva Siddhanta Church which controls the multimillion dollar funds of the Hindu Heritage Trust. Information about socially responsible investing by Hindus could not be found on the MutualFunds.com website or through a Google search. Elfman (2005), when interviewing a Hindu money manager identifed the following criteria for selecting investments: the funds avoid companies that promote violence, companies that manufacture weapons or infict harm on animals. Companies that undertake meat processing are excluded as well.
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Do Investment Funds Care About the Environment? 355 Bodhinata has provided the following criteria for companies’ selection: companies that engage in tobacco, gambling, pharmaceutical companies that engage in animal testing, companies in the food industry involved in packaged meat, fsh or fowl are avoided. Screening for defence or weapons’ manufacturing is not undertaken. Environmental measures are not considered as Bodhinata states that “all industries are involved in pollution to one degree or another” (in Elfman, 2005). Recently, the former Chairman of the National Biodiversity Authority has called for environmental norms for Indian fnancial institutions. Mr Pisupati pointed out that no progress has been made around the release of guidelines on investments in projects that affect biodiversity and ecosystems (Vincent, 2014). 3.3.11. Jewish Socially Responsible Investing. The focus in Jewish Socially Responsible Investing is on diversifcation. The principles require avoiding investing in countries that sponsor terrorism (Smith, 2013). The standard criteria for the selection of companies for investment include an emphasis on safety, liquidity, developing the land of Israel and the fnancial development of the Jewish society (Meir, 2009). The Jewish Funds for Justice Community Investment Initiative has issued more than $30 million in loans for community development in the United States (Governance & Accountability Institute, 2010). AMIDEX35^TM Israel Mutual Fund invests exclusively in Israeli companies trading on Tel Aviv and US stock exchanges. The purpose of the Fund is to invest in Israel’s key sectors that include pharmaceuticals, banking, and insurance. The prospectus contains information about the Fund’s objective which is long-term capital growth and principal investment strategy which is to invest 95% of the Fund’s net assets in AMIDEX35^TM which comprises of the 35 largest publicly traded Israeli companies (AMIDEX35^TM Israel Mutual Fund, 2014).
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4. Discussion Faith-based funds have been classifed as a type of socially responsible (SR) mutual funds (Kathman, 2012; Scatizzi, 2010). Literature on socially responsible investing suggests that SR investors are interested in promoting the wellbeing of the planet in conjunction with wealth creation (Sauer, 1997). On the contrary, fndings from the evaluation of the selection criteria of the select faith-based funds correspond with the views of McLachlan and Gardner (2004), Lewis and Mackenzie (2000), and Sparkes (2001) who consider the exact meaning of Socially Responsible investing as broad. Criteria used by the portfolio managers capture specifc impacts on society (Hallerbach & Spronk, 2002). The main explanatory factor for the lack of traction is the absence of practice of explicit sustainability responsibility knowledge (Barrett, 2000; Sperber, 1985; Sperber & Sperber, 1996; Whitehouse, 2004) and sustainability supporting investments are perceived as burdensome and cognitively costly (Pyysiainen, 2001). Anthropomorphism, or assigning human presence in objects, is easier to process (Guthrie, 2015). There is an increasing dominance of economic rationality (Deetz, 1992) as “animals, plants, the physical state of the world… do not
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356 Tehmina Khan and Peterson K. Ozili enter into consideration, except…as backdrop to human well-being” (Nelson, 1995, p. 138). It appears that Faith based investors are willing to accept the preexisting social structure (Jones, 1996) around business investments. From a practice point of view, faith-based funds need to take into consideration the religious principles which require a consideration of reducing environmental impacts and which promote the implementation of environmentally responsible investing. The main practical implication is that faith-based funds have been relying on exclusion criteria which have been narrowly defned for quite some time. The theoretical underpinnings of most religions support a novel form of stakeholder expectations which are environment impact focused rather than heavily social impact focused.
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5. Conclusions The main goal of socially responsible investing is to encourage businesses to improve their ethical, social, and environmental performances (De Colle & York, 2009). Faith-based mutual funds have been infuenced by narrowly defned and established social values criteria and maximization of expected returns (Diouf & Hebb, 2014). It is found that the practice of socially responsible investing does not necessarily include all social, ethical, environmental, and corporate governance issues. It is a matter of choice for investments’ selection between these factors (Sandberg, Juravle, Hedesström, & Hamilton, 2009; Sparkes, 2001). Heterogeneity in relation to strategies and criteria has been found previously between different types of SRIs (Sandberg et al., 2009) as in this chapter. This chapter has highlighted two points: frstly, that CSR does not always include environmental responsibility (Shane & Spicer, 1983; Stevens, 1984). This generalization of inclusion of environmental sustainability has been unsubstantiated in the selection criteria of most of the funds. The second point is that religious theory and religious practice differ regarding environmental sustainability. Greater economic returns (Herremans et al., 1993) remain the focus in faithbased funds.
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362 Tehmina Khan and Peterson K. Ozili Sperber, D. (1985). Anthropology and psychology: Towards an epidemiology of representations. Man, 73–89. Sperber, D., & Sperber, D. (1996). Explaining culture. Oxford: Blackwell Publishers. Stevens, W. (1984). Market reaction to corporate environment performance. In B. Schwartz (Ed.), Advances in accounting (pp. 41–62). Teoh, H., & Thong, G. (1984). Another look at corporate social and reporting: An Empirical Study in a developing country. Accounting, Organizations and Society, 189–220. Thrivent Financial. (2015). Thrivent mutual funds. Retrieved from https://www.thrivent. com/products/fles/mutual-funds/autodeploy/Top_Ten_Holdings.pdf Thrivent Mutual Funds. (2014). A unique kind of Not-for-proft. Retrieved from https:// www.thrivent.com/posts/community/a-unique-kind-of-not-for-profit.html. Accessed January 10, 2015. Timothy Plan. (2015a). Statutory Prospectus. Retrieved from http://hosted.rightprospectus.c om/TimothyPlan/Fund.aspx?dt=P&cu=887432763&ss=TP. Accessed on February 2015. Timothy Plan. (2015b). Statement of Additional Information. Retrieved from http://hosted. rightprospectus.com/TimothyPlan/Fund.aspx?dt=P&cu=887432763&ss=TP. Accessed on February 2015. Trotman, K. T., & Bradley, G. W. (1981). Associations between social responsibility disclosure and characteristics of companies. Accounting, Organizations and Society, 6(4), 355–362. Tsang, E. W. (1998). A longitudinal study of corporate social reporting in Singapore: The case of the banking, food and beverages and hotel industries. Accounting. Auditing & Accountability Journal, 11(5), 624–635. U.S. News and World Report. (2015). Amana Trust Growth. Retrieved from http:// money.usnews.com/funds/mutual-funds/large-growth/amana-trust-growth/amagx. Accessed on June 10, 2015. United States Conference of Catholic Bishops (USCCBs). (1991). Renewing the Earth. Retrieved from http://www.usccb.org/issues-and-action/human-life-and-dignity/ environment/renewing-the-earth.cfm. Accessed on June 11, 2015. Vaughan, A. (2015). Eight things we learned from the pope’s climate change encyclical. The Guardian. Retrieved from http://www.theguardian.com/environment/2015/jun/18/ eight-things-we-learned-from-the-popes-climate-change-encyclical. Accessed on July 20, 2015. Verschoor, C. (1998). A study of the link between a corporation’s fnancial performance and its commitment to ethics. Journal of Business Ethics, 17(13), 1509–1516. Vincent, P. (2014). Norms needed for banks against investing in green hazards. The Hindu. Retrieved from http://www.thehindu.com/sci-tech/energy-and-environment/normsneeded-for-banks-against-investing-in-green-hazards-balakrishna-pisupati/article 6563668.ece. Accessed on July 11, 2015. Vogel, D. (2001). How Green Is Judaism? Exploring Jewish environmental ethics. Business Ethics Quarterly, 11(2), 349–363. Waddock, S. (2004). Parallel universes: Companies, academics, and the progress of corporate citizenship. Business and Society Review, 109(1), 5–42. White, L. (1967). The historical roots of our ecologic crisis. Science, 155(3767), 1203–1207. Whitehouse, H. (2004). Modes of religiosity: A cognitive theory of religious transmission. Walnut Creek: Rowman Altamira. Yahoo Finance. (2015). Fund profle. Retrieved from https://au.fnance.yahoo.com/ indices?e=asx. Accessed on June 11, 2015. Zadek, S., Evans, R., & Pruzan, P. (2013). Introduction. In S. Zadek, R. Evans, & P. Pruzan (Eds.), Building corporate accountability: Emerging practice in social and ethical accounting and auditing (p. 3). London: Routledge.
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Chapter 18
Exploring the Internet of Things Within the New Generation Smart Home Systems: A Qualitative Study Burak Demir and Keti Ventura Abstract Introduction: Digitalization has become crucial in our daily lives. The rapid rise of new technologies and high interest levels of individuals enforces companies to invest in these technologies. Nowadays, as customers are willing to try new experiences, companies dynamically start to fnd new ways to develop their products and services. One of the most popular technologies used by companies to improve their services is the Internet of Things (IoT) technologies. Education, health, transportation, retail, and energy are some of the industries in which the IoT is frequently being used. As security concerns of individuals arose and willingness to remote control increases, innovative and technological projects with IoT applications are engaged in the construction and real estate sector.
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Aim: The purpose of this chapter is to explore IoT applications within the new generation smart home systems. In this framework, the effect of IoT technologies on architectural structure of the smart home and operating systems as well as IoT and mobile-supported customer-focused applications and diffculties are analyzed. Method: The study is designed as an exploratory study. The data are obtained from face-to-face interviews with companies operating on technology-based commercial and residential projects. Descriptive analysis method is used to analyze data. Sample selection was carried out by the judicial sampling technique. Findings: The results showed that smart home systems offer several customer-oriented experiences to their users like personalized accessibility,
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New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
364 Burak Demir and Keti Ventura comfort, time control, and energy savings. Wired and wireless communication protocols are included in the architecture of the system. Linux core software-based Android and iOS operating systems are used in order to enhance personal accessibility. However, some diffculties are noticed in the sector. Lack of information and internet infrastructure of companies that install electrical set-up are mentioned. Contractors, after sales service support, and customer-oriented applications are evaluated. Keywords: Internet of Things; IoT devices; customer-oriented applications; smart home automation system; mobile systems; security and energy saving JEL Codes: M00; M30; M31
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1. Introduction As a result of the rapid change in the human needs cycle, various software and hardware programs, advanced communication tools, and cloud-based systems have emerged and become interconnected. Therefore, many technological investments are on the agenda in industrial markets. New product and service models make peoples’ lives easier in different sectors. The Internet of Things (IoT) concept is important to ensure long-term sustainable value at various customer touch points. IoT technologies are used in many different sectors such as education, health, transportation, retail and energy, etc. As security, energy saving and remote control of home appliances become more important for customers, innovative and technological projects have gained much interest in the construction and real-estate sector. It’s proven that smart home systems provide qualifed and solution-oriented benefts for customer requests and needs in terms of comfort, saving, speed, functionality, resourcefulness, and time value. The evaluation of IoT technologies will be important for smart home systems. The purpose of this chapter is to explore IoT applications within the new generation smart home systems. The chapter begins with a look at IoT and the structure of smart home systems and then moves on to the qualitative research results. The chapter concludes with evaluations and propositions for research and practice.
2. Literature Review The concept of IoT, its benefts for customers, and their customer-oriented applications within smart home systems are discussed below.
2.1. The IoT The concept of IoT is a system that consists of a series of technical, dynamic, innovate principles, and ranges from computing to wireless sensors to nanotechnology. It’s a technological revolution based on the Internet that represents the future of companies and people (Singh, 2016, p. 943).
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Exploring the IoT Within the New Generation Smart Home Systems 365 IoT is a platform that can transfer and share data between smart objects over a network infrastructure, as well as, being a smart communication network and providing remote, close connection, monitoring and detection with each other through communication protocols with different functions (Gubbi, Buyya, Marusic, & Palaniswami, 2013; Ventura, 2018, p. 67). These devices, which have all kinds of physical qualities, are responsible for the collection and processing of information, communicating, being identifable, and being able to be found from certain distances. It needs a unique address to achieve semantic integration between people and objects and to achieve the ability to perceive and respond to signals that occur in interaction (Erdem, 2015, p. 5; Morandi, Sicari, De Pellegrini, & Chlamtac, 2012). IoT has also the potential to reduce resource usage by businesses whilst allowing data to be available in cloud storage and be continuously monitored (Khan, 2020, p. 292; Morgan, 2014). IoT creates signifcant opportunities for businesses and customers. Traditional marketing experiences can be successful in attracting customers and generating demand. On the other hand, IoT combines marketing with product experience and increases the interaction in customer expectations by making technological improvements in the product design (Sinha & Park, 2017, p. 233). It’s possible to develop new business models based on innovation, like closely following the products that customers look for online and providing personalized value offers (Gubbi et al., 2013; Jabraeil, Bahrami, Heidari, Allahverdizadeh, & Norouzi, 2020). IoT is one of the frequently used tools, which aims to increase customer satisfaction, loyalty, and trust at customer touch points. It’s possible for companies to obtain new and valuable information about customer behavior with IoT technologies. This will be a competitive tool for companies to be proactive in the future (Marek & Woźniczka, 2017, p. 172).
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2.2. Smart Home Systems The smart home automation system is an IoT-based concept that creates a common synergy in various engineering and science felds. The architectural structure of smart home systems is developing rapidly with the spread of the concept of information and the advancement of technology. It consists of a communication network that integrates new technologies to improve people’s quality of life (Singh, Agrawal, & Goyal, 2020, p. 95). The smart home concept is an automation system that provides users with easy detection, continuous monitoring, and control. A smart home is an ecosystem of technological devices that provides comfort, security, convenience, peace, speed, energy effciency, ease of access, control, intelligent surveillance, and monitoring. Users can carry out many functions that make life easier, such as lighting, security, entertainment, sound, heating, and blind control (TEC, 2017, p. 1). Furthermore, it allows users to access devices on the network regardless of their location in relation to their smart home systems. This means that the user can control and monitor settings and other parameters from anywhere. While thought of as
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
366 Burak Demir and Keti Ventura a fantasy, this control instinct is possible through IoT technologies. Smart home systems can be classifed in two parts (Bhat, Bhat, & Gokhale, 2017, p. 149): • Sensors, Relay Hardware (Home devices, switch modules and RF data receiver,
etc.) • User Interface and Processing Hardware (Interface device, processor, data col-
lector, GPRS (General Packet Radio Service: It’s a technology that enables data transfer over the network in mobile) module to communicate with the Internet). Sensors are devices that detect various inputs from the physical environment and convert them into electrical signals for processing. Sensors transfer the measurement data received from the environment to the controller device. Controllers send this data to activators or any object stored in the cloud (Gündüz & Daş, 2018, p. 329). Relay Hardware is an electromagnetic switch that can turn on and off the electric current and operate continuously through a low electric current. Relays actually take on the actor’s role (Nagaraja & Srinath, 2020, p. 60). It is possible to manage all scenarios in the home with the user interface device. This provides the user with real-time information (Makino et al., 2016; Sun, Dannah, Liu, & Liu, 2019, p. 228).
3. Research Methodology Smart home systems were taken into consideration due to the technological trends in the construction industry and the increased usage of IoT technologies in marketing. In this part, the purpose, research questions, sample selection, data collection, and the fndings are presented.
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3.1. Purpose This study is designed as an exploratory study which aims to explore IoT applications within the new generation smart home systems. In this framework, the effect of IoT technologies on architectural structure of the smart home systems mobile-supported customer-focused applications, security, energy saving and diffculties are analyzed.
3.2. Research Questions • What are the architectural structures and operating systems of the new genera-
tion Smart Home Systems? • What are IoT and mobile-supported customer-oriented applications? • How can users beneft from IoT-based security systems and energy savings? • What are the challenges in the new generation smart home systems and IoT
technologies?
3.3. Sample Selection and Data Collection In the study, judgment sampling technique is used. This technique is used to select information-rich cases and involves the recruitment of participants, who should
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Exploring the IoT Within the New Generation Smart Home Systems 367 Table 1. General Information About Companies and Participants. Company Name
Participant’s Name
Participants’ Jobs in Company Gender The Company Experience in Year
Core Smart Home Systems
Erdal DEMİRCİ
Sales and Marketing Director
TMS (Technology Management System)
Mustafa FİLİZCİ
Bosmer Hager
7
Male
Company Owner
16
Male
Mert ÜNLÜÖNEN
General Manager
11
Male
Emre ÖZCAN
Regional Manager
12
Male
have prominence or experience, according to researcher’s pre-determined criteria based on the research questions (Lopez & Whitehead, 2013, p. 125). Smart home systems and customer-oriented IoT applications require high levels of technical information and expertise. The data are obtained from face-to-face interviews with four companies, Core, TMS, Bosmer and Hager, operating on technologybased commercial and residential projects. Table 1 displays the profle of the participant companies. The data gathered are analyzed by descriptive analysis method.
4. Findings
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In this chapter, fndings regarding the technical aspects and customer-oriented applications of the new generation smart home systems are included. In this context, fndings regarding the architecture and operating system, IoT and mobilesupported customer-oriented smart home systems applications, IoT-based security systems, energy saving and the diffculties of the system are presented.
4.1. Architectural Structure and Operating System of IoT-Based Smart Home Systems IoT-based smart home system is a system that allows consumers to experience services such as easy access, comfort, convenience, time saving and helps people to boost their quality of life (Ghayvat, Liu, Alahi, Mukhopadhyay, & Gui, 2015). According to participants, smart home systems can provide several facilities like accessibility, control heating and cooling, sound, one-touch lighting, comfort, time control, convenience, energy saving and the ability to customize technology and security. It’s an automation structure that controls various systems and manages them according to the needs of customers. Participant companies stated that the brands have a very stable and smooth operating structure during the initial installation of smart home systems and they added that customized solutions can be offered based on customer needs. It’s
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
368 Burak Demir and Keti Ventura indicated that Z-Wave mesh network structure provides customers with communication security, energy saving, easy connectivity, and workability. Consider, for instance, the statement below: “It’s a structure that makes people’s lives qualifed. It was used as a cable structure like KNX in the 1990s. Who are these formed by public switch socket groups; Like Schneider, Siemens …? There was a communication protocol created by European brands. Z-Wave says that every device independent from the manufacturer has to communicate with each other.” (E.D., Core Smart Home Systems) KNX is a structure that provides automation and is an open standard for electronic systems for industrial companies and buildings (Jain et al., 2014, p. 3). According to participant companies, the KNX system has a long-term, problem-free revision feature which provides standardized communication and energy-saving integrated communication protocols and gathers functions of different qualities in a single center. The needs of customers are met through various scenarios which create a more reliable, auditable, solution-oriented and low-cost living space for individuals or companies. The signifcant remarks of participants about the KNX system are as follows:
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“The frst main reason for the automation system thought is energy effciency. Large plazas, offces, etc. used to be manual. Over time, different protocols were created. The concept of IoT and Industry 4.0 emerges from here, everything is interconnected. When a commercial structure is formed, companies such as ABB, Siemens… are investing. Thus, KNX structure is released.” (M.Ü., Bosmer) “It’s a system where people satisfy their needs with various scenarios. KNX system is available. In the past, every company had its own device and its own protocol. Each brand can be independent from each other. Since the protocol software language and the cabling of the system will depend on the common protocol, customers and companies can purchase the products they want independently.” (E.Ö., Hager) Singh et al. (2020) revealed that smart home systems’ communication network integrates new technologies to improve people’s quality of life. Consistent with the fndings of Singh et al. (2020), TMS company stated that smart home systems are shaped according to the demands of the customers and also the rational and hazardous aspects of people’s lives can be solved to make life easier. One can see that the control of multimedia devices in the house by means of sound and motion actions is provided quickly and interactively with Arduino and various sensor modules. This is expressed in following statement: “Everything starts with the needs of customers, it is a system that offers comfort, splendor and technology. A 220-volt structure in
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Exploring the IoT Within the New Generation Smart Home Systems 369 Arduino is a system that uses the power line as data. The customer comes from an application, the curtain or the air conditioner etc. says I want to check. We prefer KNX, RF, ZigBee or Z-Wave with small modules that can be placed behind the switch.” (M.F., TMS) The participants also expressed that operating systems must be Linux core software-based Android and iOS in order to increase the penetration of IoT device technologies to remote control and meet the changing consumer demands. The reason why it’s preferred by customers is that IoT technologies in the system work in harmony with all brands. Companies need to develop their own mobile software and follow the innovations that will turn into a trend for customer demands. Some important opinions of participants are as follows: “I can call KNX an operating system. They use software that embeds Android software on the Linux sub-base. There are both IOS and Android as apps.” (M.F., TMS) “X can be an operating system, there is no problem in this system. If you talk about KNX in your system, there is no operating system, you can control it remotely with IOS and Android. The concept of the system during the establishment phase is its planning.” (M.Ü., Bosmer)
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4.2. IoT and Mobile-Supported Customer-Focused Smart Home Systems Applications Businesses are actively involved in developing wired or wireless communication channels or protocols through their own technologies. Cost and infrastructure development play a vital role (Blaji, Nathani, & Santhakuma, 2019). According to participants, it is possible to provide for all the requests and needs of the customers at any time, place, and conditions with IoT technologies. Thanks to these technologies used through mobile devices, one eliminates the time and space restrictions for customers and accelerates access. Islam, Islam, and Mazumder (2010) revealed that mobile applications are a type of software especially encoded for smart objects and performing certain commands by users. The compatibility of mobile applications with the most used operating systems offers users prestige and functional advantages in the context of IoT technologies. Merz, Hansemann, and Hübner (2009) claim that these protocols, besides offering more comfort, convenience and security, respond to the low energy demand of the customers in terms of cost. They argue that it’s very important to be able to produce useful, creative, spontaneous and customer-oriented scenarios that can be coordinated with each other in different timelines depending on unlimited imagination. Consistent with literature, the statements of participants are as follows: “We make mobile software ourselves. Our software power that makes me special from my competitors. It is the customization of my call forwarding feature. Some want to progress based on products.
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370 Burak Demir and Keti Ventura It must be accepted in the global market. You can cut the water, provide lighting, control the elevator, integrated with intercom, manage alarm and security systems through our application.” (E.D., Core Smart Home Systems) “We control our own products through a system called KNX RF which supplies the center valves, and can integrate wireless devices into the system and establish automation. Mobile applications are available, they can control smart home systems with a simple integration; they receive the information, they defne the scenarios. Multimedia system can be added. You can control the TV via cables on the panel side. Voice controls are starting to get involved. We have control of Google, Alexia, Siri automation system and we can control these systems with IoT.” (E.Ö., Hager)
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Another advantage of these technologies is that they offer a more effective customer experience. Hoyer, Kroschke, Schmitt, Kraume, and Shankar (2020, p. 7) revealed that IoT technologies provide users with a cognitive value, as well as enormously enhancing the customer experience. Users are likely to have sensory and emotional value while using their products; therefore, they are more likely to be connected to interconnected products and devices. Accordingly, customers can incorporate their sensory, psychological, pragmatic, personal and social experiences into IoT gateways. Users have the opportunity to control IoT devices with various scenarios through the system’s interface in line. According to TMS company, IoT devices in the environment can be integrated with components such as controlling the system, obtaining data, transferring data to the cloud section, security and networking via IoT Gateway. In this way, the data obtained are used for customers to have a cognitive and emotional experience. Sensor and activator technology play an active role in smart home systems. The applications of companies are: “Within the scope of IoT, it reigns on the interface side in smart home systems. After installing the infrastructure, there are IoT gateways in the system. If available, IoT gateway can be controlled via Google via Siri interface. IoT automation is compatible with the IoT gateway. We have Bluetooth thermostats that we give to the hotels and they can control the customer room inside the room. Our American, German or local supplier offers us a mobile application that we can reach this system.” (M.F., TMS) “There are technologies that control KNX, Z-Wave, Zigbee, RF protocols, and you can install it in a place where security is enhanced. You can run the house with the open-close system, but you cannot do the same thing at the airport. It is important to know what to use and where. There is no mobile application in our company. We integrate with software companies that make applications. We can do it in the future.” (M.Ü., Bosmer)
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Exploring the IoT Within the New Generation Smart Home Systems 371 4.2.1. IoT-Based Alarm and Security Systems. The widespread use of IoT technologies brings about security and privacy concerns. Manasa and Vanitha (2016) suggested that security risk creates an alarming perception among customers and businesses as the devices are interconnected. Thanks to these technologies, users can keep an eye on their homes from a remote point and be notifed when problems occur. Customer demands can change instantly, and it is important to create a solutionoriented value proposition to understand the customer. Another security problem is a power outage. IoT devices connected to the internet are not likely to operate in case of power failure. The opinions of the participants regarding these situations are: “Some call it magnetic contacts and smoke detectors. But when the screen is out of power, security is disabled, we don’t go into those jobs. In case of violation, we may be notifed instantly, but you can call the call center with DSC. There are sensors with smoke, motion detector, magnetic contact feature. This is not real deterrent. Electricity at home is gone, which is a risk, notifcation is coming home, maybe unreachable; network cut or theft? The generator is not everywhere.” (E.D., Core Smart Home Systems)
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Participating companies manage security systems in two ways: active and passive. The active part can be called the blocking factor. It is associated with the cessation of mechanisms such as gas and electricity in case of any danger in the smart home system. Thanks to the fngerprint sensor and facial recognition objects, it is almost impossible to control the system by someone else. The passive part can be called misleading. In the absence of someone who lives at home, it can be given the feeling that someone is living inside the house by activating various scenarios at certain times. The correct integration of the system creates a reliable image perception for the brand. According to these features of the system is explained as follows: “We install with companies related to them, not our expertise. Working with the global security frms in our organization, there are cards that provide integration. It offers an interface that can control all security systems with a single touch screen on the wall. I do things such as monitoring and reversal recording control over the interface. I am not in the data of the security system. They work within themselves, I can only judge. You can produce preventive and misleading scenarios.” (M.F., TMS) “Security is interest to separate standards. You can use a normal security switchboard as a blocker with sensors attached to it. The system gives you an alarm when a thief enters your home, but it turns on all the lights at once via the smart home system. At a certain time before the thief enters, the bedroom light turns on and off frst. By creating a scenario with someone at home, passive security is provided by deceiving. When there is a fre, a system that turns off all the energy and electricity.” (M.Ü., Bosmer)
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
372 Burak Demir and Keti Ventura “Generally, the lighting desired to be controlled is in KNX. You can collect the cables of the lighting in the panel and make a basic automation system with the switches. You can make simple scenarios so that my lights turn off at night. Let’s say you are not at home. But somehow you want to show that there is a false life at home. It provides security especially in cases of theft.” (E.Ö., Hager) 4.2.2. IoT and Energy Saving. One of the customer-oriented applications of IoT technologies is the energy-saving element of these applications. Singh et al. (2020) stated that the purpose of installing smart home automation system is generally for energy saving. Electronic devices are connected with mobile applications and can be continuously monitored. One notes that the participant companies provide savings based on cost, time, and energy due to the smart interactions of IoT devices. The temperature sensors, thermostats, and share meter devices in the smart home system can be determined by the degree of ambient fow temperature. Automatic switch-off of household appliances according to the ambience temperature prevents unnecessary energy consumption. This signifcantly creates a fnancial opportunity for customers and increases their loyalty to the brand. In addition, it is noted that the devices provide a longer-term battery life by working in energy and saving mode. Consider, for example, the opinions of participants below:
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“[…] energy saving is 30 percent. If a light is entering from outside, you can set a LUX value. It does not burn at the maximum level, so it can save money as it will measure the LUX value. Because people leave home in the morning, air conditioning doesn’t have to work at 25 degrees all day. You write scripts. You raise it again at 5 in the evening. Such applications save energy.” (E.D., Core Smart Home Systems) “This business is actually a saving business in Europe. There are some saving functions especially in thermostats. There are a lot of PDI, PVM, Modulation blocks. You entered the house, you want to set the children’s room at 15 degrees to 25 degrees, you go and adjust it from the thermostat. As soon as the system understands the difference of 10 degrees, it turns on both foor heating and air conditioning heating mode. Shock heating immediately makes the room. It is said that it provides 30 percent savings.” (M.F., TMS) “Automation is not cheap, it costs money. Not only the devices used in it, but also the brain. God bless you will have an operation; you will not investigate the surgeon? There are experts in this business. They can say that we are building a smart home system at low prices. It is a preference; it is important where you use it. It saves 30 percent.” (M.Ü., Bosmer) Industrial automation and building systems are provided with energy saving elements with DALI (Addressable Lighting) systems. Control of lighting systems
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Exploring the IoT Within the New Generation Smart Home Systems 373 is possible with IoT devices such as electronic ballasts, motion, presence and light detectors. Customers feel privileged and special, which is consistent with Hoyer’s et al. (2020, p. 7) fndings of enhancing the customer experience. The statements of companies in this direction are as follows: “There are DALI systems at the point of how we can control the factories by using the daylight coming from outside. This is a protocol about lighting. Customers get their luminaires, ballasts, lighting with DALI ballasts in accordance with the DALI protocol. We can control the luminaires there either individually or completely. At this point, we provide energy savings through asset sensors. There may be situations such as forgetting the lights on the workers’ warehouse and locker rooms. It automatically turns itself off by detecting the presence here with the help of sensors.” (E.Ö., Hager)
4.3. Diffculties Encountered Within the Scope of Smart Home Systems and IoT
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Smart home systems provide many conveniences, as well as some diffculties during installation like high cost of the system, poor management of objects and installation, diffculty in providing fexibility and security (Brush et al., 2011). The companies stated that the lack of information from the frms that installed the electrical infrastructure affected the operation and quality of the process. This situation can create a long-term trust problem for customers. As Lin and Bergmann (2016) stated, the interconnection means that Internet resources can be attacked from any location, it makes cybersecurity a key issue. It’s necessary to analyze the factors such as the companies that install the system well, the quality of the technical dimension of the work, the commissioning process and the project plan consistent with the customer demand. The opinions of participants regarding these diffculties are as follows: “There is a problem in those who install the electrical infrastructure. We gave training to interior designers under the name of projecting technology. As long as the infrastructure is set up correctly. It is really necessary to analyze correctly, as soon as the customer understands that he is throwing his money on the street, he is depressed.” (M.F., TMS) “People who don’t know the job. From electrician to engineer. We do not have many problems with the customer, the customer may remain ignorant at some points. But there are people on the market that are cheaper. One of the most major problems with implementation planned projects do not match in Turkey.” (MU, it is Bosmer) “There may be problems with the installation and the stage after installation. The projecting part of the work is very important. There is no problem in the system after editing as desired by customers
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374 Burak Demir and Keti Ventura who can request revision according to their own comfort. There is a notifcation system for malfunctions but it is on the feld side.” (E.Ö., Hager) Participants stated that IoT devices are likely to experience loss of signal over wireless communication protocol. The correct construction of the smart home system at the project stage eliminates the negative effects of the whole process. The participants summarized this situation as follows: “Certain devices may come out or fall off the system. Some devices are fully cloud-based. Unless the battery is discharged on the smart home side, the device does not easily cause problems. Due to the low battery, the lamp can be turned on for 10 seconds instead of 1 second. When the screen cannot communicate, it can restart itself. The system has no meaning when the internet is lost connection.” (E.D., Core Smart Home Systems)
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5. Conclusion In this study, the authors aimed to examine the concept of IoT in the context of new generation smart home systems. According to Singh et al. (2020) and Jabraeil et al. (2020), one notes that smart home systems offer customer-oriented experiences such as easy access, speed, comfort, and time saving elements through IoT technologies. KNX, Z-Wave, ZigBee, RF etc., wired and wireless communication protocols are included in the architecture of the system. These systems are often preferred by customers because they are important in terms of reliability and energy saving (Merz et al., 2009). Therefore, on the condition of being customer oriented, the control of the parameters determined in both industrial sectors and building automation systems can be managed without any problem through these systems. Thus, it provides customers with the opportunity to create a more reliable, continuously auditable and low-cost opportunity. As Hoyer et al. (2020) emphasized in their study, IoT technologies provide both sensory and emotional customer experiences. Android and iOS operating systems are software systems used for communication purposes in IoT technologies. Discrimination by businesses could have a negative impact on the minds of the customers. This is crucial for seamless customer experience, satisfaction, and loyalty. It’s possible to manage security systems with various user scenarios, cameras, sensors, password panels, and warning messages. It can be observed that in scenarios created for DALI systems, customer needs and time provide a sustainable energy-saving element. As Brush et al. (2011) emphasized, poor management of the automation process raises several problems. The lack of knowledge of companies that install the electrical infrastructure of the system and organize the process adversely affects the participation processes with the customer and the brand. Internet infrastructure can create an alarming problem with the use of the product. In terms of the original aspect of the study, there is a gap in the literature regarding the marketing aspect of IoT and smart home systems. The fact that the research has not been
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Exploring the IoT Within the New Generation Smart Home Systems 375 handled in the marketing feld before and the persuasion processes of the participants constitutes the limitations of the study. The information obtained from this study, which is considered qualitatively in the context of IoT technologies and smart home systems, can give quantitative research a different perspective. In this direction, further studies can enrich the literature with the perceived and expected service quality, customer responses, and experiences.
Acknowledgement This paper is the extended version of the study presented at IV. International Applied Social Sciences Congress 22nd-24th October 2020 and printed as a Full text.
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References Bhat, O., Bhat, S. & Gokhale, P. (2017). Implementation of IoT in smart homes. International Journal of Advanced Research in Computer and Communication Engineering, 6(12), 149–154. Blaji, S., Nathani, K., & Santhakuma, R. (2019). IoT technology, applications and challenges: A contemporary survey. Wireless Personal Communications, 108(1), 363–388. https://doi.org/10.1007/s11277-019-06407-w Brush, A. J. B., Lee, B., Mahajan, R., Agarwal, S., Saroiu, S., & Dixon, C. (2011). Home automation in the wild: Challenges and opportunities. In Proceedings of the SIGCHI conference on human factors in computing systems, New York, USA (pp. 2115–2124). Erdem, Ö. (2015). Honey Thing: Nesnelerin İnterneti için Tuzak Sistemi. Yüksek Lisans Tezi, İstanbul Şehir Üniversitesi, Fen Fakültesi, Bilgi Güvenliği Mühendisliği. Ghayvat, H., Liu, J., Alahi, E. E. M., Mukhopadhyay, C. S., & Gui X. (2015). Internet of Things for smart homes and buildings: Opportunities and challenge. Australian Journal of Telecommunications and the Digital Economy, 3(4), 33–47. Gubbi, J., Buyya, R., Marusic, S., & Palaniswami, M. (2013). Internet of Things (IoT): A vision, architectural elements, and future directions. Future Generation Computer Systems, 29(7), 1645–1660. Gündüz, M. Z., & Daş, R. (2018). Nesnelerin İnterneti: Gelişimi, Bileşenleri ve Uygulama Alanları. Pamukkale Üniversitesi Mühendislik Bilimleri Dergisi, 24(2), 327–335. Hoyer, W. D., Kroschke, M., Schmitt, B., Kraume, K., & Shankar, V. (2020). Transforming the customer experience through new technologies. Journal of Interactive Marketing, INTMAR-00329, 1–15. Islam, R. Md., Islam, R. Md. & Mazumder, A. T. (2010). Mobile application and its global impact. International Journal of Engineering & Technology IJET-IJENS, 10(06), 72–78. Jabraeil, J. M. A., Bahrami, B., Heidari, A., Allahverdizadeh, P., & Norouzi, F. (2020). Some cases of smart use of the IoT. In Towards the Internet of Things. EAI/ Springer innovations in communication and computing. Cham: Springer. https:// doi.org/10.1007/978-3-030-18468-1 Jain, S., Kumar, V., Paventhan, A. Chinnaiyan, Kumar V., Arnachalam, V., & Pradish, M. (2014). Survey on smart grid technologies-smart metering, IoT and EMS. In 2014 IEEE students’ conference on electrical, electronics and computer science (pp. 1–6).
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376 Burak Demir and Keti Ventura Khan, T. (2020). Internet of Things: The potentialities for sustainable agriculture, international business, trade and institutional sustainability, world sustainability series (pp. 291–302). Cham: Springer. https://doi.org/10.1007/978-3-030-26759-9_17 Lin, H., & Bergmann, N. W. (2016). IoT privacy and security challenges for smart home environments. Information, MDPI, 7(3), 44, 1–15. Lopez, V., & Whitehead, D. (2013). Nursing & Midwifery Research: Methods and appraisal for evidence-based practice, sampling data and data collection in qualitative research (pp. 123–140). Mosby: Elsevier. Makino, Y., Wongpatikaseree, K., Okada, T., Nguyen, H., Lim, Y., & Tan, Y. (2016). Development of home simulation with thermal environment and electricity consumption. In 7th International Conference on Information Communication Technology for Embedded Systems (IC-ICTES 2016) (pp. 1–6). Manasa, M., & Vanitha, M. (2016). Smart home automation security and energy effcient wireless system through GSM. International Advanced Research Journal in Science, Engineering and Technology (IARJSET), 3(7), 209–212. Marek, L., & Woźniczka, J. (2017). The Internet of Things as a customer experience tool. Jagiellonian Journal of Management, 3(3), 163–176. Merz, H., Hansemann, T., & Hübner, C. (2009). Building automation: Communication systems with EIB/KNX, LON, and BACnet. Heidelberg: Springer. Morandi, D., Sicari, S., De Pellegrini, F. & Chlamtac, I. (2012). Internet of Things: Vision, applications and research challenges. Ad Hoc Networks, 10(7), 1497–1516. Morgan, J. (2014). A simple explanation of the Internet of Things. Retrieved from http:// www.forbes.com Nagaraja G. S., & Srinath, S. (2020). Security architecture for IoT-based home automation. In S. Satapathy, V. Bhateja, J. Mohanty, & S. Udgata (Eds.), Smart intelligent computing and applications. Smart innovation, systems and technologies. Singapore: Springer. https://doi.org/10.1007/978-981-13-9282-5_6 Singh, P. (2016). Internet of Things (IoT): A literature review. International Research Journal of Engineering and Technology (IRJET), 03(12), 943–949. Singh, A. K., Agrawal, S., & Goyal, D. (2020). Low-cost and energy-effcient smart home security and automation. In M. Pant, T. Sharma, S. Basterrech, & C. Banerjee (Eds.), Computational network application tools for performance management. Asset analytics (performance and safety management). Springer. https://doi.org/10.1007/978981-32-9585-8 Sinha, S. R., & Park, Y. (2017). Marketing your IoT initiatives. In Building an effective IoT ecosystem for your business. Cham: Springer. https://doi.org/10.1007/978-3-31957391-5 Sun, M., Dannah, W., Liu, Q., & Liu, X. (2019). A survey of simulators for home energy management: System architecture, intelligence, UI and effciency. In X. Sun, Z. Pan, & E. Bertino (Eds.), Artifcial intelligence and security. ICAIS 2019. Lecture Notes in Computer Science (Vol. 11634). Cham: Springer. https://doi. org/10.1007/978-3-030-24271-8_20 TEC. (2017). Telecommunication Engineering Centre, Technical Report M2M/IOT Enablement in Smart Homes, TEC-TR-IoT-M2M-007-01, M2M Smart Homes Working Group, India. Ventura, K. (2018). The virtual world and marketing. In Basar, Ercis, & Unal (Eds.), Chapter Five: Potentials of IoT as a marketing tool: Opportunities vs. challenges (pp. 67–84). Newcastle upon Tyne, UK: Cambridge Scholars Publishing.
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Chapter 19
Financial Inclusion in Nigeria: Determinants, Challenges, and Achievements Peterson K. Ozili Abstract Purpose: This chapter analyzes several indicators of fnancial inclusion in Nigeria.
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Method: This chapter uses trend analyses to examine the indicators of fnancial inclusion in Nigeria. Findings: The fndings reveal that people with a secondary education and unemployed people had higher levels of debit card ownership, higher levels of account ownership of any type, and higher levels of account ownership in a fnancial institution. Borrowings from family or friends decreased during the period. The level of savings and borrowings was higher for adults with at least a secondary education while the level of savings, using a savings club or persons outside the family, decreased among females, poor people and among people with a primary education. Credit card ownership was low among unemployed people, while credit card ownership was much higher among employed people, the richest people and among people with at least a secondary education. Finally, borrowings and savings using family, friends, or saving clubs signifcantly contributed to economic growth than borrowings and savings through fnancial institutions. Implications: It shows that Nigerian authorities should increase the number of formal account ownership by removing obstacles such as income and education bias and gender discrimination in the delivery and use of fnancial services.
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378 Peterson K. Ozili Originality: Recent studies in the literature have investigated fnancial inclusion in developing economies, but little attention has been paid on the determinants and challenges of fnancial inclusion in Nigeria. This chapter aims to fll this gap by providing a comprehensive understanding and analysis of fnancial inclusion in Nigeria. Keywords: Financial inclusion; access to fnance; development; economic growth; poverty reduction; Nigeria; digital fnance; fnancial education; fnancial literacy JEL Codes: G21; O16; P34
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1. Introduction In this chapter, the author lays out the analyses of several indicators of fnancial inclusion in Nigeria. Financial inclusion is a growing concern in Nigeria. The banking system in Nigeria is less inclusive than those in more developed African countries such as South Africa. In recent years, several policies have been introduced by various government agencies to increase the level of fnancial inclusion in Nigeria. The objective of the author in this chapter is to examine the determinants of fnancial inclusion in Nigeria. This chapter discusses the main barriers to fnancial inclusion in Nigeria and the progress made so far. In Nigeria, there is still a lack of proper understanding of what constitutes fnancial inclusion in Nigeria – Africa’s second largest economy, where the process of fnancial reforms and liberalization is still ongoing. In fact, the importance of fnancial inclusion in Nigeria is determined by its connection to three major debates currently ongoing in the country that concern poverty reduction, the need to reduce the level of infation and the need to control the shadow banking sector. Financial inclusion is defned as access to, and the use of, formal fnancial services to improve the welfare of individuals in a country (Demirgüç-Kunt, Klapper, Singer, & Van Oudheusden, 2015; Ozili, 2020a, 2020b). Financial inclusion makes it possible for individuals to save for the future, invest in education, train their children, and launch businesses, and this contributes to poverty reduction and economic growth (Bruhn & Love, 2014; Ozili, 2018). In Nigeria, being fnancially included can lead to economic benefts as individuals with access to formal fnancial services are able to invest in education and entrepreneurial activities, which can contribute to reduce poverty and also allows them to increase their income (Bruhn & Love, 2014; Ozili, 2020a). Recent studies in the literature have investigated fnancial inclusion in developing economies, but little attention has been paid on the determinants and challenges of fnancial inclusion in Nigeria. This chapter aims to fll this gap by providing a comprehensive analysis of fnancial inclusion in Nigeria. Using data from the World Bank’s Global Findex database, the fndings indicate that the educated, rich, and employed population are more likely to be fnancially included than the poor, uneducated, and unemployed population. Also, borrowings and savings outside fnancial institutions (using family, friends or
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Financial Inclusion in Nigeria 379 saving clubs) signifcantly contributed to economic growth than borrowing and savings through fnancial institutions. This chapter contributes to the understanding of fnancial inclusion in Nigeria in the following ways. Firstly, the author analyzes the determinants of fnancial inclusion, and comments on the individual characteristics infuencing fnancial inclusion the most, in Nigeria. Secondly, this study provides a more focused examination of the determinants of fnancial inclusion and the use of fnancial services and products in Nigeria. To the best of the author’s knowledge, there has been little research on the main challenges and determinants of fnancial inclusion in Nigeria. Thirdly, the author analyzes if and how barriers to fnancial inclusion and barriers to borrowing are associated with individual characteristics, including individuals’ income and education. The answer to these questions can help one understand the current state of fnancial inclusion in Nigeria in order to identify policies that can promote fnancial inclusion. Fourthly, as banks continue to grant fewer loans to ordinary people preferring to lend to corporations, this has led to growth in alternative sources of borrowing outside the formal fnancial sector, leading to the growth of the shadow banking system. The development of the shadow banking system raises questions concerning the effectiveness of banking regulation in Nigeria. Finally, the analysis of fnancial inclusion provides insights on the magnitude of the use of formal savings and credit from alternative sources of borrowing at the individual level in Nigeria and helps us in identifying the individual characteristics associated with reliance on different alternative sources of borrowing. The remainder of this chapter is structured as follows. Section 2 presents some stylized facts about fnancial inclusion in Nigeria. Section 3 presents the literature review on fnancial inclusion. Section 4 examines the impact of fnancial inclusion for economic growth. Section 5 presents a concluding section.
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2. Stylized Facts About Financial Inclusion in Nigeria 2.1. Financial Inclusion in Nigeria: Trends and Analysis This section highlights the major trends in the level of fnancial inclusion in Nigeria using eight (8) indicators of fnancial inclusion. Data were collected from the Global Findex database of the World Bank. The data are based on the survey report of the World Bank on the state of fnancial inclusion in Nigeria. The survey requires respondents/individuals to give their opinion to specifc questions over a 12-month period. The eight categories (or indicators) of fnancial inclusion are: (i) owning an account of any type, (ii) borrowing from a fnancial institution, (iii) borrowing from family or friends, (iv) credit card ownership, (v) debit card ownership, (vi) account ownership in a fnancial institution, (vii) savings at a fnancial institution, and (viii) saved using a savings club or person outside the family. 2.1.1. Account Ownership of Any Type. The “account ownership of any type” category or indictor refers to the percentage of people who report having an account by themselves or together with someone else in a bank or at another
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380 Peterson K. Ozili fnancial institution. It also refers to people using a mobile money service as well. As can be observed in Table 1, people with at least a secondary school education had higher levels of account ownership which includes owning an account in a bank, non-bank fnancial institution or a mobile money service. Similarly, people outside the labor force (i.e., unemployed people) had higher levels of account ownership including owning an account in a bank, other fnancial institution or a mobile money service. The other categories in Table 1 witnessed an increase in account ownership in 2014 and a decline in 2017. 2.1.2. Borrowing from a Financial Institution. The “borrowing from a fnancial institution” category or indicator refers to the percentage of people who report borrowing any money from a bank or another type of fnancial institution. As can be observed in Table 2, people with a secondary school education or higher education had higher levels of borrowings from a bank or another type of fnancial institution. Most of the other categories in Table 2 witnessed an increase in account ownership in 2014 and a decline in 2017. 2.1.3. Borrowing from Family or Friends. The “borrowing from a fnancial institution” category refers to the percentage of people who report borrowing any money from family, relatives, or friends. As can be observed in Table 3, borrowings from family or friends decreased in all categories in 2014 and 2017 except for the young adult category that had an increase in borrowings from family and friends in 2017. 2.1.4. Credit Card Ownership. The “credit card ownership” category refers to the percentage of people who report having a credit card. As can be observed in Table 4, credit card ownership by unemployed people decreased in 2014 and 2017. However, credit card ownership increased in 2014 and 2017 among employed people, the richest people, and among people with at least a secondary education. 2.1.5. Debit Card Ownership. The “debit card ownership” category refers to the percentage of people who report having a debit card. As can be observed in Table 5, debit card ownership increased in 2014 and 2017 among unemployed people and among people with at least a secondary education. 2.1.6. Account Ownership in a Financial Institution. The “account ownership in a fnancial institution” refers to people who report having an account (by themselves or together with someone else) at a bank or another type of fnancial institution but not in a mobile money service. As can be observed in Table 6, account ownership in a fnancial institution increased in 2014 and 2017 among unemployed people and among people with at least a secondary education. 2.1.7. Saved at a Financial Institution. The “saved at a fnancial institution” category refers to the percentage of people who report saving or setting aside any money at a bank or another type of fnancial institution for the purpose of savings. As can be observed in Table 7, savings at a fnancial institution decreased in 2014 and 2017 among people with at least a secondary education. 2.1.8. Saved Using a Savings Club or Person Outside the Family. The “saved using a savings club or person outside the family” category refers to the percentage of people who report saving or setting aside any money to start, operate, or expand a farm or business, young adults. As can be observed in Table 8, savings
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Financial Inclusion in Nigeria 381 Table 1. Owning an Account of Any Type. Year People That Report Owning an Account of Any 2011 Type
2014
2017
1
Account owners (% age 15+)
29.7
44.4
39.7
2
Account owners, female (% age 15+)
25.9
34.0
27.3
3
Account owners, in labor force (% age 15+)
34.1
52.6
42.9
4
Account owners, income, poorest 40% (% ages 15+)
13.9
30.5
24.5
5
Account owners, income, richest 60% (% ages 15+)
40.1
53.7
49.7
6
Account owners, male (% age 15+)
33.2
54.3
51.4
7
Account owners, older adults (% ages 25+)
33.8
48.8
44.0
8
Account owners, out of labor force (% age 15+)
17.6
29.01
30.2
9
Account owners, primary education or less (% ages 15+)
12.2
28.1
16.1
10
Account owners, rural (% age 15+)
23.6
38.7
33.3
11
Account owners, secondary education or more (% ages 15+)
44.1
56.0
59.3
12
Account owners, young adults (% ages 15–24)
21.5
35.7
32.6
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using a savings club or person outside the family decreased in 2014 and 2017 among females, poor people, people with a primary education or less.
2.2. Factors that Promote Financial Inclusion in Nigeria 2.2.1. Fintech. Fintech, or fnancial technology, refers to new or existing technology or innovation that disrupts traditional ways of conducting fnancial transactions. Fintech introduces a new way to perform fnancial transactions with little or no human interaction. Nigeria witnessed a boom of Fintech business in 2015 and this became possible through increase in the number of smartphone users across the country. Fintech, made available through the smartphone of individuals in Nigeria, made it possible for individuals to shop for goods at online stores, make bank transfers using mobile apps, manage their personal fnance; thereby bringing a large number of citizens to the fnancial sector to take advantage of these benefts. Also, start-up businesses were able to set-up new business models that require business owners to work from home using fnancial technology and to save the cost of renting a physical offce space. Also, through payment-based Fintech processes, the fnancial regulator is able to monitor all fnancial transactions for transparency, fairness and to detect suspicious activities related to fraud and other crimes.
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382 Peterson K. Ozili Table 2. Borrowing from a Financial Institution. Year
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People that Report Borrowing from a Financial Institution 2011 2014 2017 1
Borrowed from a fnancial institution, female (% age 15+) 1.9
4.1
3.7
2
Borrowed from a fnancial institution, in labor force (% age 15+)
2.3
5.8
4.6
3
Borrowed from a fnancial institution, income, poorest 40% (% age 15+)
1.8
6.1
2.8
4
Borrowed from a fnancial institution, income, richest 60% (% age 15+)
2.3
4.7
4.7
5
Borrowed from a fnancial institution, male (% age 15+)
2.2
6.3
4.1
6
Borrowed from a fnancial institution, older adults (% age 25+)
2.0
5.7
3.8
7
Borrowed from a fnancial institution, out of labor force (% age 15+)
1.4
4.1
1.9
8
Borrowed from a fnancial institution, primary education or less (% age 15+)
1.2
5.9
1.7
9
Borrowed from a fnancial institution, rural (% age 15+)
1.8
5.4
2.7
10 Borrowed from a fnancial institution, secondary education or more (% age 15+)
2.8
4.8
5.9
11 Borrowed from a fnancial institution, young adults (% age 15–24)
2.1
4.4
4.3
2.2.2. Digital Finance: USSD Codes, Electronic Cards, and Mobile Bank Apps. A PWC 2017 Fintech survey report1 showed that over 62% of customers will use mobile applications to access fnancial services within the next 5 years in Nigeria. The introduction of USSD codes in Nigeria (such as GTB *737#) allow customers to make a wide range of fnancial transactions from their phone using a USSD code. The USSD code is a communication technology that sends a request to a banking system interface on behalf of the bank customer with the expectation that the bank will approve the request when the correct access-code or passcode is provided. Electronic cards have also been in existence in Nigeria as far back in 2015 and have continued to evolve into sophisticated card products over time such as ATMs, dollar cards, etc. Also, there is wide use of debit cards in Nigeria. Mobile bank apps are also used by bank customers to access their bank accounts remotely and to authorize fnancial transactions from one party to another. These digital fnance products have helped to increase the level of fnancial inclusion in Nigeria. 1
https://www.pwc.com/ng/en/pdf/nigeria-fntech-report-2017.pdf
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Financial Inclusion in Nigeria 383 Table 3. Borrowed from Family or Friends. Year
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People That Report Borrowing Money from Family or Friends
2011
2014
2017
1
Borrowed from family or friends (% age 15+)
44.1
37.5
28.2
2
Borrowed from family or friends, female (% age 15+)
42.2
37.2
27.8
3
Borrowed from family or friends, in labor force (% age 15+)
48.6
42.3
30.7
4
Borrowed from family or friends, income, poorest 40% (% age 15+)
43.6
37.7
26.2
5
Borrowed from family or friends, income, richest 60% (% age 15+)
44.3
37.4
29.5
6
Borrowed from family or friends, male (% age 15+)
45.9
37.8
28.7
7
Borrowed from family or friends, older adults (% age 25+)
47.8
42.2
26.6
8
Borrowed from family or friends, out of labor force (% age 15+)
31.8
28.5
21.1
9
Borrowed from family or friends, primary education or less (% age 15+)
46.1
44.6
26.8
10 Borrowed from family or friends, rural (% age 15+)
45.4
36.0
28.7
11 Borrowed from family or friends, secondary education or more (% age 15+)
42.3
32.5
30.3
12 Borrowed from family or friends, young adults (% age 15–24)
36.5
28.1
31.8
2.2.3. Authority to Reject or Accept Financial Innovation by the Financial Regulator. Another factor that helped to promote fnancial inclusion in Nigeria is the power of the fnancial sector regulator to accept or reject fnancial innovations from operating in Nigeria. The fnancial regulator, the Central Bank of Nigeria (CBN), is independent and has full power to reject or accept an application made by a company to introduce a fnancial innovation to the Nigerian fnancial sector. The CBN receive and assess all applications made by local and foreign companies seeking to introduce a new fnancial technology or new fnancial products and services in the Nigerian fnancial market. Ideally, the CBN will invite the promoters of the innovation for a discussion session, to ensure that the CBN understands what the innovation seeks to achieve and the associated risks. The CBN will then assess whether the new innovation is risky and whether the applicant-company can manage the risk internally, and whether the innovation
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384 Peterson K. Ozili Table 4. Credit Card Ownership. Year
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People Who Report Owning a Credit Card
2014
2011
2017
1
Credit card ownership (% age 15+)
0.7
2.7
2.5
2
Credit card ownership, female (% age 15+)
0.8
1.7
1.7
3
Credit card ownership, in labor force (% age 15+)
0.9
2.5
3.1
4
Credit card ownership, income, poorest 40% (% age 15+)
0.7
1.4
0.7
5
Credit card ownership, income, richest 60% (% age 15+)
0.8
3.6
3.8
6
Credit card ownership, male (% age 15+)
0.7
3.7
3.4
7
Credit card ownership, older adults (% age 25+)
0.9
3.1
3.0
8
Credit card ownership, out of labor force (% age 15+)
0.4
3.3
0.9
9
Credit card ownership, primary education or less (% age 15+)
0.5
2.2
0.1
10
Credit card ownership, rural (% age 15+)
0.7
1.7
1.7
11
Credit card ownership, secondary education or more (% age 15+)
0.9
3.1
4.5
12
Credit card ownership, young adults (% age 15–24)
0.5
2.03
1.8
will increase systemic risk to the entire fnancial system. Based on these criteria, the CBN will make an accept-reject decision. Therefore, promoters of certain fnancial innovations in Nigeria have a duty to ensure that the regulators understand what the innovation seeks to achieve and the associated risks, to improve the chance of getting the regulator’s approval for it. Finally, it is important to understand that all fnancial innovations that improve the level of fnancial inclusion in the country and which do not pose any signifcant risks to the fnancial system are more likely to be approved by the CBN.
2.3. Areas for Improvement 2.3.1. Securing Digital Payment Technology. The government in Nigeria needs to ensure that digital payment channels are safer, more affordable, and more transparent. Digitizing payments through technology can improve effciency by increasing the speed of payments and reducing the cost of disbursing and receiving payments. It can also improve the security of payments and thus lower the incidence of payment fraud. Disbursing payments through digital channels rather than cash can increase fnancial transparency and reduce corruption.
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Financial Inclusion in Nigeria 385 Table 5. Debit Card Ownership. Year
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People That Report Owning a Debit Card
2011
2014
2017
1
Debit card ownership (% age 15+)
18.5
35.6
31.5
2
Debit card ownership, female (% age 15+)
17.8
25.2
22.5
3
Debit card ownership, in labor force (% age 15+)
21.3
43.6
34.1
4
Debit card ownership, income, poorest 40% (% age 15+)
6.5
22.5
19.6
5
Debit card ownership, income, richest 60% (% age 15+)
26.5
44.3
39.4
6
Debit card ownership, male (% age 15+)
19.3
45.4
40.1
7
Debit card ownership, older adults (% age 25+)
20.6
39.3
35.6
8
Debit card ownership, out of labor force (% age 15+)
11.1
20.4
23.9
9
Debit card ownership, primary education or less (% age 15+)
4.1
18.1
9.6
10
Debit card ownership, rural (% age 15+)
13.9
30.6
25.8
11
Debit card ownership, secondary education or more (% age 15+)
30.5
48.0
49.5
12
Debit card ownership, young adults (% age 15–24) 14.5
28.1
25.1
2.3.2. Greater Empowerment of Women. Efforts aimed at increasing the level of fnancial inclusion in Nigeria should ensure that women are granted substantial access to formal fnancial services. Inclusive growth is meaningless without including women who are often marginalized in the society. Excluding women, who represent half the population, makes the fnancial development process and outcomes unjust, unacceptable, and incomplete. 2.3.3. Greater Possibilities for Fintech. Currently, the activities of Fintech in Nigeria are rudimentary. There are greater possibilities and ideas that can be achieved through Fintech if they are allowed to operate to their full potential. Fintech can revolutionize how existing fnancial institutions create and deliver products and services and can provide new gateways for business owners to grow their business. Fintech can also help to decentralize or democratize access to fnancial services in Nigeria. Examples of these possibilities or ideas include: the use of cryptocurrencies, blockchain, new digital advisory systems, digital advisory trading systems, artifcial intelligence, machine learning, electronic peer-topeer lending, equity crowdfunding, and mobile payment services. Nigeria needs to introduce robotic advisory systems that provide personalized individual assistance in the management of personal fnance. Fintech can provide automated fnancial advisors, also known as “robo-advisors.” Currently, the United States
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386 Peterson K. Ozili Table 6. Account Ownership in a Financial Institution. Year
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Persons That Report Owning an Account in a Financial Institution
2011
2014
2017
1 Financial institution account (% age 15+)
29.6
44.1
39.4
2 Financial institution account, in labor force (% age 15+)
34.1
52.5
42.6
3 Financial institution account, older adults (% age 25+) 33.8
48.4
43.8
4 Financial institution account, out of labor force (% age 15+)
17.6
28.3
30.2
5 Financial institution account, primary education or less (% age 15+)
12.2
27.5
15.8
6 Financial institution account, rural (% age 15+)
23.5
38.4
33.1
7 Financial institution account, secondary education or more (% age 15+)
44.1
55.9
58.9
8 Financial institution account, female (% age 15+)
25.9
33.5
27.1
9 Financial institution account, income (poorest 40%; % age 15+)
13.9
29.9
24.5
10 Financial institution account, income (richest 60%; % age 15+)
40.1
53.6
49.2
11 Financial institution account, male (% age 15+)
33.2
54.2
51.7
12 Financial institution account, young adults (% age 15–24)
21.4
35.7
32.1
is the leading market for robo-advisors. The robo-advisors can reduce fxed costs (such as the labor cost of hiring fnancial advisors or the cost of renting a physical offce space), and robo-advisors can also help to reduce transaction fees. 2.3.4. Financial Literacy Training. There is a need for greater training for fnancial literacy in the country particularly in the Northern part of Nigeria. Benefciaries of fnancial literacy training will be willing to own an account and will be more likely to save. Female benefciaries of fnancial literacy will also be able to use credit to start their own businesses to improve their welfare and the welfare of their families. Nigeria can strengthen fnancial literacy training to close the fnancial inclusion gap in the country. 2.3.5. Create Regulatory Sandbox for Financial Innovation. Nigeria faces some challenges in regulating Fintech and fnancial innovations. Some of these challenges include: the lack of adequate resources, staff, expertise, and tools for regulation; the underdeveloped fnancial market infrastructure, limited market for retail fnancial services; balancing consumer protection and competition in
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Financial Inclusion in Nigeria 387 Table 7. Saved at a Financial Institutions. Year
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Persons That Report Having Savings at a Financial Institution
2011 2014 2017
1
Saved at a fnancial institution (% age 15+)
23.5
27.1
20.6
2
Saved at a fnancial institution , out of labor force (% age 15+)
11.9
13.7
12.3
3
Saved at a fnancial institution, female (% age 15+)
20.9
21.4
13.4
4
Saved at a fnancial institution, in labor force (% age 15+)
27.8
34.1
23.4
5
Saved at a fnancial institution, income, poorest 40% (% age 15+)
9.5
17.8
13.3
6
Saved at a fnancial institution, income, richest 60% (% age 15+)
32.9
33.1
25.3
7
Saved at a fnancial institution, male (% age 15+)
26.2
32.4
27.2
8
Saved at a fnancial institution, older adults (% age 25+)
26.7
30.5
22.0
9
Saved at a fnancial institution, primary education or less(% age 15+)
8.2
17.5
7.5
10 Saved at a fnancial institution, rural (% age 15+)
18.7
24.5
17.2
11 Saved at a fnancial institution, secondary education or more (% age 15+)
36.3
33.6
31.2
12 Saved at a fnancial institution, young adults (% age 15–24)
17.2
20.0
18.5
the fnancial innovation industry, insuffcient regulatory ability to adapt to the fast-changing digital fnance and fnancial technology environment, etc. These regulatory challenges in regulating fnancial innovation in Nigeria can be overcome by creating a regulatory sandbox for fnancial innovation. A regulatory sandbox is a framework set up by a fnancial sector regulator to test innovations and to allow innovations to thrive in a controlled environment under the regulator’s supervision. Regulatory sandboxes can help to address some of these challenges in the following ways: (i) by eliminating existing regulations that hinder the existing fnancial innovation, (ii) by enabling the regulator to revise and shape regulatory and supervisory policies to ensure that the policies favor the growth of Fintech and fnancial innovations, (iii) by creating an open and active dialog between regulators and innovative service providers so that each side can learn from the other. Nigeria needs to create regulatory sandboxes that allow fnancial innovations to thrive for the beneft of excluded and underserved customers.
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388 Peterson K. Ozili Table 8. Saved Using a Savings Club or Person Outside the Family. Year People Using a Savings Club or a Person Outside the Family to Save
2011
2014
2017
1
Saved, (% age 15+)
44.4
23.0
25.4
2
Saved, in labor force(% age 15+)
48.6
27.1
28.7
3
Saved, female (% age 15+)
47.1
25.1
24.7
4
Saved, income, poorest 40%(% age 15+)
44.2
30.6
23.3
5
Saved, income, richest 60% (% age 15+)
44.6
17.9
26.7
6
Saved, male (% age 15+)
41.9
21.1
25.9
7
Saved, older adults (% age 25+)
48.8
26.3
27.8
8
Saved, out of labor force (% age 15+)
33.1
15.34
15.7
9
Saved, primary education or less (% age 15+)
48.6
30.1
23.9
10
Saved, rural (% age 15+)
44.8
22.9
23.7
11
Saved, secondary education or more (% age 15+)
41.0
17.6
26.9
12
Saved, young adults (% age 15–24)
35.7
15.3
20.4
3. Literature Review
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3.1. Nigerian Studies Few studies have examined some determinants of fnancial inclusion in Nigeria. For instance, Bayero (2015) fnd that greater awareness by customers and good fnancial infrastructure had positive effects for fnancial inclusion. Babajide, Adegboye, and Omankhanlen (2015) show that fnancial inclusion is a signifcant determinant of the total factor of production in the economy. Mbutor and Uba (2013) examine the effect of fnancial inclusion on monetary policy in Nigeria between 1980 and 2012. They fnd that the increasing number of bank branches does not lead to greater fnancial inclusion possibly because banks mainly pursued proft objective not fnancial inclusion objective when they open new bank branches. David-West (2016) explores Nigeria’s path to digital fnancial inclusion and the use of Firstmonie – the mobile money app of First Bank to gain an understanding of the constraints of mobile money operations in Nigeria. Odior and Banuso (2012) show that a cashless policy is benefcial to the Nigerian economy. Efobi, Beecroft, and Osabuohien (2014) examined the determinants of access to, and use of, bank services in Nigeria using data from the World Bank Household Survey (2011) on fnancial inclusion. They examined three dependent variables: use of bank services, use of the account to save, and frequency of bank withdrawals. They fnd that income level, age, and information and communication technology (ICT) inclination of individuals affect access to and use
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Financial Inclusion in Nigeria 389 of bank services in Nigeria. Nkwede (2015) investigates the effect of fnancial inclusion on the growth of Nigerian economy, and fnd that fnancial inclusion had a signifcant and negative impact on economic growth in Nigeria. Kama and Adigun (2013) showed that although some progress have been made to improve the level of fnancial inclusion in Nigeria, the major challenges to achieving full fnancial inclusion in Nigeria are low fnancial literacy, inadequate infrastructural facilities, weak fnancial technology used by fnancial institutions. Adeola and Evans (2017) examine the impact of fnancial inclusion and fnancial development on economic diversifcation in Nigeria during the 1981–2014 period. They fnd that fnancial inclusion, when measured in terms of fnancial access and fnancial usage, has positive and signifcant effects on economic diversifcation. Taken together, these studies show that Nigeria faces some challenges in achieving full fnancial inclusion, and there is mixed evidence on the effect of fnancial inclusion on the economy.
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3.2. Barriers to Financial Inclusion in Nigeria 3.2.1. Political Interference. Several attempts by the fnancial system regulator (CBN) to implement certain fnancial inclusion policies in the country have been blocked by lawmakers both in the past and recently. This prevents the country from achieving its national fnancial inclusion goals. Recently, on September 18, 2019, the CBN issued a cashless policy that imposed charges on withdrawals and deposits (Table 9). The purpose of the CBN’s cashless policy was to encourage electronic fnancial transactions through online bank transfers and to strongly discourage cash-based transactions which will help reduce theft, robbery, and corruption. This policy will also compel employers and business owners to ensure that their employees own a bank account for payment of salaries electronically, and will make families compel their members to own a bank account to facilitate online transfers of money to their family members. But the general public misunderstood the purpose of the policy, and reacted to the cashless policy. In response, the Nigerian lawmakers argued that the policy was not needed at this time, they argued that the rates were too high and that the implementation was discriminatory because it was implemented in some Nigerian states while other states where exempted, which undermined the equality of all Nigerian states in the country according to the Federal constitution. Due to these concerns, the Nigerian lawmakers stopped the CBN’s effort to implement this aspect of its cashless policy2 at the time. This is an example of how political interference in Nigeria prevents achieving full fnancial inclusion. 3.2.2. High Cost of Doing Business. The cost of doing business in Nigeria is high for many reasons. Unreliable power supply, high cost of energy, insuffcient credit bureaus, and the absence of a national database with customers’ fnancial history, all these contribute to increasing the cost of doing business in Nigeria.
2
https://punchng.com/cashless-policy-reps-ask-cbn-to-suspend-charges-on-deposits/ http://saharareporters.com/2019/09/19/breaking-suspend-new-charges-transactionlawmakers-tell-cbn
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390 Peterson K. Ozili Table 9. Implementation of the CBN Cashless Policy. Account Type
Withdrawal/Deposit Limits
Processing Fees for Processing Fees for Withdrawals Deposits
Individual
Above N500,000
3%
2%
Corporate
Above N3,000,000
5%
3%
Implementation September 18, 2019 date
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Pilot state
Lagos, Ogun, Kano, Abia, Anambra, Rivers and the FCT
Nigerian banks also design the pricing of their fnancial products and services to refect the prevailing cost of doing business in the country which leads to high interest rates on loan and high transaction costs. As a result, individuals are often discouraged from borrowing from banks preferring to borrow from family, friends and from agents in the informal sector, and reducing the level of fnancial inclusion. Also, high transaction costs might be too costly for small businesses and banks may lose the patronage of small businesses, which would have negative effects for fnancial inclusion. 3.2.3. Uneven Financial Development in the North and South Regions. Most fnancial institutions and Fintech businesses are located in the South region of the country because the South region has better infrastructure and a high level of business patronage. Financial institutions in the South offer fnancial services at competitive rates to individuals and businesses which lead to intense competition for market share through innovation and great customer service. These leads to higher levels of fnancial development in the South region, compared to the North. Also, it is easier for fnancial institutions to persuade southerners to open bank accounts in a bank to take advantage of interest on deposits, free debit cards and digital banking apps due to high fnancial literacy in the South. In contrast, the North is relatively fnancially underdeveloped because fnancial institutions have fewer presence in the North region due to low business patronage, lack of infrastructure in some areas and weak infrastructure in other areas in the North region. Also, it is not easy for fnancial institution to persuade uneducated Northerners to open bank accounts in a bank so that they can take advantage of interest on deposits, free debit cards, digital banking apps, etc., due to religious sentiments and other belief systems that are anti-technology in the region. These issues affect the level of fnancial inclusion in the North of Nigeria. 3.2.4. High Financial Illiteracy. The lack of fnancial education programs has been a problem that many individuals and families face in Nigeria. Lack of knowledge about available fnancial services makes it diffcult for individuals and families to use emerging fnancial products and services to improve their fnancial welfare. And even when some fnancial education programs are implemented in urban cities, such programs are short-lived due to high cost especially when the costs of fnancial education programs outweigh its potential benefts. Some research shows that the cost of fnancial education may outweigh its beneft
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Financial Inclusion in Nigeria 391 (Ozili, 2018; Willis, 2008). Also, it is important to point out that not all fnancial education programs are equally effective in Nigeria due to language barriers and the unwillingness of fnancial educators to go to remote areas to educate citizens in remote areas of the country. Thirdly, there is a lack of standard for fnancial literacy in Nigeria. This makes it diffcult for fnancial educators to know if they have succeeded in teaching citizens about the use of fnancial services since there are no uniform standards for fnancial literacy in the country. If the goal of fnancial education is to increase fnancial literacy, how do fnancial educators in Nigeria know if they have succeeded without a standard fnancial literacy measure? Finally, fnancial education in Nigeria is not well-tailored to meet the education needs of people in different demographics, life stages, and learning styles in the country. 3.2.5. The State of the Economy. In Nigeria, the state of the economy affects the level of fnancial inclusion. During recessions, the level of local economic activities decreases and gives rise to unemployment in Nigeria which translates to fnancial hardship coupled with bank’s unwillingness to lend to ordinary people during recessions. Individuals are forced to look away from banks and turn to family, friends and relatives for fnancial assistance during recessions. When recessions become severe, many individuals may withdraw their savings from formal fnancial institutions preferring to hold their money themselves due to fear that banks might go bankrupt. Even the money borrowed from family and friends will not be used to revive local economic activities rather it will be used to fnance emergency and personal consumption or expenditure during a recession, also, the savings withdrawn from banks might be hoarded and kept out of the fnancial system for a long time. All these leads to voluntary fnancial exclusion – where people choose to leave the fnancial sector because it has no beneft to them. This suggests that the level of fnancial inclusion is greater in periods of economic prosperity and lower during recessions. 3.2.6. Corruption. The public funds allocated for fnancial inclusion programs and activities in Nigeria may be used for other purposes contrary to what the funds were allocated for. Such funds after having been allocated may even be depleted at the allocation stage, that is before they reach the agency of the government responsible for achieving specifc fnancial inclusion objectives. The remaining funds may be insuffcient to achieve the desired fnancial inclusion objectives of the government. This demonstrates how corruption affects the level of fnancial inclusion in Nigeria. 3.2.7. Fintech Increases Discrimination. Fintech lenders in Nigeria serve more creditworthy borrowers than poor people. They charge higher interest rates (above 20%), but the higher interest paid to Fintech lenders by borrower is a result of the convenience provided by them. Fintech lenders are also discriminatory in charging higher interest rates from minority groups.
4. Effect of Financial Inclusion on Economic Growth In Section 6, several studies reported conficting effect of fnancial inclusion on the Nigerian economy. I test this effect, using data collected from the Global
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392 Peterson K. Ozili Findex database of the World Bank for the 2011, 2014, and 2017 period (note that fnancial inclusion data were only available for three years in the database). The following question is empirically addressed: through what channel does greater fnancial inclusion lead to economic growth? To answer this question, the “fnancial inclusion” variable is broken down into its several components, and it is estimated that economic growth as a function of fnancial inclusion is as shown below: GDP growth = f (financial inclusion determinants) Econometrically, the model is expressed as: ∆ GDPt = AAt + CCt + DDt + EEt + FFt + GGt + HHt + e where AA = account owners of any type (% age 15+); CC = borrowing from family or friends (% age 15+); DD = credit card ownership (% age 15+); EE = debit card ownership (% age 15+); FF = fnancial institution account ownership (% age 15+); GG = savings at a fnancial institution (% age 15+); HH = savings using a savings club or person outside the family (% age 15+), and t = year. The results in Table 10 show that only two fnancial inclusion indicators had a signifcant and positive effect on economic growth. The two indicators are the “borrowing from family or friends” indicator and the “saving using a savings club or person outside the family” indicator. The other variables were not signifcantly related to ΔGDP and the models report a negative R2. The result suggests that borrowings and savings outside fnancial institutions (using family, friends, or saving clubs) signifcantly contributed to economic growth than borrowing and savings through fnancial institutions.
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5. Conclusion There is the expectation that fnancial inclusion in Nigeria will contribute to economic growth by increasing the possibilities for greater savings, consumption, better education, and entrepreneurship among individuals, particularly female adults. In this chapter, the author analyzed the state of fnancial inclusion in Nigeria based on the Global Findex database. The author analyzed several indicators of fnancial inclusion, and found that people with at least a secondary level of education and unemployed people had higher levels of debit card ownership, higher levels of account ownership of any type, and higher levels of account ownership in a fnancial institution. Also, people with at least a secondary level of education had higher levels of borrowings from a bank or another type of fnancial institution, and had lower levels of savings at a fnancial institution while savings, using a savings club or persons outside the family, decreased among females, poor people and among people with a primary education. Furthermore, there was fewer credit card ownership by unemployed people, while credit card ownership increased among employed
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−28.2
0.134 (2.06)
−0.090
0.107 (2.30)
Coeffcient (t-statistic)
Coeffcient (t-statistic)
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*, **, and *** denotes 10%, 5%, and 1% signifcance levels. t-statistics are reported in parenthesis.
Notes: The regression is estimated using time series OLS regression. AA = account owners of any type; CC = borrowed from family or friends; DD = credit card ownership; EE = debit card ownership; FF = fnancial institution account ownership; GG = saved at a fnancial institution; HH = saved using a savings club or person outside the family.
−0.28
0.134 (2.06)
Coeffcient (t-statistic)
32.38
−84.38
1.623 (1.52)
Coeffcient (t-statistic)
R2
42.29
0.119* (3.44)
Coeffcient (t-statistic)
0.183* (3.13)
−9.44
0.106 (2.30)
Coeffcient (t-statistic)
HH
GG
FF
EE
DD
CC
AA
Coeffcient (t-statistic)
Table 10. Effect of Financial Inclusion on Economic Growth.
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Financial Inclusion in Nigeria 393
394 Peterson K. Ozili people, the richest people, and among people with at least a secondary level of education. Also, borrowings from family or friends decreased. Finally, borrowings and savings using family, friends or saving clubs signifcantly contributed to economic growth than borrowing and savings through fnancial institutions. The main conclusion is that the level of fnancial inclusion in Nigeria is high relative to other African countries. However, the use of fnancial institutions to save in Nigeria remains low, which might be a result of lack of trust in fnancial institutions in Nigeria. The fndings have some policy implications. It shows that, although fnancial inclusion does not constitute a major problem in Nigeria, Nigerian authorities should increase the number of formal account ownership by removing obstacles such as income and education bias and gender discrimination in the delivery and use of fnancial services. Nigerian policymakers should implement policy measures to expand the use of formal bank accounts for savings and borrowings by ordinary people. Future studies can explore the strategies that banks and fnancial institutions use to persuade individuals to save their money in banks as well as the strategies used by banks to encourage individuals to borrow money from banks and other fnancial institutions.
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References Adeola, O., & Evans, O. (2017). Financial inclusion, fnancial development, and economic diversifcation in Nigeria. The Journal of Developing Areas, 51(3), 1–15. Babajide, A. A., Adegboye, F. B., & Omankhanlen, A. E. (2015). Financial inclusion and economic growth in Nigeria. International Journal of Economics and Financial Issues, 5(3), 629–637. Bayero, M. A. (2015). Effects of cashless economy policy on fnancial inclusion in Nigeria: An exploratory study. Procedia-Social and Behavioral Sciences, 172, 49–56. Bruhn, M., & Love, I. (2014). The real impact of improved access to fnance: Evidence from Mexico. Journal of Finance, 69(3), 1347–1376. David-West, O. (2016). The path to digital fnancial inclusion in Nigeria: Experiences of Firstmonie. Journal of Payments Strategy & Systems, 9(4), 256–273. Demirgüç-Kunt, A., Klapper, L., Singer, D., & Van Oudheusden, P. (2015). The Global Findex Database 2014: Measuring fnancial inclusion around the World. World Bank Policy Research Working Paper No. 7255 (April), 1–88. https://doi.org/10.1596/18139450-7255. Efobi, U., Beecroft, I., & Osabuohien, E. (2014). Access to and use of bank services in Nigeria: Micro-econometric evidence. Review of Development Finance, 4(2), 104– 114. Kama, U., & Adigun, M. (2013). Financial Inclusion in Nigeria: The Journey so Far. Retrieved from SSRN 2365209. Mbutor, M. O., & Uba, I. A. (2013). The impact of fnancial inclusion on monetary policy in Nigeria. Journal of Economics and International Finance, 5(8), 318–326. Nkwede, F. (2015). Financial inclusion and economic growth in Africa: Insight from Nigeria. European Journal of Business and Management, 7(35), 71–80. Odior, E. S., & Banuso, F. B. (2012). Cashless banking in Nigeria: Challenges, benefts and policy implications. European Scientifc Journal, 8(12), 289–316.
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Financial Inclusion in Nigeria 395
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Ozili, P. K. (2018). Impact of digital fnance on fnancial inclusion and stability. Borsa Istanbul Review, 18(4), 329–340. Ozili, P. K. (2020a). Financial inclusion research around the world: A review. Forum for Social Economics, 49(2), 1–23. Ozili, P. K. (2020b). Theories of fnancial inclusion. Retrieved from SSRN 3526548. Willis, L. E. (2008). Against fnancial-literacy education. Iowa Law Review, 94, 197.
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Chapter 20
Evaluation of Factors Affecting the Financial Performance of Borsa İstanbul Cement Sector Companies Nida Abdioğlu and Sinan Aytekin Abstract Introduction: Turkish cement industry, which sustains growth trend between the years 2015 and 2018, is the biggest cement producer of Europe besides the growth success. Production trend in cement industry reversed after the decrease in the value of Turkish Lira and increased infation in 2018. The data of this industry, which contributes to Turkish economy directly and indirectly, have become one of the leading indicators. Aim: From this point of view, 17 cement industry frms which are traded in Borsa İstanbul equity market continuously are examined in terms of their Earnings Before Interest, Taxes, Depreciation, and Amortization, Cash Conversion Cycle (CCC), Export Rate Ratio and Gross Sales. These variables are analyzed between the period 2013:Q1 and 2019:Q2.
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Method: Independent variables in the models are Industry Production Index (IPI), CBRT Dollar/TL selling rate of exchange, Tangible Asset Ratio, Growth Rate, Financial Leverage Ratio, Current Ratio, Market-to-Book Ratio (MB), Price-to-Earnings Ratio (PE), and Return on Equity (ROE). Findings: According to panel regression results, Dollar/TL exchange rate is the unique independent variable that affects four dependent variables. While Dollar/TL exchange rate negatively affects Earnings Before Interest and Taxes and Gross Sales, it positively affects CCC and Export Rate. MB ratio positively affects CCC. In contrast, IPI, Tangible Asset Ratio, and Financial Leverage Ratio negatively affect CCC. Export ratio is negatively affected both by IPI and PE ratio. While MB ratio negatively affects Gross Sales ratio, IPI, Tangible Asset Ratio and Growth Rate positively affect it.
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398 Nida Abdioğlu and Sinan Aytekin Keywords: Financial performance; cement industry; panel data analysis; GMM; Borsa Istanbul; Turkey JEL Codes: C33; L11; M21
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1. Introduction Firms use fnancial outputs that emerge as a result of their activities as indicators of fnancial performance. These indicators are used as decision-making units in terms of both internal and external stakeholders. While the performances of frms generally contribute to the sector in which they operate on a micro basis, the performances of some frms also become important indicators of the national economy on a macro basis. One of these important sectors is the construction and real-estate sector. The sector, which grew faster than the national growth rate during the 2003–2007 period when the macro indicators were positive in the Turkish economy, lost this momentum in 2008. It also had a negative impact on economic growth in 2008 and 2009 and grew more than the national economy again between 2010 and 2014. The construction and real-estate sector, which had a coordinated proceeding with the national economy as of 2015, started to contribute negatively to the national economy again with its performance in the second half of 2018. This contraction in the sector continued in 2019 and by the end of the year, the contraction in the sector was around 12.7% compared to the previous period (KPMG, 2020). Cement and ready mixed concrete industries, which belong to the stone and earth-based sector, have important contributions to the direction of growth in Turkish economy. Having been the leader in Europe, Turkish cement industry has grown rapidly since 2015. The sector, which increased its production within the frst six months of 2018, was affected negatively by the increase in the costs due to the exchange rate shock experienced in August 2018. As of November 2018, the production of the sector decreased by 7.6% compared to the same period of the previous year. The total contraction in 2018 was around 9% (Turkrating, 2019). The contraction in the sector continued in 2019, and production decreased by 25% in the frst 10 months compared to the same period of the previous year. In this period, the depreciation of the Turkish lira especially against the US Dollar and Euro made a positive contribution to the exportation in the sector. Around 19.4% of the production was exported in the same period. This increase meant that export rate was increased by 46% in the same frst 10 months period compared to the same period of the previous year, and this caused a 33% decrease in domestic sales due to infation and exchange rate pressure (Türkiye Çimento Müstahsilleri Birliği (TCMA), 2020). For these reasons, it has become very important to monitor the direction of the cement industry, which has signifcant contributions to the macro indicators in Turkish economy and operates as one of the essential components of the construction sector. Therefore, the factors affecting Earnings Before Interest,
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Evaluation of Factors Affecting the Financial Performance 399 Taxes, Depreciation, and Amortization (EBITDA), Cash Conversion Cycle (CCC), Export Rates, and Gross Sales of 17 companies operating in the Cement Sector, which had continuously been traded in the Borsa Istanbul during the 2013:Q1–2019:Q2 period, were examined in this study. Industrial Production Index, CBRT US Dollar/TL Exchange Rate, Tangible Asset Ratio, Investment Growth Rate, Financial Leverage Ratio, Current Ratio (CR), Market-to-Book Ratio (MB), Price-to-Earnings Ratio (PE), and Return on Equity (ROE) ratios were included in the model as the independent variables. Although there are many studies in the fnance literature that examined the fnancial performances of frms with different variables, the fact that there is not any study measuring performance with micro and macro variables in the cement sector constitutes the original aspect of the study. It is believed that determining the fnancial performance indicators in the sector, which has a signifcant weight in the Turkish economy, would contribute to the literature.
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2. Literature Review There are many studies in the fnance literature that measure the fnancial performances of companies with different micro and macro variables. In this part of our study, we try to summarize the studies which represent the fnancial performances of the frms in the cement sector and the studies which examine the variables that are the focus of our study. When the literature is reviewed, it is observed that while the number of studies analyzing EBITDA, Gross Sales Proft and Export Rate variables as dependent variables is limited, there are more studies linking CCC with the performance of the frm. Ersoy et al. (2016) and Üstün et al. (2018) include the EBITDA/Total Asset variable as one of the fnancial performance indicators in their studies. Işık et al. (2016), in their study investigating the effect of R&D expenditures on profitability and sales, establish six different models in which operating proft and sales are dependent variables. Erdil and Özdemir (2016) investigate the export performances of the frms in the Turkish textile sector; and Eren (2014) measures the effects of generic competitive strategies on export performance using the data obtained through surveys from 386 administrators in the automotive side industry frms operating in Turkey. Similarly, Çubukçu and İmamoğlu (2019) investigate whether logistics performances affect the performance implementations and export performances of the frms through the surveys administered to the directors of 55 export frms operating in Bayburt, Erzincan and Erzurum in Turkey. As a result, they fnd a positive relation between logistics performance and frm performance as well as the export performance. CCC is one of the important variables that represent the working capital management skills of the frms. This variable, which may differ depending on whether the frm operates in the production or service sector, is also an indicator of the effectiveness of the management of the working capital in the frms. Particularly, in the manufacturing industry frms cash turns into raw materials, semi-fnished products and fnished products. In the end, products turn into cash or forward receivables depending on the type of sales. Therefore, the activity cycle starts with
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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400 Nida Abdioğlu and Sinan Aytekin cash and is completed by returning of the cash to the company again (Okka, 2018). In general, the frms do not desire the CCC to extend. Because the need for working capital would increase with the extended CCC. In the opposite case, frms may have to meet their working capital needs with commercial debts. CCC is obtained by subtracting the days payables outstanding (DPO) from the sum of the days sales outstanding (DSO) and the days of inventory outstanding (DIO). Therefore, long DSO and the DIO extend CCC, while long DPO shortens CCC. Since CCC also represents the working capital effectiveness of the frms, it is often associated with the corporate proftability. In one of these studies, Deloof (2003) investigates the relation between working capital management and proftability of 1,009 large-scale frms operating in the non-fnancial sector in Belgium during the 5-year period from 1992 to 1996. He states that frms could increase their proftability by reducing their DSO and the DIO, while less proftable frms should extend their DPO. Similarly, Teruel-Garcia and Martinez-Solana (2007) investigate the impact of working capital management of 8,872 SMEs operating in Spain on their proftability between 1996 and 2002. As a result, they determine that the frms could create value by reducing their DSO and DIO and thus increase their proftability by shortening the CCC. As it can be derived from here, among the CCC variables, there is a negative relation between frm performance and DSO as well as DIO. In their studies revealing this relation, Raheman and Nasr (2007) examine the CCC and components of the 94 enterprises traded in the Pakistan Karachi Stock Exchange during the 1999–2004 period. As a result, they prove that there is a strong negative relation between the working capital management and proftability variables of the frms; and that as the CCC extends, the proftability of these frms decline. Again Gill et al. (2010) examine the relation between working capital management and proftability of 88 frms traded in the New York Stock Exchange during the 2005–2007 period. As a result, they determine that there is a statistically signifcant relation between the proftability of the frm and the CCC and that the frms could increase their proftability with optimal CCC and DSO. Similar results are also obtained in other studies conducted with public joint stock frms data. In their study, Lazaridis and Tryfonidis (2005) measure the relation between CCC and proftability using data from 131 frms traded in the Athens Stock Exchange during the 2001–2004 period. As a result, they prove that there is a statistically signifcant relation between gross sales proft and CCC as well as proftability, and that the frms could gain proft by keeping CCC components at the optimum level. In another study, Garanina and Petrova (2015) fnd a negative relation between the CCC and frm performance for 720 Russian frms engaged in various economic activities (telecommunications, transportation, electricity industry, trade, metallurgy, mechanical engineering, chemistry and petrochemicals, oil and gas) between 2001 and 2012. In their study that associated CCC with the stock price performance, Azam and Haider (2011) investigate the effects of working capital management on their performances using the data obtained from 21 non-fnancial sector frms traded in the Pakistan Karachi Stock Exchange KSE-30 index for a period of 10 years between 2001 and 2010. As a result, they prove that they could increase the value of stocks by decreasing the stock amount, CCC and net trading cycle periods, and that they could affect the overall performances of the frms with the help of increased liquidity
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Evaluation of Factors Affecting the Financial Performance 401 accordingly. Majeed et al. (2012), fnd similar results in manufacturing industry frms with investigating the effects of the Return on Assets (ROA), ROE and Earnings Before Interest and Taxes (EBIT) variables on the CCC using the 5-year data belonging to the 2006–2010 period of 32 frms that are randomly selected among the frms operating in the chemistry, automotive and construction sectors in Pakistan. As a result, they determine that there is a negative relation between the frm performance and average DSO as well as average DIO among the CCC variables. In another study on manufacturing frms, Padachi (2006) measures the relation between working capital management and proftability of 58 small-scale production enterprises operating in Mauritius during the 1998–2003 period. As a result, it is stated that the investment in stocks and excessive amount of receivables reduce the proftability. Muscettola (2014), on the other hand, reveal that the shortness of CCC increase the EBITDA, which referred to the proftability, in their study conducted on 4,226 SMEs operating in Italy between 2007 and 2010. Yıldırım (2018) also investigates the relation between components of working capital and frm proftability. Accounts receivable turnover, inventory turnover, accounts payable turnover and CCC are used as independent variables. Low level of correlation is found between independent variables and frm proftability. It is also found that accounts payable turnover affects ROA. Looking at the literature in general, it is observed that there is a strong interest in the studies on CCC as a performance indicator.
3. Data and Methodology
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In this study, determinants of earnings before interest and tax, CCC, Export Rate and Gross Sales are investigated for cement industry frms. Cement industry frms listed in Borsa Istanbul between 2013:Q1 and 2019:Q2 are included in the analyses. Quarterly data is used in the analyses. Finnet database is used to collect accounting variables and Bloomberg database is used to obtain macro variables. These frms are listed in Table 1. In all, 494 observations are used in the panel regressions. Table 1. Cement Industry Companies. Code
Name
Code
Name
ADANA
Adana Cement (A)
BUCIM
Bursa Cement
ADBGR
Adana Cement (B)
CMBTN
Çimbeton
ADNAC
Adana Cement (C)
CMENT
Çimentaş
AFYON
Afyon Cement
CIMSA
Çimsa
AKCNS
Akçansa
GOLTS
Göltaş Cement
ASLAN
Aslan Cement
KONYA
Konya Cement
BTCIM
Batı Cement
MRDIN
Mardin Cement
BSOKE
Batısöke Cement
NIBAS
Niğbaş Cement
BOLUC
Bolu Cement
NUHCM
Nuh Cement
UNYEC
Ünye Cement
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402 Nida Abdioğlu and Sinan Aytekin Following models are used in the analyses:
Ebitda f ,t = a0 + a1IPI t + a2USDt + a3Tang f ,t + a4Growth f ,t + a5 Lev f ,t +a6CR f ,t + a7 MB f ,t + a8 PE f ,t + a8 ROE f ,t CCC f ,t = a0 + a1IPI t + a2USDt + a3Tang f ,t + a4Growth f ,t + a5 Lev f ,t +a6CR f ,t + a7 MB f ,t + a8 PE f ,t + a8 ROE f ,t Export f ,t = a0 + a1IPI t + a2USDt + a3Tang f ,t + a4Growth f ,t +a5 Lev f ,t + a6CR f ,t + a7 MB f ,t + a8 PE f ,t + a8 ROE f ,t
(1)
(2)
(3)
Sales f ,t = a0 + a1IPI t + a2USDt + a3Tang f ,t + a4Growth f ,t + a5 Lev f ,t +a6CR f ,t + a7 MB f ,t + a8 PE f ,t + a8 ROE f ,t
(4)
EBITDA, CCC, Export Rate (Export), and Sales Growth (Sales) are used as dependent variables in this study. Furthermore, nine independent variables are used in each model. Among these variables, two of them are macro variables and the rests are frm-specifc accounting variables. The defnitions of these dependent and independent variables are shown in Table 2. Random-effect panel regressions are used for models 1, 2, and 4, and fxed-effect panel regression is used for model 3. The result of Breusch–Pagan Lagrance Multiplier (LM) test is taken into account to decide between random-effect model and ordinary least squares model (Sarıkovanlık, et al., 2019). Furthermore, Hausman
Dependent Variables Independent Variables
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Table 2. Defnition of Variables. Variable
Defnition
EBITDA
Growth Rate of Earnings Before Interest and Tax
CCC
CCC = DIO + DSO − DPO
Export
Export Ratio=Exports/Gross Sales
Sales
Gross Sales (t)
IPI
Industry Production Index
USD
Dollar/ TL Exchange Rate
Tang
Tangibility Ratio= Tangible Assets/ Total Assets
Growth
Growth Rate of Liquid Assets/ Total Assets
Lev
Leverage Ratio= Total Liabilities/ Total Assets
CR
CR = Current Assets/ Current Liabilities
MB
MB = Market Value/ Book Value
PE
Price/Earnings
ROE
ROE = Net Profts/Total Equity
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Evaluation of Factors Affecting the Financial Performance 403 test is used to decide between random-effect model and fxed-effect model. Hausman test is not rejected for model 1, 2 and 4 and it is rejected for Model 3. In addition, Arellano and Bond’s (1991) generalized methods of moments (GMM) is used as a dynamic panel estimation method. It is assumed that dependent variables in each model are affected by their values in the previous time period. Endogeneity issue is tried to be solved by removing fxed effects in GMM (Baum et al., 2013). Thus, lagged values of the dependent variables are used as endogenous variables. The independent variables at time t-2 are used as instrumental variables in each regression. Furthermore, according to Arellano–Bond test result there is not a second order serial correlation in the regressions. This shows that the instruments are valid in the regressions. Moreover, the null of Hansen test is rejected and this shows the validity of the instruments.
4. Empirical Results Table 3 shows the summary statistics of the variables used in this study. Average frm in the sample has an EBITDA growth rate of 21.14%. This shows that the cement industry frms increased their EBITDA values by 21.14% compared to their previous year EBITDA values. CCC’s mean value is 104.47 days. The average Export Ratio is 12.43% and Gross Sales Growth is 13.48%. IPI and USD are used as macro variables. Average IPI is 105.73 and average USD/TL exchange rate is 3.32 between 2013:Q3 and 2019:Q4. Tangibility Ratio is 0.42 and Growth Rate of Liquid Assets is 7.16. Leverage ratio is 0.36, CR is 1.96, market to book MB value is 1.87, PE is 13.96, and ROE is 14.22. Pearson Correlation coeffcients among the variables used in this study are shown in Table 4. According to Table 4, EBITDA has positive relation with sales, Table 3. Descriptive Statistics.
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Variable
Mean
N
sd
p25
p50
p75
EBITDA
494
21.14
78.57
−18.23
0.00
38.40
CCS
494
104.47
49.06
71.71
97.11
144.49
Export
494
12.43
11.38
0.20
10.47
22.99
Sales
494
13.48
29.17
−2.40
10.34
28.33
IPI
494
105.73
10.37
96.90
105.76
114.80
USD
494
3.32
1.23
2.28
2.96
3.82
Tang
494
0.42
0.13
0.33
0.40
0.48
Growth
494
7.16
47.18
−7.25
4.15
14.65
Lev
494
0.36
0.15
0.24
0.34
0.45
CR
494
1.96
1.13
1.16
1.70
2.41
MB
494
1.87
1.02
1.04
1.70
2.38
PE
494
13.96
12.84
6.75
9.08
17.08
ROE
494
14.22
16.54
4.54
14.41
22.52
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
−0.005
0.01
−0.04
MB
PE
ROE
0.001 −0.38* −0.08
Lev
−0.02
0.04
CR
0.08
Growth
0.05
0.13*
0.11
0.11
0.27*
0.05
0.06
0.53*
1
IPI
0.41*
−0.01
0.10
1
USD
−0.07
−0.04 −0.13*
−0.11*
0.26* −0.004 −0.003 −0.06
−0.31* −0.06
1
−0.22*
0.10
0.11
0.07
−0.08
−0.66*
0.22* −0.30*
−0.03
0.07
0.02
1
Growth Lev
0.50* −0.01
−0.06
1
Tang
−0.16* −0.16* −0.27* −0.39*
0.15*
0.32*
0.17*
0.01
0.10
1
−0.29* −0.07
0.24* −0.02
0.04
−0.24* −0.14*
0.09
Tang
0.007
−0.19*
0.02
−0.03
USD
−0.04
1
−0.04
0.39* −0.18*
0.18*
1
Export Sales
IPI
Sales
−0.03
Export
1
−0.10
CCC
EBITDA
EBITDACCC
Table 4. Pearson Correlation Matrix.
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0.17*
0.06
0.13*
1
CR
1
PE
0.30* −0.04
0.50*
1
MB
1
ROE
404 Nida Abdioğlu and Sinan Aytekin
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Evaluation of Factors Affecting the Financial Performance 405 and it has negative relation with USD. CCC has positive relation with Export, CR, and ROE, and it has negative relation with Sales, Tang, and Lev. Export is positively related with ROE, and it is negatively related with Tang, MB, and PE. Sales has negative relation with CR, and it has positive relation with Tang, Growth, and Lev. Table 5 shows the fxed and random-effect regression results. Column 1 of Table 5 uses EBITDA as a dependent variable. According to random-effect regression results, only USD/TL exchange rate affects EBITDA. As Turkish Lira loses value, the value of earnings decreases and therefore EBITDA of the cement industry frms decreases. CCC is used as a dependent variable in column 2 of Table 5. According to random-effect regression results, IPI, USD, Tang, and Lev negatively affect CCC, and MB positively affects CCC. Table 5. Fixed-Effect and Random-Effect Regression Results. EBITDA (RE) CCC (RE) IPI USD Tang Growth
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Lev
Export (FE)
Sales (RE)
0.634
−0.251**
[0.110]
[0.012]
[0.000]
5.198***
1.043***
[0.000]
[0.000]
[0.000]
[0.071]
42.536
−61.732***
5.4
38.869***
[0.229]
[0.000]
[0.115]
[0.001]
0.082
0.03
0.005
0.209***
[0.279]
[0.118]
[0.353]
[0.000]
−17.842***
−0.134***
0.280** [0.044] −2.273*
7.122
−61.715***
4.457
3.679
[0.851]
[0.000]
[0.174]
[0.769]
CR
−3.997
−2.439*
−0.061
−2.328
[0.359]
[0.084]
MB
−1.091 [0.815]
PE ROE Constant 2
R
N
5.450***
[0.867] −0.618
[0.110] −3.199**
[0.007]
[0.240]
[0.037]
−0.109
0.016
−0.046*
−0.021
[0.746]
[0.873]
[0.064]
[0.853]
−0.213
−0.101
0.025
0.007
[0.405]
[0.219]
[0.240]
[0.935]
6.724
157.749***
[0.874]
[0.000]
[0.000]
[0.245]
0.13
0.18
0.07
0.38
494
494
20.747***
494
* p < 0.1, ** p < 0.05, *** p < 0.01.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
−16.996
494
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406 Nida Abdioğlu and Sinan Aytekin When the variables affecting Export Rate is examined, a negative relation between IPI and Export Rate is found. The existing exchange rate shocks in Turkey can be shown as one of the reasons of this negative relation. As a result of these shocks, the trade of cement sector companies decreased. In line with this reduction, cement industry frms looked for new markets abroad and they increased their export ratios. Although the export rate of these companies increased, the industry production index (IPI) of Turkey decreased as a result of economic conditions. That’s why a negative relation between IPI and Export Rate is found. Moreover, USD variable has positive relation with export rate. Therefore, as value of Turkish Lira decreases, export rate increases. Exchange rate depreciation results in higher export ratios in line with Arslan and Wijnbergen (1993). Moreover, it is consistent with Mundell–Fleming model which states that the appreciation in exchange rate reduces export rate (Abeysinghe & Yeok, 1998). In the last column of Table 5, determinants of gross sales are investigated. IPI, tangibility, and growth rate of liquid assets positively affect Sales. Moreover, USD/ TL exchange rate and MB value negatively affect Sales. Firstly, it is found that increased industry production increase sales level. Secondly, the negative relation between USD and Sales shows that as Turkish Lira loses value, sales level of the cement industry companies decreases. Decreased currency value affects the purchasing power in the country and as results sales level is expected to decrease. The positive relation between Tangibility and Sales is a result of higher production capacity of frms with higher Tangibility. Moreover, it is found that frms with more liquid assets have higher level of sales. Since it is easy to convert these assets into cash, it is expected to found higher sales level in these companies. Lastly, a negative relation between Market-to-Book value and Sales level is found for cement industry frms. USD variable is the common variable that affects dependent variable in each model. However, it negatively affects EBITDA and Sales. Furthermore, it positively affects CCC and Export Rate. Table 6 shows the GMM regression results by considering endogeneity issue. Previous period value of each dependent variable is added into the models. Column 1 of Table 6 shows the factors affecting EBITDA of cement industry frms. Previous value of EBITDA (L. EBITDA) and IPI positively affect EBITDA. However, USD/TL exchange rate and current asset ratio negatively affect EBITDA. In column 2 of Table 6, it is seen that lagged value of CCC, USD/TL exchange rate, and MB have positive relations with CCC. As shown in column 3 of Table 6, as IPI increases export rate decreases. In addition, as value of Turkish Lira decreases export rate increases. Finally, the determinants of gross sales are examined in the last column of Table 6. L.sales, Growth, and Lev positively affect Sales. USD and ROE negatively affect Sales.
5. Conclusions Turkish cement industry is the leader of Europe in terms of its production level and it makes important contribution to the country’s growth. The exchange rate shock occurred in 2018 in Turkey caused a reduction in the production level of cement industry in 2018 and 2019. However, the decreased value of Turkish lira
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Evaluation of Factors Affecting the Financial Performance 407 Table 6. Dynamic Panel Regression Results. EBITDA L. EBITDA
CCC
Export
Sales
0.294*** [0.000]
L.CCC
0.367** [0.046]
L.Export
0.711*** [0.000]
L.Sales
0.649*** [0.000]
IPI
0.624*** [0.004]
USD Tang
4.103**
0.794**
[0.000]
[0.020]
[0.014]
[0.000]
−27.382
−6.126
2.735
14.65
[0.536]
[0.861]
[0.321]
[0.480]
0.01
0.009
0.089***
−16.340***
Lev
28.509
[0.440] [0.705]
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PE ROE
[0.604] −17.22 [0.543]
[0.000] −6.049***
[0.358]
[0.000]
−1.999
44.312*
[0.572]
[0.083]
−9.413**
0.749
[0.046]
[0.609]
[0.419]
[0.324]
4.346
5.468*
−0.037
−0.854
[0.755]
[0.085]
[0.945]
[0.766]
−0.074
−0.065
−0.018
0.115
[0.779]
[0.464]
[0.468]
[0.411]
−0.564 [0.234]
N
0.421***
[0.071]
−0.107
MB
−0.024*
[0.003]
Growth
CR
−0.247***
456
−0.03 [0.798] 456
−0.26
−1.185
−0.015
−0.208**
[0.515] 456
[0.032] 456
* p < 0.1, ** p < 0.05, *** p < 0.01.
resulted in higher level of export in this industry. Although infation and exchange rate shock reduced the level of production inside the country, they increased the export levels of the industry. Since the cement industry makes important contribution to the macro indicators of the country, we suppose it is remarkable
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
408 Nida Abdioğlu and Sinan Aytekin to investigate the developments in the industry. Following this idea, we examine the factors affecting fnancial performance, Sales, CCC, and Export Rates of the cement industry frms in Turkey. We fnd that USD/TL exchange rate variable has signifcant relations with all of the dependent variables. While it affects EBITDA and Sales negatively, it has positive impacts on CCC and Exports. Decreased value of Turkish Lira is supposed to decrease the earnings and sales of the companies. However, it increases the export level and CCC. When dynamic panel regressions are taken into account, it is seen that IPI is the another variable which affects each dependent variable signifcantly. It is found that IPI affects the dependent variable as in the reverse direction of USD variable. Leverage, CR and Market-to-Book Value are found to affect CCC variable. However, when the endogeneity issue is considered, only MB variable affects CCC among those variables. Furthermore, when the factors affecting Sales variable is taken into account, it is found that random-effect regression results and GMM regression results show different conclusions. IPI, USD and Growth are the common variables that affect Sales. However, GMM regression results show that leverage and ROE affect on Sales. This study shows that only IPI and USD/TL exchange rate can be shown as the variables that are effective on Sales, Export ratio, CCC and performance of cement industry frms in Turkey. We are not able to show another common variable that is effective on these four dependent variables. In order to strengthen the cement industry frms in the country, more valuable Turkish Lira and much more production levels are needed in the country. This study can be repeated with different variables according to the development trend of the cement industry for future research. Thus, the factors which affect the fnancial performance of cement sector frms can be determined more accurately.
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REFERENCES Abeysinghe, T., & Yeok, T. L. (1998). Exchange rate appreciation and export competitiveness: The case of Singapore. Applied Economics, 30(1), 51–55. Arellano, M., & Bond, S. (1991). Some tests of specifcation for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297. Arslan, I., & Wijnbergen, S. van. (1993). Export incentives, exchange rate policy and export growth in Turkey. The Review Economics and Statistics, 75(1), 128–133. Azam, D. M., & Haider, S. I. (2011). Impact of working capital management on frms’ performance: Evidence from non-fnancial institutions of KSE-30 index. Interdisciplinary Journal of Contemporary Research in Business, 3(5), 481–492. Baum, C. F., Lewbel, A., Schaffer, M. E., & Talavera, O. (2013). Instrumental variables estimation using heteroskedasticity-based instruments. German Stata Users Group Meeting, Potsdam, Retrieved from https://www.stata.com/meeting/germany13/ abstracts/materials/de13_baum.pdf Çubukçu, M. İ., & İmamoğlu, N. (2019). The effect of logistics performance on company performance and export performance. The Journal of International Social Research, 12(62), 1221–1234.
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Evaluation of Factors Affecting the Financial Performance 409 Deloof, M. (2003). Does working capital management affect proftability of Belgian frms? Journal of Business Finance and Accounting, 30(3&4), 573–587. Erdil, T. S., & Özdemir, O. (2016). The determinants of relationship between marketing mix strategy and drivers of export performance in foreign markets: An application on Turkish clothing industry. Procedia – Social and Behavioral Sciences, 235, 546–556. Eren, M. Ş. (2014). The effect of generic competitive strategies on frms’ export performance. Journal of Yasar University, 9(34), 5998–6022. Ersoy, E., Üstün, F., & Ünlü, U. (2016). The impact of professional management on frm performance: Evidence from Turkey. Turkish economy in a new era: Selected articles. In W. Sayers (Ed.), AGP Research is an Imprint of Mayaa Education (pp. 150–155). London. Garanina, T., & Petrova, O. (2015). Liquidity, cash conversion cycle and fnancial performance: Case of Russian companies. Investment Management and Financial Innovations, 12(1), 90–100. Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working capital management and proftability: Evidence from the United States. Business and Economics Journal, 10, 1–9. Işık, N., Engeloğlu, Ö., & Kılınç, E. C. (2016). The effect of research and development expenditures on the proftability and sales: An application on BIST companies. Erciyes University Journal of Economics and Administrative Sciences, 47, 27–46. KPMG. (2020). İnşaat sektörel bakış. Retrieved from https://assets.kpmg/content/dam/ kpmg/tr/pdf/2020/01/sektorel-bakis-2020-insaat.pdf Lazaridis, I., & Tryfonidis, D. (2005). The relationship between working capital management and proftability of listed companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 19, 26–25. Majeed, S., Majidmakki, M. A., Saleem, S., & Aziz, T. (2012). The relationship of cash conversion cycle and frm’s proftability: An empirical investigation of Pakistani frms. International Journal of Financial Management, 1(1), 80–96. Muscettola, M. (2014). Cash conversion cycle and frm’s proftability: An empirical analysis on a sample of 4,226 manufacturing SMEs of Italy. International Journal of Business and Management, 9(5), 25–35. Okka, O. (2018). Finansal Yönetim. Ankara: Nobel Akademik Yayıncılık. Padachi, K. (2006). Trends in working capital management and its impact on frms’ performance: An analysis of Mauritian small manufacturing frms. International Review of Business Research Papers, 2(2), 45–58. Raheman, A., & Nasr, M. (2007). Working capital management and proftability – Case of Pakistani frms. International Review of Business Research Papers, 3(1), 279–300. Sarıkovanlık, V., Koy, A., Akkaya, M., Yıldırım, H. H., & Kantar, L. (2019). Finans Biliminde Ekonometri Uygulamaları. Ankara: Seçkin Yayıncılık. Teruel-Garcia, P. J., & Martinez-Solano, P. M. (2007). Effects of working capital management on SME proftability. International Journal of Managerial Finance, 3, 164–177. Türkiye Çimento Müstahsilleri Birliği (TCMA). (2020, May). Çimento ve klinker istatistikleri. Retrieved from https://www.tcma.org.tr/tr/haber_detay/cimento-ve-klinkeristatistikleri Turkrating. (2019, March). Sektör raporları, çimento sektörü. Retrieved from http:// turkrating.com/cimento-sektoru-mart-2019-08621.html Üstün, F., Ersoy, E., & Ünlü, U. (2018). The impact of competitive aggressiveness on fnancial performance: A research on the leading industrial frms in Turkey. Afyon Kocatepe University Journal of Economics and Administrative Sciences, 20(2), 67–76. Yıldırım, H. H. (2018). Firmaların çalışma sermayeleri bileşenleri ile aktif karlılığı ve özsermaye karlılığı arasındaki ilişki: Borsa İstanbul’da bir uygulama. Sosyal Bilimlere Multidisipliner Bakış. Güven Plus Grup A.Ş. Yayınları.
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New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Chapter 21
Measuring Financial Inclusion and Financial Exclusion Peterson K. Ozili Abstract Purpose: This chapter proposes a number of measures for fnancial inclusion and fnancial exclusion. Method: The author use ratio analysis and statistics to develop several indices of fnancial inclusion. Findings: This chapter fnds that there are several indices of fnancial inclusion that can contribute to inform policy making in the fnancial inclusion agenda. Implications: The indices developed in this chapter can help policymakers toward designing better fnancial inclusion policies and can provide feedback and insight to policy makers to improve current fnancial inclusion policies.
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Originality: The literature on fnancial inclusion and exclusion lacks a comprehensive index that measures the extent of fnancial inclusion and exclusion across countries. This chapter attempts to fll this gap by proposing some index or indicators of fnancial inclusion and exclusion. Keywords: Financial inclusion; fnancial exclusion; poverty; access to fnance; index; inclusive growth; development JEL Codes: G00; G21; O16
New Challenges for Future Sustainability and Wellbeing, 411–427 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211022
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412 Peterson K. Ozili
1. Introduction This chapter proposes a number of measures for fnancial inclusion and fnancial exclusion. Financial inclusion has received a lot of attention lately in the fnancial development literature and in the development economics literature. Financial inclusion has a positive effect for poverty reduction, economic wellbeing, and economic development. However, the literature on fnancial inclusion and exclusion lacks a comprehensive index that measures the extent of fnancial inclusion and exclusion across countries. This chapter attempts to fll this gap by proposing an index or indicators of fnancial inclusion and exclusion. An index of fnancial inclusion (IFI) will help in identifying and testing several hypotheses relating to fnancial inclusion in the literature (Sarma, 2008). A comprehensive measure of fnancial inclusion and exclusion is needed because it aids comparison across countries, regions, and communities in order to assess the state of fnancial inclusion in one country or community compared to other countries and communities. Measuring fnancial inclusion using a number of indicators makes it easy to identify the relevant factors that determine the level of fnancial inclusion at a particular time and for a particular group of individuals or households. Using indices to measure the level of fnancial inclusion can help policy makers and analysts to evaluate and communicate the strengths and weaknesses in the progress of fnancial inclusion in individual countries. This study contributes to the fnancial inclusion literature. It contributes to the studies in the fnancial inclusion literature that develop some indices of fnancial inclusion. This study also adds to this literature by providing a set of unique but easy-to-compute measures of fnancial inclusion and exclusion. The remainder of the chapter is organized as follows. Section 2 presents a discussion on fnancial inclusion and fnancial exclusion. Section 3 presents some proposed measurement of fnancial inclusion. Section 4 concludes.
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2. Understanding Financial Inclusion and Exclusion 2.1. Financial Inclusion Financial inclusion is the delivery of fnancial services, including banking services and credit, at an affordable cost to the vast sections of disadvantaged and low-income groups who tend to be excluded (Kelkar, 2010). Financial inclusion involves granting access to, and the provision of, formal fnancial services to the undeserved population (Ozili, 2018). From a sociology perspective, fnancial inclusion is considered to be part of the larger issues of social inclusion in a society. In a fnancially inclusive society, individuals and households will have unrestrictive access to any type of fnancial services they want and when they want it (Ozili, 2020). To achieve fnancial inclusion, some policy makers tend to rely on formal fnancial institutions, banks, microfnance institutions, or Fintech companies to deliver fnancial products and services to the underserved groups of the population (Arslanian & Fischer, 2019; Birkenmaier et al., 2019; Ozili, 2018). Financial inclusion can be achieved by increasing fnancial access in two ways. (1) Financial inclusion may be achieved by removing existing price and structural
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Measuring Financial Inclusion and Financial Exclusion 413 barriers that prevent individuals and households from accessing basic fnancial services (Birkenmaier et al., 2019). It assumes that basic fnancial services already exist and there are barriers that prevent access to basic fnancial services. (2) Financial inclusion is achieved through increased supply of basic fnancial services. It assumes that there are no barriers to fnancial services only that fnancial services are in limited supply (Allen et al., 2012). An optimal approach to achieve fnancial inclusion involves the simultaneous removal of barriers to fnancial access and increased supply of fnancial services to the population especially poor households and other excluded groups of the population.
2.2. Financial Exclusion
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Leyshon (1995) defnes fnancial exclusion as those processes that serve to prevent certain social groups and individuals from gaining access to the formal fnancial system. Sinclair (2001) suggests that fnancial exclusion means the inability to access necessary fnancial services in an appropriate form. Carbo et al. (2005) defned fnancial exclusion as the inability of some societal groups to access the fnancial system. Kempson et al. (2004) identifed six common reasons for fnancial exclusion although the extent of exclusion varies from country to country. These barriers are: identity requirements, terms and conditions of bank accounts, bank charges, physical access to bank branches, psychological and cultural infuences, and ease of use of banking services. Chakrabarty (2010) suggests that fnancial exclusion is caused by demand‐side and supply‐side barriers to fnancial inclusions. Exclusion from the fnancial sector may be caused by problems with access, market conditions, prices, marketing or self-exclusion in response to negative experiences or perceptions (Ozili, 2018; Sarma, 2008). Financially exclusion may also be caused by religious belief that is hostile to the use of fnancial technology in everyday life (Ozili, 2018). Although zero-level fnancial exclusion is desirable, in reality, it is impossible to achieve a zero-level fnancial exclusion because some individuals will voluntary opt-out from participating in the fnancial system out of their own freewill.
2.3. The Literature on Financial Inclusion Index Some studies attempt to develop some measures of fnancial inclusion. Sarma (2008) proposes an IFI. The proposed IFI captures information on various dimensions of fnancial inclusion in a single number ranging between 0 and 1, where “0” denotes complete fnancial exclusion and “1” indicates full fnancial inclusion in a country. Camara and Tuesta (2014) developed a composite index for fnancial inclusion and used demand-side and supply-side information to measure the extent of fnancial inclusion at country level. Mialou et al. (2017) developed a composite index based on factor analysis. They derive a weighting methodology whose absence has been the most persistent of the criticisms of previous indices. Goel and Sharma (2017) developed an index to measure the extent of fnancial inclusion using indicators of the levels of access and usage of fnancial services. Similarly, Ambarkhane et al. (2016) developed measures of fnancial inclusion
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414 Peterson K. Ozili based on demand, supply, and infrastructure indicators of fnancial inclusion. They used the indicator to measure fnancial inclusion in Indian states.
3. Financial Inclusion Indices and Measurement
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3.1. Rate of Financial Inclusion (RFI) Index The RFI is a macro-level measure of growth in the level of fnancial inclusion for countries. It measures the growth in fnancial inclusion by taking into account the size of the population and the size of the fnancial sector using a broad range of fnancial sector size indicators. The RFI indicator is a reliable measure for tracking the growth RFI because it is risk-sensitive and is sensitive to fuctuating economic conditions. For instance, the RFI tend to be negative during bad economic times because the size of the fnancial sector tends to shrink in bad times, leading to negative growth in the fnancial sector while the population size continues to increase even in bad times. A negative RFI would signal increasing fnancial exclusion or lower levels of fnancial inclusion. This expectation is intuitive because in bad times, households and many individuals tend to exit the formal sector either by closing their formal accounts or by taking away their money from fnancial institutions, preferring to keep their money elsewhere, which leads to a contraction in the size of the fnancial sector; thereby, reducing the level of fnancial inclusion. On the other hand, the RFI tend to be positive in good economic times because the size of the fnancial sector tends to increase in good years, leading to positive growth in the fnancial sector while the population size continues to increase. This expectation is also intuitive because, in good times, households and many individuals keep their deposits in banks and engage in larger volume of transactions leading to higher levels of fnancial intermediation, which leads to an expansion in the size of the fnancial sector. An important indicator of the size of the fnancial sector is the fnancial system deposit to gross domestic product (GDP) ratio since it captures the total number of deposits brought into the fnancial system by individuals, households and businesses as a proportion of GDP. The frst approach to measuring the RFI is the logarithmic growth rate approach. Under this approach, the RFI index is the ratio of the change in the size of the fnancial sector to the logarithmic change in population size. The “change in size of the fnancial sector” is the size of fnancial sector in the current year (F2) minus the size of fnancial sector in the previous year or in a given base year (F1) which is equivalent to F2 – F1. On the other hand, “change in population size” is the population size in the current year (log P2) minus population size in a given base year (logP1) which is equivalent to log (P2 – P1), and population size consist of the size of the rural population and the size of the urban population. An alternative measure is the percentage growth approach. Under this approach, the RFI index measures the percentage change in the size of the fnancial sector to the percentage change in the size of the population. The size of the fnancial sector can be measured using any of the following indices: the fnancial system deposits to GDP ratio, bank deposits to GDP ratio and M2 to GDP ratio – and data for fnancial sector size can be obtained from the global fnancial development indicators of the World Bank.
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Measuring Financial Inclusion and Financial Exclusion 415 Let’s take an example. Assuming India’s population was 751 million in 2016 and 850 million in 2017, and the size of India’s fnancial sector – measured by the fnancial system deposits to GDP ratio – was 64.9 and 66.1 in 2016 and 2017, respectively. The RFI in India in 2017 will be 4.16% using approach and as shown below: Method 1: using growth rate (in percentage) RFI = ( Growth in financial sector size / Population growht rate ) * 100 RFI = [ ( F 2 − F 1) / F 1] / (P 2 − P1) / P1] * 100 Growth in financial sector size (%) = (66.1 − 64.9) / 64.9 = 0.0185 Population growth rate (%) = (850m − 751m) / 751m = 99m / 751m = 0.132 India’s RFI = 0.0185 / 0.132 = 0.1402 = 14.02% Method 2: using logarithmic approach RFI = Change in financial sector size / logarithmic change in population size RFI = ∆F / log( ∆P ) = ( F 2 − F 1) / log ( P 2 − P1) India’s RFI = (66.1 − 64.9) / log (850m – 751m) = 1.2 / (log 99m) = 1.2 / 7.99 = 0.15%
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3.2. Rural Financial Inclusion Rate (RFIR) Index Rate of rural fnancial inclusion refers to the growth in the level of fnancial inclusion for the rural population. It measures the growth in fnancial inclusion by taking into account the size of the rural population and the size of the fnancial sector. RFIR index can be measured as the percentage change in the size of the fnancial sector to percentage change in the size of the rural population. Or, can be measured as the change in the size of the fnancial sector to the logarithmic change in the size of the rural population. Where “change in rural population size” is the rural population size in the current year (RP2) less rural population size in a given base year (RP1) which is equivalent to RP2 – RP1. On the other hand, the “change in size of the fnancial sector” is the size of fnancial sector in the current year (F2) less the size of fnancial sector in a given base year (F1) which is equivalent to F2 – F1. The size of the fnancial sector is measured using any of the following indices: the fnancial system deposits to GDP ratio, bank deposits to GDP ratio, and M2 to GDP ratio. Data for fnancial sector size can be obtained from the Global Financial Development Indicators of the World Bank.
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416 Peterson K. Ozili Method 1: using growth rate (in percentage) RFI = (Growth in financial sector size / Rural population growth rate ) * 100 RFIR = ∆ F / ∆ RP = [( F 2 − F 1) / F 1] / ( RP 2 − RP1) / RP1] * 100 Method 2: using the logarithmic approach RFIR = ∆ F / log ( ∆ RP ) = [( F 2 − F 1) / F 1] / log ( RP 2 – RP1)
3.3. Urban Financial Inclusion Rate (UFIR) Index
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UFIR refers to the growth in the level of fnancial inclusion for the urban population. It measures the growth in fnancial inclusion by taking into account the size of the urban population and the size of the fnancial sector. The UFIR index can be measured as the ratio of the percentage change in the size of the fnancial sector to the percentage change in the size of the urban population. Or, can be measured as the ratio of the change in the size of the fnancial sector to the logarithmic change in the size of the urban population, where “change in urban population size” is the urban population size in the current year (UP2) minus urban population size in a given base year (UP1) which is equivalent to UP2 – UP1. On the other hand, the “change in size of the fnancial sector” is the size of the fnancial sector in the current year (F2) minus the size of the fnancial sector in a given base year (F1) which is equivalent to F2 – F1. The size of the fnancial sector is measured using any of the following indices: the fnancial system deposits to GDP ratio, bank deposits to GDP ratio, and M2 to GDP ratio.1 Data for fnancial sector size was obtained from the global fnancial development indicators of the World Bank. Method 1: using growth rate (in percentage). UFIR = (Growth in financial sector size / Urban population growth rate ) * 100 UFIR = ∆F /∆UP = [( F 2 − F 1) / F 1] / (UP 2 −UP1) / UP1] * 100 Method 2: using the logarithmic approach UFIR = ∆F / log (∆UP ) = [( F 2 − F 1) / F 1] / log (UP 2 −UP1)
3.4. The Financially Included Population This index measures the number of households or individuals in the formal fnancial sector. This includes all individuals and households that have access to, and use, basic fnancial services for consumption, education, and healthcare 1
M2 to GDP ratio is the ratio of coins and notes as well as near money to GDP.
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Measuring Financial Inclusion and Financial Exclusion 417 expenditure as well as for savings. The formula for determining the fnancially included population is given as the product of the RFI and the size of the population, as shown below: Financially included population = current RFI * total population size
3.5. The Financially Excluded Population This index measures the number of people outside the formal fnancial sector. This includes all individuals and households that do not have access to or use basic fnancial services for consumption, education and healthcare expenditure as well as for savings. The formula for determining the fnancially excluded population (FEP) is given as:
Financially excluded population ( FEP ) = Total population size – Financially included population
Or, FEP = current rate of financial exclusion (RFE) * total population size where the “current RFE” is defned as 1 minus the current RFI, that is: RFE =(1− RFI )
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3.6. Voluntary Financial Exclusion Rate Voluntary fnancial exclusion (VFE) is the willful and deliberate refusal to participate in the formal fnancial sector by households and individuals. Individuals may exit the formal fnancial sector for many reasons such as a general lack of interest in fnancial institutions, religious beliefs, dissatisfaction arising from one’s past experience in the fnancial sector, lack of trust in banks, etc. Most of the reasons for VFE cannot be measured arithmetically except for a few. One meaningful way to determine the number of people who are voluntarily excluded from the population is to determine the VFE ratio. The VFE ratio measures the number of formal accounts closed by account owners relative to the total number of formal accounts in the fnancial sector in given period of time, where the total number of formal account refers to the total number of formal account ownership in a defned period of time. Closed formal accounts refer to all formal accounts that were closed by the account owner across all fnancial institutions in the fnancial sector during a period of time but it excludes all formal accounts that were closed by fnancial institutions for legal and regulatory reasons. The VFE ratio is given as:
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418 Peterson K. Ozili VFE ratio = the number of closed formal accounts by account owners / total number of formal accounts in the financial sector
3.7. Forced Financial Exclusion Ratio The forced fnancial exclusion ratio (FFER) measures the number of formal accounts that were closed by fnancial institutions in the fnancial sector for legal and/or regulatory reasons relative to the total number of formal accounts in the fnancial sector during a period of time. This is intuitive and easy to understand because regulators and law enforcement have the power to instruct fnancial institutions to close bank accounts whose account activity are deemed to be suspicious, unethical, questionable, fraudulent, or illegal. The owner of such accounts may be temporarily or permanently excluded from the fnancial sector when their accounts are used as conduits for fraud and illegal transactions FFER ratio = the number of forced closed accounts / total number of formal accounts in the financial sector
3.8. Financial Access Ratio
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The fnancial access ratio (FAR) broadly measures the extent to which households have access to account ownership in the banks or fnancial institutions nearest to them or in their immediate communities. It identifes the proportion of households that own or hold a bank account or other formal accounts in a geographical area where bank branches may be limited or in excess supply. The FAR can be narrowly defned as the ratio of households that own or hold a bank account to the total number of available bank branches in the geographical area. A high FAR implies greater fnancial access and greater fnancial inclusion while a low ratio implies low fnancial access and low fnancial inclusion. The FAR ratio is expressed as: FAR = account to ownership by households ( log ) / total number of available bank branches For example, assume that the number of households (or individuals) that own a bank account in Nevada in the United States in 2018 was 897,507 and only four banks – HSBS, Wells Fargo, Bank of America and Citi – operated in Nevada in 2018. Each of the banks had 7, 9, 11, and 6 branches, respectively. Using the above information only, the FAR for Nevada will be: FAR = log (number of households that own an account) / total number of available bank branches. FAR = log 897,507 / (7 + 9 + 11 + 6) = 5.95 / 23 = 0.2587 = 25.9%
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Measuring Financial Inclusion and Financial Exclusion 419 An interesting feature of the FAR ratio is that the FAR ratio cannot be increased simply by increasing the value of denominator. Higher values of the FAR ratio can be achieved either by (i) increasing the number of account owners or (ii) through the simultaneous reduction in the denominator and increase in the numerator. This is intuitive because it suggests that greater “access to fnance” or greater fnancial access is not achieved by increasing the number of bank branches but rather it would require reducing the number of branches and a preference for other non-bank channels to deliver fnancial services to a larger number of households and individuals.
3.9. Account Usage Ratio Account usage ratio measures the frequency of formal account usage by households or individuals over a defned period of time usually a year. It captures the average number of formal account activity in a year. Formal account activity includes all account infows and outfows as well as individuals’ account balance checking activity. The account usage ratio is measured as the number of account activity divided by 365 days in a year. A high account usage ratio (FAR) implies greater fnancial inclusion. AUR = number of bank account activity / 365 days
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3.10. Account Inactivity Ratio Some scholars argue that bringing people into the fnancial sector is not a major problem (Mader & Sabrow, 2019; Ozili, 2020). Rather the bigger problem emerges when individuals and households in the fnancial sector choose to become inactive users of basic fnancial services, and the inactivity they create is detrimental to the goals of fnancial inclusion and is detrimental for the economy (Ozili, 2020). In light of this, it is important to develop an indicator, the “account inactivity ratio” (AIR), that capture the level of account inactivity in the formal fnancial sector. This ratio measures the number of dormant or inactive formal accounts in the fnancial sector relative to the total number of formal accounts in the fnancial sector. A low “AIR” is desirable and benefcial for fnancial inclusion while a high “AIR” is undesirable and detrimental for fnancial inclusion. AIR = number of dormant formal accounts / total number of formal accounts
4. Methodology In this section, I use available data to test the accuracy and validity of some of the newly constructed fnancial inclusion indices. Data for population size and data for fnancial sector size (fnancial system deposits to GDP ratio) were collected from the World Bank database. Also, when computing the logarithmic
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420 Peterson K. Ozili transformation for the “change in population size (ΔP)” time series data, some observations with negative values became indeterminate because the logarithm of negative numbers cannot be determined, and the countries whose reported data were affected by this problem were excluded from the analyses. Finally, the RFI was computed in Table 1 using available data.
5. Results 5.1. Rate of Financial Inclusion The result for the RFI is reported in Table 1. Countries with the top 10 RFI index using the growth rate approach are: Georgia, France, Mauritius, China, Zimbabwe, Czech Republic, Lesotho, Brazil, Denmark, and Ecuador, while countries with low RFI ranking are Poland, the United States, Haiti, Rwanda, Ghana, India, and Kenya. Under the logarithmic change approach, countries with the top 10 RFI index using the growth rate approach are: Zimbabwe, Georgia, Ecuador, Mauritania, Mauritius, Lesotho, Peru, China, Brazil, and Egypt, while the countries with the lowest RFI ranking are the United States, Kenya, Poland, Rwanda, and Haiti.
5.2. The Financially Included Population
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The fnancially included population is calculated as the product of the current fnancial inclusion rate and the size of the population. The result is reported in Table 2. The positive values in column C of Table 2 represents the number of population members that are included in the fnancial sector while negative values in column C of Table 2 represent the number of population members that are excluded in the fnancial sector. As can be observed, countries like Zimbabwe, Philippines, France, China, and Brazil have a larger fnancially included population compared to other countries with positive values, while South Sudan, Russia, Kenya, Iraq, India, and Colombia have a larger FEP compared to other countries with negative values.
6. Conclusion This chapter proposed some indices of fnancial inclusion. The proposed indices were developed to facilitate cross-country comparison and to rank the level of fnancial inclusion across countries. The indices in this chapter can help policymakers in designing better fnancial inclusion policies and can provide feedback and insight to policy makers to improve current fnancial inclusion policies. The study has some limitation. The biggest advantage of a fnancial inclusion index is also its greatest weakness in that it sometimes ignores the bigger picture! By reducing a complex set of behavioral patterns in fnance to a single number, a fnancial inclusion index can sometimes miss the bigger picture. For instance, a country that enjoys greater access to fnance may witness a large number of inactive account users in the formal fnancial sector despite having greater access
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Afghanistan
Australia
Austria
Brazil
Chile
China
Colombia
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt
Finland
France
Georgia
Ghana
Haiti
Iceland
India
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
s/n Country Name
ΔP
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
0.0106
0.0237
0.0131
0.0225
0.00013
0.00008
0.0023
0.0211
0.0178
0.0111
0.0065
0.0026
0.0151
0.0056
0.0143
0.0081
0.0069
0.0169
0.0258
Table 1. RFI Across Selected Countries.
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7.1507
3.9009
5.1534
5.8058
2.6981
3.7304
4.1109
6.3001
5.4687
5.0621
4.5678
4.4487
5.8631
6.8881
5.4172
6.2229
4.7846
5.6137
5.9606
Log (ΔP)
ΔF
−0.0171
−0.0522
−0.0038
−0.033
0.0556
0.0332
0.0050
0.0873
0.0851
0.0168
0.0323
0.0276
−0.0498
0.0754
−0.0493
0.0512
0.0181
−0.0825
0.0456
−1.6020
−2.1985
−0.2951
−1.4698
415.417
413.1386
2.1317
4.1320
4.7725
1.5224
5.0079
10.3920
−3.2882
13.459
−3.439
6.3277
2.6082
−4.8616
1.7704
32
36
28
31
1
2
16
12
10
20
9
6
39
4
40
8
14
41
18
RFI (Method 1) Rank #1
−0.0023
−0.0134
−0.0007
−0.0056
0.0206
0.0089
0.0012
0.0138
0.0155
0.0033
0.0071
0.0062
−0.0085
0.0109
−0.0091
0.0082
0.0038
−0.0147
0.0076
(Continued)
36
27
37
34
2
10
23
5
3
18
13
14
32
9
30
11
16
26
12
RFI (Method 2) Rank (#2)
Measuring Financial Inclusion and Financial Exclusion 421
Indonesia
Iraq
Israel
Kenya
Korea, Rep.
Kuwait
Lebanon
Lesotho
Mauritania
Mauritius
Namibia
New Zealand
Pakistan
Peru
Philippines
Poland
Qatar
Russian Federation
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
s/n Country Name
Table 1. (Continued)
ΔP
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0.0011
0.0265
0.0001
0.0146
0.0167
0.0209
0.0214
0.0188
0.0009
0.0285
0.0079
0.0150
0.0251
0.0043
0.0238
0.0195
0.0257
0.0118
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5.1885
4.8472
3.6756
6.1787
5.7145
6.6304
5.0031
4.6489
3.0569
5.0756
4.2151
5.0032
4.9966
5.3433
6.0681
5.2234
5.9741
6.4901
Log (ΔP)
ΔF
−0.0488
−0.0246
−0.0012
0.0305
0.0748
0.0139
0.0121
0.0129
0.0404
0.0755
0.0554
0.0055
−0.048
0.0091
−0.0410
0.0328
−0.0819
−0.0022
−45.7156
−0.9299
−9.2835
2.0995
4.4679
0.6633
0.5651
0.6855
44.8406
2.6436
7.0076
0.3713
−1.9143
2.1326
−1.7227
1.6760
−3.1831
−0.1847
43
30
42
17
11
22
23
21
3
13
7
24
34
15
33
19
38
26
RFI (Method 1) Rank #1
−0.0094
−0.0051
−0.0003
0.0049
0.0131
0.0021
0.0024
0.0027
0.0132
0.0148
0.0131
0.0011
−0.0096
0.0017
−0.0067
0.0062
−0.0137
−0.0003
RFI (Method 2)
31
34
37
17
7
21
20
19
6
4
7
24
30
22
33
14
26
37
422 Peterson K. Ozili
Saudi Arabia
South Sudan
Uganda
United States
Zambia
Zimbabwe
39
40
41
42
43
44
ΔP
0.0147
0.0299
0.0064
0.0382
0.0072
0.0202
0.0267
5.3146
5.6903
6.3172
6.1804
4.8935
5.8173
5.4943
Log (ΔP) −0.0213
0.17189
−0.0598
−0.0017
0.01514
−0.3073
−0.0591
ΔF
11.6874
−1.9993
−0.2733
0.3962
−42.5555
−2.9222
−0.7983
5
35
27
25
44
37
29
RFI (Method 1) Rank #1
0.03234
−0.0105
−0.0003
0.0024
−0.0628
−0.0101
−0.0038
RFI (Method 2)
1
28
37
19
25
29
35
Notes: ΔP = percentage change in population size from 2017 to 2016 [i.e., P2 – P1) / P1]. Log (ΔP) = logarithmic change in population size. ΔF = percentage change in fnancial sector size from 2017 to 2016 [i.e., (F2 – F1) / F1]. P2 = population size in 2017. P1 = population size in 2016. Population size and fnancial sector size data was obtained from World Bank database. Financial sector size (F) was measured using the fnancial system deposits to GDP ratio in the global fnancial development database. RFI (method 1) = the growth rate (percentage change) approach. RFI (method 2) = the logarithmic approach.
Rwanda
38
s/n Country Name
Table 1. (Continued)
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Measuring Financial Inclusion and Financial Exclusion 423
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
10,982,366
Haiti
Indonesia
India 264,645,886
1,338,658,835
343,400
29,121,471
Ghana
Iceland
3,728,004
Georgia
96,442,593
Egypt, Arab Rep. 5,508,214
16,785,361
Ecuador
66,865,144
10,513,131
Dominican Republic
France
5,764,980
Denmark
Finland
10,594,438
China 48,901,066
1,386,395,000
Chile
Czech Republic
18,470,439
Brazil
Colombia
8,797,566 207,833,831
Austria
24,601,860
Australia
−0.00034
−0.00239
−0.01338
−0.00075
−0.00568
0.020611
0.008905
0.001218
0.013858
0.015571
0.003337
0.007076
0.006213
−0.0085
0.010956
−0.00911
0.008241
0.0038
−0.01471
0.007666
B
A 36,296,400
RFI (Method 2)
Population (Year-2017)
Afghanistan
Country Name
Table 2. Determining the Financially Included Population.
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−89,064
−3,203,813
−4,593
−8,262
−165,543
76,839
595,425
6,710
1,336,461
261,372
35,087
40,793
65,828
−415,429
15,188,652
−168,311
1,712,697
33,428
−361,935
278,263
C (C = A*B)
Financial Included Population
424 Peterson K. Ozili
50,221,473 51,466,201 4,056,097 6,811,873 2,091,412 4,282,574 1,264,613 2,402,603 4,793,900
Kenya
Korea, Rep.
Kuwait
Lebanon
Lesotho
Mauritania
Mauritius
Namibia
New Zealand
11,980,937 33,099,147 10,910,759 41,162,465 325,147,121 16,853,688 14,236,745
Saudi Arabia
South Sudan
Uganda
United States
Zambia
Zimbabwe
Qatar
Rwanda
2,724,724
Poland 144,496,740
37,974,826
Philippines
Russian Federation
31,444,297 105,173,264
Peru
207,896,686
8,713,300
Israel
Pakistan
37,552,781
Iraq
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0.032344
−0.01052
−0.00028
0.00245
−0.06282
−0.01017
−0.00389
−0.00942
−0.00508
−0.00032
0.004947
0.013103
0.002098
0.002424
0.002787
0.013235
0.014891
0.013148
0.001114
−0.00961
0.001717
−0.00677
0.006281
−0.01371
460,473
−177,383
−90,395
100,847
−685,381
−336,496
−46,564
−1,361,374
−13,854
−11,970
520,335
411,999
436,115
11,620
6,695
16,737
63,773
27,498
7,590
−38,968
88,382
−340,024
54,731
−514,915
Measuring Financial Inclusion and Financial Exclusion 425
426 Peterson K. Ozili to fnancial services. Therefore, many fnancial inclusion indexes may not communicate the bigger picture to policy makers and analysts. Secondly, different countries may adopt different fnancial inclusion policies which are designed and implemented to deal with the unique problems facing each country, and this may render fnancial inclusion indices ineffective for cross-country comparison. Thirdly, most fnancial inclusion index often identifes and explain the relationships between past information which policy makers may not be interested in. Policy makers and analysts may be more interested in current and future information on fnancial inclusion. Finally, the methodology used to derive the fnancial inclusion indices is often not standardized. The recommendation to policy makers is for policy makers to consider using alternative indices in measuring the level of fnancial inclusion. Future research can re-visit the measurement of fnancial inclusion indicators.
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References Allen, F., Demirguc-Kunt, A., Klapper, L., & Peria, M. S. M. (2012). The foundations of fnancial inclusion: Understanding ownership and use of formal accounts. Washington D.C.: The World Bank. Ambarkhane, D., Singh, A. S., & Venkataramani, B. (2016). Measuring fnancial inclusion of Indian states. International Journal of Rural Management, 12(1), 72–100. Arslanian, H., & Fischer, F. (2019). Financial Innovation and Inclusion. In The future of fnance (pp. 81–86). Cham: Palgrave Macmillan. Birkenmaier, J., Despard, M., Friedline, T., & Huang, J. (2019). Financial inclusion and fnancial access. In Encyclopedia of social work. Oxford, UK: Oxford University Press. Camara, N., & Tuesta, D. (2014). Measuring fnancial inclusion: A muldimensional index. BBVA Research Paper (14/26). Carbo, S., Gardener E. P., Molyneux, P. (2005). Financial exclusion in developing countries. In Financial Exclusion (pp. 145–168). London: Palgrave Macmillan. Chakrabarty, K. C. (2010). Deputy Governor, Reserve Bank of India at the National Finance Conclave 2010. Organised by KIIT University, Bhubaneswar. Goel, S., & Sharma, R. (2017). Developing a fnancial inclusion index for India. Procedia Computer Science, 122, 949–956. Kelkar, V. (2010). Financial inclusion for inclusive growth. ASCI Journal of Management, 39(1), 55–68. Kempson, E., Atikinson, A. & Pilley, O. (2004). Policy level response to fnancial exclusion in developed economies: Lessons for developing countries. Report of Personal Finance Research Centre, University of Bristol. Leyshon, T. (1995). Geographies of fnancial exclusion: Financial abandonment in Britain and the United States. Transactions of the Institute of British Geographers New Series, 20, 312–341. Mader, P., & Sabrow, S. (2019, January). All myth and ceremony? Examining the causes and logic of the mission shift in microfnance from microenterprise credit to fnancial inclusion. In Forum for social economics (Vol. 48, No. 1, pp. 22–48). Abingdon, UK: Routledge.
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Measuring Financial Inclusion and Financial Exclusion 427 Mialou, A., Amidzic, G., & Massara, A. (2017). Assessing countries’ fnancial inclusion standing—A new composite index. Journal of Banking and Financial Economics, 2(8), 105–126.
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Ozili, P. K. (2018). Impact of digital fnance on fnancial inclusion and stability. Borsa Istanbul Review, 18(4), 329–340. Ozili, P. K. (2020). Financial inclusion research around the world: A review. Forum for Social Economics. Abingdon, UK: Sarma, M. (2008). Index of fnancial inclusion (No. 215). Working Paper. Sinclair, S. P. (2001). Financial exclusion: An introductory survey. Report of Centre for Research in Socially Inclusive Services, Heriot-Watt University, Edinburgh.
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Chapter 22
Competition Regulation in Kosovo: An Emphasis on Enterprises Concentration G. Asllani, S. Grima, and Sh. Citaku Abstract Purpose: This chapter addresses the main issues about regulation and protection of competition in Kosovo, with particular attention given to the control of enterprises concentration. The importance of controlling concentrations is based on the fact that enterprise concentration, whether local or international, can produce unequitable market conditions, creating monopolistic positions for some. Therefore, control of access from the Competition Authority is necessary, in order for competition to a level playing feld for all.
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Design/Methodology/Approach: The authors carried out a desk review of academic literature, the national reports provided by the competition authority and international institutions, competition law and other available important data. This is to determine and highlight the development of economic competition and control of concentrations, for example regulation and supervision in Kosovo and to determine whether this is in line with European Union directives. Findings: Findings show that competition in Kosovo is still at a phase of development and more is needed to improve and ensure an adequate competition regime in accordance with EU regulations and practices. Signifcant efforts are necessary to improve legislative alignment and enforcement, specifcally on control of mergers and acquisitions. Practical Implications: The authors herein propose a few measures to be undertaken in order to ensure the effective implementation of the law on the protection of competition and the market economy. Originality/Value: The authors defne the needs for strengthening and the implementation of Competition Law in Kosovo, such as undertaking the proper coordinated steps in order to have adequate competition authority. New Challenges for Future Sustainability and Wellbeing, 429–440 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211023
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430 G. Asllani et al. Keywords: Competition; mergers; acquisition; dominant position; market economy; Kosovo JEL Codes: D41; F12
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1. Introduction Similarly, to Southeast European countries, Kosovo implements the principles of a free market economy. Despite the diffculties, efforts to establish a free market economy, there is a need to undertake reform to modernize the economy in order to face the reality of economic integration and global markets in general. In this regard, an important aspect is the measurement of economic reforms, the justice system, and the effective implementation of the competition law in accordance with the “Acquis Communautaire.” Moderate progress has been made in the last decade, but there is still more actions required to have a competitive economy and be in an adequate position for EU integration. Concentrations are one of the important parts of the competition law where through this practice it is possible to carry out merges and acquisitions of enterprises. With this type of practice, one is open to abuse, so the role of the competent supervisory authorities is necessary to regulate them. Since the establishment of the joint ventures, problems in this area have been addressed, and their activity within market modernization became more complex in both the application and investigation by the competent controlling authorities. The Kosovo market is small and has limited exports due to the shortage of production. The economy is mainly based on imports of goods and services and concentration practices due to the exclusivity agreements with foreign enterprises to bring goods to the domestic market. These companies, being the main distributor, have a direct impact on the competitiveness of operators in the market, creating the need for control. In this chapter, we aim to lay out our analyses of the economic competition as an integral part of the functioning of the market as well as to highlight the problems of enterprise concentration. In doing so, we will address issues raised in terms of the competition law and recommend possible improvements that can be made through the conversion toward European regulations, creating market stability and a long run sustainable economy.
2. Literature Review Competition is an important stimulus to a market. It has a positive effect on improving the country’s economic performance, effciency of resources allocation, innovation, technical progress, regulation of concentration, and economic power (Asllani & Grima, 2019). Competition is the main mechanism
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Competition Regulation in Kosovo 431 of competitiveness and contributes to a country’s economic growth (Dutz & Hayri, 1999). Free and effective competition is defned as the market situation in which enterprises or sellers independently try to attract buyers in order to meet a certain economic objective, which is closely related to raise the profts and sales in the majority of the market. Competition law aims to apply legal rules and standards to regulate market imperfections and to maintain, promote, and restore the conditions of normal competition (Malltezi, 2011). It is defned as a process of competition between market subjects, through which enterprises try to increase revenue by bringing in more customers (Maher & Dabbah, 2004). In order for competition to exist, several companies must operate in one market. The competition between enterprises operating in the same market can present itself in different ways, such as quality, service, price, or combination, without leaving aside the focus on costumers (Pranvera, 2008). The competition policy pursued by state authorities aims at the development of effcient competition on the common market, exerting an active infuence on its functioning (Directorate General for Competition, EU). The effectiveness of the competition and consumer protection system depends on the effcient operation of the competition authorities in terms of the implementation of the European Union (EU) law (Van Den Bergh & Camesasca, 2001). In this context, for the state, it is very important to have adequate competition authorities, which are responsible for developing and protecting competition (Buccirossi & Ciari, 2018). The independence of national competition authorities boosts the trust on the part of investors in regulated undertakings based on the objective and transparent regulation of the authority (Szydło, 2013). For the correct operation of competition protection, authorities need to engage in prevention and enforcement (Palmigiano, 2013). The institutional capacities represent an important element for the implementation, either in the form of the competition law enforcement or in the form of competition advocacy (Begović & Popović, 2018). It is also of great signifcance to insist on a transparent discussion of public interest in the domain of protection of competition, encompassing all parties involved (Obradović, Lončar, Stojanović, & Milošević, 2019).
3. Legal Aspect of the Competition in Kosovo Market economy and freedom of the economic activity is guaranteed by the Constitution of Kosovo. This constitution shall ensure a favorable legal environment for a market economy, freedom of economic activity, and safeguards for private and public property (Article 119, paragraph 1). By the constitution, the actions limiting free competition through the establishment or abuse of a dominant position or practices restricting competition are prohibited, unless explicitly allowed by law (Article 119, paragraph 3). The Constitution shall establish independent market regulators where the market alone cannot suffciently protect the public interest (Article 119, paragraph 5). Consumer protection is guaranteed in accordance with the law (Article 119, paragraph 7). According to the constitution, the
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432 G. Asllani et al. Table 1. Ex ante and Ex post Actions/ Ex ante
Ex post
Ex Ante or Ex Post
⦁⦁ Control of concen-
⦁⦁ Investigation of cartels ⦁⦁ Abuse with dominant
⦁⦁ Competition advocacy
trations (merger and acquisition)
position
⦁⦁ Sanctioning decision Source: Adapted from Asllani (2017).
Assembly of Kosovo has adapted The Law on the Protection of Competition of 2010. According to Article 1 LPC: this law defnes the rules and measures to protect free and effective competition in the market, competences and organization of the Competition Authority and the procedures to implement this law.
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The LPC applies to all forms of prevention, restriction, or misuse of competition by enterprises in the territory of the Republic of Kosovo, or outside its territory provided these actions have effect in Kosovo. The law provides two manners of supervising market competition: (1) Control of the actions of enterprises and (2) Control of the structure of the market. Controlling the actions of enterprises takes place by overseeing agreements between enterprises that restrict competition and possible abuses committed by enterprises that hold a dominant position in the market. The legal defnition of what constitutes an “enterprise” is provided by the LPC Amendment. Accordingly, Article 2 (2) defnes an enterprise as: any business activity, regardless of the manner or form of organization management, public entrepreneurship established to carry out activities in the public interest, and any other natural or legal person or public authority that carries out economic activities whether or not it is considered a business entity. Controlling the structure of the market is achieved by supervising concentrations in order to prevent the creation of a market structure that can facilitate anti-competitive exchanges between enterprises and the creation of a dominant position which may lead to higher market prices. The difference between reviewing agreements and dominance on the one hand, and concentrations on the other hand, is that the analysis of restrictive practices focuses on the past (performed ex post), whereas the assessment of concentrations is based on predictions made for the future (conducted ex ante) (Table 1). The treatment facilities of the competition are all activities of enterprises or other coordinated practices through which in various forms affects the market order and free competition. In addition, actions through the issuance of laws and
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Competition Regulation in Kosovo 433 Table 2. Restriction of Competition. Restriction of Competition by the Side of Enterprises
Restriction of Competition by the Side of State
⦁⦁ Agreements that signifcantly
⦁⦁ Legal monopoly ⦁⦁ Exclusive rights ⦁⦁ Actions and acts that create
damage, limits the competition ⦁⦁ Abuse of dominant position ⦁⦁ Concentration that signifcantly damage, limits the competition
discrimination
⦁⦁ Non-transparency of state assistance
policies
Source: Adapted from Asllani (2017).
other legal acts by the state can affect its disorder. Therefore, it is necessary to control and advocate the competition (Asllani, 2017) (Table 2).
4. Concentration of Companies
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Concentration is defned as the legal combination of two or more frms by merger or acquisition. Those may have a positive impact on the market, but also they may restrict competition if they create or strengthen a dominant market player. Regulation No. 1/2003 of European Commission and Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings (the EC Merger Regulation) address the concentration and its authorization system between enterprises with relevant impact on the market. According to these regulations, the concentration between enterprises is considered: the merger of two or more enterprises, control in one or more enterprises, as well as the creation of a joint venture.
4.1. Merger and Acquisitions A merger occurs when two separate entities combine assets to create a new joint organization. A merger requires two companies to consolidate into a new entity with a new ownership and management structure (Kedia, Panchapagesan, & Uysal, 2011). Typically, mergers are created to reduce operational costs, expand within new markets, growth revenue and profts (Motis, 2007). Mergers are usually voluntary and involve companies that are roughly the same size and scope. Regulation No. 1/2003, Articles 102, provides the merger of two enterprises, as a result, of which a single company remains or a new one is created. That is, a merger can be carried out by absorption (i) or by the creation of a new company (ii). In the case of merging with absorption, frm A absorbs frm B. After merging, frm B loses the opportunities it had before (A + B = A (B)). In the second case, we are dealing with the creation of a new company C, both companies, A and B transfer their assets to C, and then cease to exist (A + B = C).
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434 G. Asllani et al.
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4.2. Gaining Control Competition legislation provides the situations of gaining control over another company by purchasing shares. The control obtained in this way can be exclusive or shared. Control is defned as the possibility to act and have decisive infuence on the economic activity of an enterprise. Gaining control can be done even when more than half of the persons of the governing bodies of the controlled company are also in the governing bodies of the merged company. (a) Exclusive Control. A company gains exclusive control over another company when it directly or indirectly holds a portion of the capital that gives the majority of votes in the assemblies of that company. It can decide the strategic business issues of this enterprise. In addition, one company gains control over another company if a minority participation in the company’s capital gives it the opportunity to have a majority in the meetings of the assembly of that company. This can happen when few shareholders do not participate in the assemblies, thus allowing a minority of voting rights to have a majority in these assemblies. (b) Joint Control. Two or more enterprises acquire joint control over an enterprise when they are able to jointly act in the decisions that impact on the economic activity of the controlled enterprise. The decisive infuence in this case consists on the possibility of blocking actions related to the enterprise strategy. The blocking situation can occur in a variety of situations, such as the equality of votes or the right to appoint persons to the boards of directors, the right to veto, or the obligation to jointly exercise voting rights. (c) Establishment of a Joint Venture. The third case of a concentration is the creation of a joint venture, which performs all the functions of an independent economic entity. Unlike taking joint control that presupposes an existing society, in this case the enterprises create a new enterprise. In order to be considered an independent entity, the joint venture must perform for a long time and independently, the actions or functions of an ordinary enterprise. The enterprise must have a daily management structure, suffcient fnancial sources, human and active resources to operate in the market. The joint venture should have access to the market, That is, to trade goods or offer products independently from the controlling companies (Bruce, 1988). A Joint venture is an entity controlled by two or more other enterprises. Through this joint enterprise one will want to achieve common objectives. In the context of competition law, these transactions can be seen as agreements or as mergers. When enterprises that cooperate do not transfer their activities to the new or joint venture, it is known as an agreement, which is usually horizontal (Regulation (EEC) Nr. 4064). When an enterprise (or at least one of them) transfers part of its activity to a joint venture, we are dealing with a merger of enterprises or the establishment of a joint venture. The deeper and more extended the cooperation, the closer we get to creating a joint venture (i.e., enterprise concentration).
4.3. Acquisitions An acquisition takes place when one company takes over all of the operational management decisions of another company. In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to
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Competition Regulation in Kosovo 435 exist with its assets becoming part of the larger company. Acquisitions, sometimes called takeovers, generally carry out a more negative connotation than mergers (Sugiarto, 2000). As a result, acquiring companies may refer to an acquisition as a merger even though it is clearly a takeover. Acquisitions require large amounts of cash, but the buyer’s power is absolute (Wissal, 2017). Companies may acquire another company to purchase their supplier and improve economies of scale; which in turn lowers the costs per unit as production increases. Companies might look to improve their market share, reduce costs, and expand into new product lines.
5. Types of Concentrations and Their Consequences on Competition Concentrations can be: (a) horizontal if the participating enterprises are active in the same relevant market, (b) vertical if the enterprises operate at different market levels, and (c) conglomerates if the enterprises, not being at different market levels, are active in markets of various products.
5.1. The Negative Consequences of Concentrations
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Concentrations between two or more competing companies can have negative consequences for competition. Negative consequences can be uncoordinated or unilateral and coordinated consequences. (a) Unilateral Consequences: The most direct consequence of concentration is the elimination of competition between merged enterprises. Especially when the participating enterprises are among the main competitors in the market, the elimination of competition between them can have signifcant consequences on the competition, when a new enterprise with a dominant position is established. Competitive pressure that existed before concentration is eliminated, making it possible to increase the market price. In addition, concentrations in oligopolistic markets, which can eliminate important sources of competition, can also lead to increased market price. This can also result when enterprises do not coordinate with each other. Even in this case, we are dealing with concentrations that can signifcantly limit competition. (b) Coordinated Consequences: A concentration of two enterprises can create or strengthen the dominant common position of two or more enterprises in the market or of all existing enterprises in the market. In this case, concentration increases the probability that some or all companies in the market can coordinate their actions without having to enter into agreements.
6. Defning the Relevant Market (Relevant Market Analysis) Any defned competition is analyzed given a specifc market. Based on this market, the market shares that belong to each enterprise are determined. The market that is taken as the basis for calculating market shares and determines relevant competition is called the relevant market. The Law on Protection of Competition provides a market defnition, which, according to this defnition, includes products
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436 G. Asllani et al. Table 3. Relevant Market. Product Market
Geographic Market
⦁⦁ Replacement of demand ⦁⦁ Replacement from the supply
⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁
(substitute products and complementary products) ⦁⦁ Potential competition
Local market National market European market World market
Source: Adapted from Asllani (2017).
that are considered substitutable by consumers or other customers in terms of their characteristics, price, and function and are offered or required by enterprises in a geographical area with the same conditions of competition, an area, which is distinguished from other restrictive areas. This defnition includes two components of the respective market: the product market and the geographic market (Table 3).
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7. EU Rules on Concentration Control A focus on the European dimension exercised by companies seeking to carry out this operation, the legislation stipulates that the Commission must be notifed before its implementation. The main focus of concentration control is on the potential competitive consequences that may arise as a result of the increase in the dominant position in a given market, a position caused by a concentration (Rodger & MacCulloch, 2009). These companies must demonstrate to the Commission a non-abusive purpose in the course of the operation in order to conclude such an agreement. The stages in which the procedure of concentration operates in European legislation are similar to the one in Kosovo. That is because within the Stabilisation and Association Agreement (SAA) and all the agreements that Kosovo has with the EU, in the so called legislation with “Acquis Communautaire” highlights the integration process into the European family (SAA, 2015). The Commission has the obligation to publish the notices of the interested enterprises, which must be included in the legal framework of the regulation. The purpose of this notice is to describe in a general way the basic reasoning of the referral case in Article 4/4 and 5, Article 9 and Article 22 of the Regulation of the EC Council no. 139/2004 of 20 January 2004 “On the Control of Concentrations between Enterprises” including the recent changes made to the European Competition System, the legal criteria that must be met in order for the reference to the Commission to be acceptable, and to determine factors that can be considered. The notice also provides practical guidance regarding the referral system mechanism. The notifcation in question must contain all data of the participating parties as well as all the necessary information for the enterprises but without providing information that may result in trade secrets, thus preserving the principle of confdentiality. The Commission has a duty to transmit notifcation notices to all Member States. Unless the Member State disagrees, the Commission considers that there
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Competition Regulation in Kosovo 437 is a special market where competition may be signifcantly affected by concentration. Then it may decide to refer to the competent authority of that Member State for the implementation of domestic law to protect effective competition (Weber, Tarba, & Öberg, 2014). An important moment in the EU procedure for concentrations is the annual turnover of the participating enterprises. Community jurisdiction in the feld of concentration control is determined by the application regarding the turnover of interested companies. Criteria included in Article 1 point (2) and point (3) of the Union Regulation. The Union Regulation defnes a clear division of powers. Concentration with a “Community Dimension,” that is, those on the threshold of turnover in Article 1 of the Regulation on Unions, fall under the exclusive jurisdiction of the Commission; Member States are excluded from the application of the national competition law for concentration, pursuant to Article 21 of the Regulation. In the case of concentration below the thresholds set for turnover, they shall remain within the competence of the Member States. The Commission has no jurisdiction to deal with them under the Regulation (Benacchio, 2010). Thus, the approach used in the cases analyzed above deals particularly with concentration, which are prohibited if they signifcantly impede effective competition, even if it does not create or strengthen the dominant position. This constitutes an essential criterion after the notifcation of the Commission for the particular operation (Raganelli, 2006).
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8. Implementation of Concentration Procedures by the Kosovo Competition Authority Control of merger and acquisitions is one of the legal instruments that enable the Competition Authority to prevent the strengthening or increase of market concentration. It provides the right not to authorize or conditionally authorize the realization of transactions of sale/purchase of shares between enterprises, if these transactions cause a signifcant strengthening of the concentration in the respective market, or the restriction of effective competition in the market. The Law on Competition prohibits mergers, which risk creating or strengthening a dominant position (Article 14, Law No. 03/L-229, 2010). In recent years, there has been a symbolic increase in the number of notifcations submitted to the Authority. However, it should be noted that the decision of the Competition Authority could in many cases be permissible for the merger, because not every merger can be a concentration. The procedure for controlling concentration within the competition law goes through two stages. The frst phase focuses on notices and supporting documentation. At this stage, certain steps are followed, where at the beginning the companies express their interest in realizing the agreement, which should be consulted with the Competition Authority by notifcation. The notice must contain detailed data on the parties, based on the name and address of the enterprises, the representatives, the nature of the activity they exercise, the object of the transaction and the fnancial data. The second phase is the review of the notice, the commencement of proceedings by the Commission and the deadlines to be observed.
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438 G. Asllani et al. The publication of the preliminary procedure constitutes an important moment of the rules applicable for the effect of the steps followed for the evaluation of the concentration. The authority within sixty (60) days from the day of receiving the conclusion for the initiation of the procedure issues a decision for concentration (Article 20, paragraph 8). It should be noted that this deadline is applicable if the concentration does not strengthen the dominant position in the market of the companies participating in the concentration, does not limit market competition, and does not affect the violation of consumer rights. In cases where the mentioned signs appear, then the Commission decides to authorize the concentration with conditions and obligations or to initiate an in-depth procedure. There are cases where the Competition Authority fails to track the abusive effects of concentration because, as discussed above, it is diffcult to trace the complex facts of the market. The Commission shall notify in writing the parties involved in the proceedings of any objections they may have and shall set a time limit within which they may submit their claims in writing and/or at a hearing. Regarding the publication of decisions, they are published on the offcial website of the Competition Authority. In summary, the decisions of the Competition Commission are: (a) Permission for concentration, (b) Conditional permission (structural or behavior remedies) and (c) Refusal for concentration (Table 4). Table 4. Permission of Concentration/merging (2015–2019). Year
Concentration/Merger
2020
⦁⦁ Decision NLB and Komercijalna Banka ⦁⦁ Decision i SavaRe and NLB Vita
2019
⦁⦁ Decision i SavaRe Triglav and DCB ⦁⦁ Decision i SavaRe Triglav and ZTSR ⦁⦁ Decision for concentration permission from Coca Cola HBC- Serbi
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over Bambi a.d.
⦁⦁ Decision for concentration Ipko Telecommunications L.L.C over
Vision TV SH.P.K
2018
⦁⦁ Concentration of NEREGLIA TRADING and BETA GROUP: ⦁⦁ Concentration of NKL Limited over Feronikeli ⦁⦁ Concentration of American Hospital over Hygea Hospita
2017
⦁⦁ Concentration between control of British American” Tobacco
Western Europe Commercial Trading Limited (BAT WECTL) over Bulgar Tabac Holding AD and their branches ⦁⦁ Concentration of EMONA over CDI Kosovo 2016
⦁⦁ Company Phoenix Pharma DOOEL Skopje, Republic of North
Macedonia, receiving the control through purchasing 100% of shares over Exclusive Pharma Sh.p.k, branch in Prishtina ⦁⦁ Adris Grupa sh.a. for menaging and investing in Rovinj/ Croatia and state company “CROATIA Osiguranje” Source: Adapted from Kosovo Competition Authority, Reports (2015–2019).
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Competition Regulation in Kosovo 439
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9. Conclusions As a part of the competition law, concentration operations are an important part of market regulation. Concentration operations are monitored by the Competition Commission precisely because they can have negative effects on the markets in which they are conducted. The number of concentration in recent years has increased in line with the rise of market players and their economic power. However, when compared with the practices of controlling the concentrations, the number of cases handled, concentration decisions by the Competitions Authorities in the region and the EU countries, Kosovo’s competition authority is still at an early stage and can be improved. The legislation in force with the relevant legal provisions, despite being forcefully enforceable, does not diminish the dominant position of shareholders and control of concentration. Therefore, a legal framework is needed which will create benefts to strengthen competitiveness, simplify practices, increase the effectiveness of the competition authority in reviewing the requirements for a concentration permit based on time and cost. It is important that the Competition Authority cooperates with other market regulators, including local, regional and those in the EU. The nature of the concentration cases requires the exchange of information and the implementation of the implemented practices in order for them to be treated fairly, based on the fact that concentration can be done by local enterprises or by enterprises operating abroad. Special attention during the implementation of the Competition Law should be paid to the defned threshold limits (annual turnover) of concentration, which currently is set at a high watermark when considering the country’s economy. Since by setting it at the right level; that is at a lower level of total annual turnover, the number of notifcations of concentration to the competition authority controlling them would increase and thereby reduce the level of concentration in the economy. It is of particular importance to advocate through which market actors will be notifed of the law of competition, the rights and obligations. All these actions will create a suitable environment for the further development of free competition and its protection.
REFERENCES Asllani, G. (2017). Competition and competition right. National Library of Pristine. Printed book. ISBN: 978-9951-697-05-7. Asllani, G., & Grima, S. (2019). Competition policy in the Western Balkan Countries. European Research Studies Journal, XXII(2), 347. Begović, B., & Popović, V. (2018). Competition authorities in South Eastern Europe: Building institutions in emerging markets. Cham: Springer Open. Benacchio, G. (2010). Diritto Privato dell’Unione Europea, publication 4 (p. 485). Padova: Cedam. Bruce, K. (1988). Joing ventures: Theoretical and empirical perspective. Strategic Management Journal, 9, 321.
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440 G. Asllani et al. Buccirossi, P., & Ciari, L. (2018). Western Balkans and the design of effective competition law: The role of economic, institutional and cultural characteristics. Springer Open.
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Buccirossi, P., & Ciari, L. (2018). Western Balkans and the design of effective competition law: The role of economic, institutional and cultural characteristics. Springer Open. ISSN 1431-1933. Department of Law and Economics University of Belgrade, School of Law, Serbia, https://doi.org/10.1007/978-3-319-76644-7_2. Commission Notice. (n.d.). On the Concept of Full-function Joint Ventures under Council Regulation (EEC) Nr. 4064 On the Control of Concentrations between Undertakings, OJ. Constitution of the Republic of Kosovo. (2008). Retrieved from https://gzk.rks-gov.net Dutz, M., & Hayri, A. (1999). Does more intense competition lead to higher growth? CEPR Discussion Paper No. 2249. European Commission. (2010). EU competition law rules applicable to merger control. Brussels: Offcial Journal of the European Union. Kedia S. V., Panchapagesan, V., & Uysal, V. (2011). Geography and acquirer returns. Journal of Financial Intermediation. Law on the Protection of Competition on 2010. (2010). Retrieved from https://ak.rks-gov.net/ Maher, M., & Dabbah. (2004). EC and UK competition law, commentary. cases and materials. Routledge-Cavendish, UK: Cambridge University. Malltezi, A. (2011). Albanian Law of commercial companies. Tirana: mediaprint. Motis, J. (2007). Mergers and Acquisitions Motives (No. 0730). Retrieved from https:// economics.soc.uoc.gr/wpa/docs/paper2mottis.pdf Obradović, M., Lončar, D., Stojanović, F., & Milošević, S. (2019). Public interest consideration in competition policy. Ekonomika preduzeća, 67, 196. doi:10.5937/ EKOPRE1808167O. Pranvera, K. (2008). Abuse below the threshold of dominance: Market power, market dominance, and abuse of economic dependence. Max Planck Institute for Intellectual Property, 5, Springer 2. Raganelli, B. (2006). Finanza di progetto, recerca e sviluppo (p. 3). Padova: Cedam. Regulation (EC) No 139/2004 of 20 January 2004. (2004). Rodger, B. J., & MacCulloch, A. (2009). Competition Law and Policy in the EC and UK, New York. ISBN 0-203-92658-7. Rule No. 1/2003. (2003). European Commission for Competition. Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty. Stabilisation and Association Agreement (SAA). (2015). The Stabilisation and Association Agreement on 27 October 2015. Retrieved from https://www.mei-ks.net/en Sugiarto, A. (2000). The effect of mergers and acquisitions on shareholder returns. Melbourne: Victoria University of Technology. Szydło, M. (2013). State parliament as the infrastructural sectors regulator. (Krajowy parlament jako regulator sektorów sieciowych). Warszawa: Wolters Kluwer Polska. Van Den Bergh, R., & Camesasca, P. D. (2001). European Competition Law and Economics: A comparative perspective. Antitrust law. Groningen: Antwepen. Weber, Y., Tarba, S., & Öberg, C. (2014). A comprehensive guide to mergers & acquisitions. New Jersey: FT Press. Wissal, B. L., (2017). Merger and acquisitations: A synthesis of theories directions for future research. Risk Governance & Control: Financial Markets & Institutions, 7(1), 71.
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Chapter 23
Internal Branding and Brand Citizenship Behavior: The Role of Trust, Commitment, and Organizational Climate Ahmad Aljarah and Pelin Bayram Abstract Purpose: The purpose of this study is to explore the role of internal branding (IB) in fostering branding citizenship behavior in the hospitality context as well as the mechanisms underlying the relationship. Design/methodology/approach: This study obtained empirical evidence from 377 hotel employees in North Cyprus.
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Findings: Our fndings support the positive relationship between IB and brand citizenship behavior (BCB). The evidence was found for a dual and sequential mediating role of brand trust and brand commitment. Moreover, the organizational climate serviced as a moderator to infuence the positive relationships between IB and BCB. Practical implication: This study has shown that employees are rewarding frms involved in IB initiatives in the form of BCB – directly and indirectly – through trust and commitment. This fnding can advance managers’ understanding, enabling them to better manage their IB initiatives to achieve the most effective outcomes. Originality/value: The research advances convergence between IB and BCB research streams, which has been under-explored in the tourism context. Besides, it extends the IB and brand citizenship literature through a novel dual and sequential mediation mechanism and organizational climate as a novel moderator.
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442 Ahmad Aljarah and Pelin Bayram Keywords: Internal branding; Brand citizenship; Behavior; Trust; Commitment; Organizational climate; JEL Codes: D21; D23
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1. Introduction Service marketing literature and practitioners acknowledge that employees, especially in the service industry, play a crucial role in building brand processes and the company’s proftability (Miles & Mangold, 2004; Morhart, Herzog, & Tomczak, 2009). Contemporary studies in relationship marketing literature explored the company-employee relationship as a fundamental concept for the company’s superior success (Herington, Johnson, & Scott, 2006). Recently, the brand became particularly signifcant in the tourism and hospitality industry (Buil, Martínez, & Matute, 2016) since the industry is largely labor-intensive, and organizational initiatives are driven by employees’ intentions and abilities (King, 2010). King and Grace (2006) proposed that the importance of the customer-employee interaction, as well as increased competition in the hospitality industry, has shifted the focus more on employees’ motivation and performance. The way employees behave and perform in their job determines the customer’s perception of a brand (de Chernatony, Drury, & Segal-Horn, 2003) as Morhart et al. (2009) stated that “customers’ perceptions of a service brand depend highly on the behavior of frontline staff.” However according to Fitzgerald (2004), approximately 72% of the hotel employees are less motivated to represent their company’s brand. North Cyprus has a service-oriented economy and due to political conficts the island do not have foreign trade relationships with other countries rather than the mainland Turkey. Thus, tourism and higher education industries are considered as two primary sources of foreign exchange. According to governmental statistics, international tourist arrivals in North Cyprus reached over 1 million in 2018 (Tourism Planning Department, 2019) and the industry’s direct contribution to gross domestic product (GDP) is 9.6%, as well as in 2018, the service industries accounted for 81,2% of total North Cyprus workforce (Turkish Cypriot Chamber of Commerce, 2019). Given the statistics above, tourism industry is an important part of Northern Cyprus’s overall economy and due to the growing number of hotels, the industry becomes intensely competitive. Therefore, the establishment of employees’ brand-building behavior (i.e., brand citizenship behavior (BCB)) is critical for the economy of the country. In this respect, internal branding (IB) has gained considerable attention by the researchers as an effective way to build a successful brand (Burmann, Zeplin, & Riley, 2009; King, 2010; Punjaisri, Wilson, & Evanschitzky, 2008). IB is an implementation of the brand cognitively, affectively, and behaviorally at the level of employee (Piehler, Hanisch, & Burmann, 2015), where the employees are considered as the key target of the IB process which boosts and align the brand internally (Xiong & King, Xiong and King, 2015) which then moves externally to customers (Chang, Chiang, & Han, Chang, Chiang, and Han, 2012). However, despite increasing interest in brand managing, the existing literature on brand management mainly focus on external stakeholders (e.g., Robinson & Wood,
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Internal Branding and Brand Citizenship Behavior 443 2018) and pay little attention to discuss it in the context of internal stakeholders (Burmann, Jost-Benz, & Riley, 2009; Iyer, Davari, & Paswan, 2018; Piehler, Grace, & Burmann, 2018). Moreover, within the marketing literature, little is known about the way IB infuences BCB, even though some research has examined the association between IB and BCB (e.g., Burmann & Zeplin, 2005; Liu, Ko, & Chapleo, 2017; Piehler, Schade, & Burmann, 2019; Piehler et al., 2015). In fact, despite the insightfulness of previous studies on IB and BCB, they have many major limitations. Firstly, the association between IB and BCB in the hospitality industry is still questionable. Indeed, while previous studies in the hospitality area have debated the effects of IB and employees’ brand-building behavior in term of brand loyalty, brand commitment, brand performance, brand identifcation (Punjaisri, Evanschitzky, & Wilson, 2009; Punjaisri & Wilson, 2011; Terglav, Konečnik Ruzzier, & Kaše, 2016), a little attention has been specifcally paid to empirically examine the relationship between IB and BCB (Buil et al., 2016). Thus, the lack of knowledge of how hotels might utilize from their IB initiatives to promote the BCB of their internal stakeholders is engendered. Secondly, little attention has been paid to the role of brand trust in the IB-BCB relationship – particularly in the hospitality context. Brand trust has been widely argued as a factor that plays a critical role in assimilating and exploiting frm initiatives and converting such initiatives into improving the stakeholder attitude (Lacey & Kennett-hensel, 2010; Vlachos, Tsamakos, Vrechopoulos, & Avramidis, 2009). Prior studies empirically found that a high degree of IB is more likely to promote employee commitment toward an organization, which in turn leads to adequate affective BCB (Burmann & Zeplin, 2005; Piehler, King, Burmann, & Xiong, 2016). However, drawing on the Commitment-Trust theory (Morgan & Hunt, 1994) which suggests that commitment is a result of trust in an organizational social exchange and strong relationship requires both trust and commitment, it is diffcult to maintain brand-supporting behaviors with the absence of trust construct. Thus, examining the mediating role of brand trust between IB and BCB become one of the primary purposes of this study. Thirdly, while IB has been directly linked to BCB, there is little understanding of conditions that makes this most effectively. Organizational climate has been accepted as a critical driver that determines employee attitude toward their organization (Feng Jing, Avery, & Bergsteiner, 2011; Walumbwa, Wu, & Orwa, 2008 ). It infuences employee feeling about the work climate (Marinova, Cao, & Park, 2019). Therefore, a high degree of organizational climate enhances employees’ perceptions of the work environment (Bell & Menguc, 2002; Hopkins, 2002), which may in turn infuence the effectiveness of IB on employee outcomes. For instance, Özduran and Tanova (2017) argued that an effective organizational climate (e.g., the fairness of decision taken by executives, fairness in allocating resource or resolving conficts needs) in the hospitality industry contributes to a large extent in increasing the relationship between organization internal initiatives and employee voluntarily behavior. However, no studies, to the best of our knowledge, have examined exactly how organizational climate affects the IB-BCB relationship. Such a gap limits our understanding of the boundary conditions that IB may affectively promote BCB. Lastly, despite the importance of studying citizenship-related behaviors, such behavior has not been adequately investigated in the hotel context (Fu, Haobin, & Law, 2014).
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444 Ahmad Aljarah and Pelin Bayram Bringing all together, the objective of this research is to deepen our understanding of the relationship between IB and employees’ brand-building behavior by exploring the underlying mechanism of how and under what conditions IB enhances BCB. The study investigates the dual mediating role of brand trust and brand commitment individually as well as to examine the sequential mediating effect of brand trust and commitment. In addition, we invoke the organizational climate as a factor that might strengthen or weaken the proposed positive IB–BCB relationship. Our investigation of this topic contributes to the literature in several ways. First, this research flls some gaps in the current academic literature on IB. Specifcally, it extends previous research by empirically examining the consequences of IB in the hospitality industry. Second, for the frst time, this research posits assimilating and exploiting the role of brand trust in converting IB initiatives into improving the BCB. Third, we articulate the double-mediating effect of both brand trust and brand commitment. Specifcally, this study attempts to contribute to the related literature by empirically providing the serial multiple mediation effects on the relationship between IB and BCB. Fourth, we respond to the most recent calls of scholars to examine the role of organizational climate in the relationship between employeerelated IB inputs and organizational related outcomes (Piehler et al., 2018).
2. Theoretical Background and Hypothesis Development
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2.1. IB and BCB The term IB has been introduced over about four decades ago in the work of Berry, Hensel, Burke, Berry, and Burke (1976) that the employees are corporate internal customers. It has been later developed to become a multi-dimensional construct (Jou, Chou, & Fu, 2008). The term fts in with the broader category of internal marketing (Du Preez & Bendixen, 2015) and refects ‘the activities undertaken by an organization to ensure that the brand promise refecting the espoused brand values that set customers’ expectations is enacted and delivered by employees’ (Punjaisri & Wilson, 2011). It has been seen as one of the sources of a strong brand (Burmann, Zeplin, et al., 2009), an indicator of a high level of employee work engagement and organizational identifcation (Buil et al., 2016), and driver of a higher level of job satisfaction (Du Preez & Bendixen, 2015). Thus, IB serves as a source of competitive advantage for an organization. Burmann and Zeplin (2005) identifed three essential levers that antecedent IB; human resources activities which refer to activities that ensure the ft between employee identity and brand identity such as recruiting employees whose behavior support the brand or brand-oriented training; internal communication which represent the managerial tools that could be used to build effective employee attachment toward the brand and to infuence their behavior such as employee-oriented workshop programs (Piehler et al., 2015), and brand leadership which refers to the activities that motivates employee to live the brand such as articulating the brand core competences, brand personality, and what the values the frms’ brand stands for (Burmann & Zeplin, 2005). In other hands, BCB is established principally on the theory of organizational citizenship behavior (Porricelli, Yurova, Abratt, & Bendixen, 2014), which, the
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Internal Branding and Brand Citizenship Behavior 445 latter, has been defned as employee discretionary behaviors that are not directly or explicitly recognized by the organization’s formal reward system but, in the aggregate, enhance the organizational effectiveness (Organ, 1988). It considered one of the sources of positive psychological and social environment inside the organization (Robbins & Judge, 2017). However, BCB is a brand-oriented concept and goes beyond the extent of organization citizenship behavior as it also contains externally targeted behavior of the employee while organization citizenship behavior (OCB) focuses on the employees’ internal behavior within the organization (Burmann & Zeplin, 2005; Xie, Peng, & Huan, 2014). Therefore, BCB can be explained as discretionary behaviors of employees that enhance brand strength and identity (Burmann, Zeplin, et al., 2009; Chang et al., 2012; Morhart, Herzog, & Tomczak, 2009; Nyadzayo, Matanda, & Ewing, 2015). This may include learning more about the brand, recommending the brand to others, passing the brand knowledge to new employees, helping other employees to perform their tasks, employee self-development. Podsakoff, MacKenzie, Paine, and Bachrach (2000) identifed BCB as helping behavior, brand consideration, brand enthusiasm, sportsmanship, brand endorsement, self-development, and brand advancement. Based on the fndings of an empirical study by Burmann, Jost-Benz, and Riley (2009), these seven dimensions are reduced into three dimensions: brand selfdevelopment, willingness to help other employees and customers of the brand, and brand enthusiasm. The study of Nyadzayo, Matanda, and Ewing Nyadzayo et al., (2015) replaced the brand self-development with brand endorsement and discussed it as a brand endorsement, helping behavior and brand enthusiasm. BCB has been considered as the ultimate consequence of IB in several studies (Burmann & Zeplin, 2005; Piehler, 2018). The role of IB in engendering employee involvement in BCB could be analyzed in light of social identity theory. It has been used for a long time to explain the relationship between company initiatives and their stakeholders (Ahearne, Bhattacharya, & Gruen, 2005; Bhattacharya & Sen, 2003). The social identity theory (Tajfe & Turner, 1985) argues that individuals tend to classify themselves and try to seek out groups for affliation that are distinctive on dimensions they value. When the provided values by organizations’ activities congruent with an individual (such as employee) own value, the individuals’ identifcation with the organization increase (Luu, 2017). Such increased identifcation will increase their feeling of personal obligation to the organization’s brand and could be translated to behavior that offers no reward to them but utilizes the organization such as BCB (Burmann & Zeplin, 2005). Empirical evidence seems to provide support on this. For instance, the study of King and Grace (2012) that employee receptiveness which is the psychological traits of the employees and relationship orientation between the employees and their organization are the supplementary drivers of IB that not only generate brand commitment but also directly generates BCB. Another study by Punjaisri et al. (2008) argued that the outcome of IB is brand consistent employee behavior in other words brand-supporting behavior. Consequently, marketing literature suggests that IB may be an antecedent of BCB. Based on the above discussion, this research adopts the concept of IB and proposes the following hypothesis. H1: IB has a positive infuence on BCB
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446 Ahmad Aljarah and Pelin Bayram
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2.2. The Mediation Role of Brand Trust Trust has been considered as a signifcant construct in relationship marketing (Aljarah, 2020; Xie et al., 2014). It has been defned as a psychological state that consequence from the confdence of one party (i.e., employee) on another party (i.e., organizations’ brand) that, the later, perceived as reliable and integrity (Morgan & Hunt, 1994). It is a critical component of a successful employee-company relationship (Lewicki & Bunker, 1996). Here, we argue that brand trust plays a mediator role through which IB affects BCB. First, we argue that the IB initiatives of a frm will be related to the amount of trust that the employees have toward the frm’s brand. In this vein, a well-treatment of an organization of its employees is a tool that could be used to change the employee perception of the corporate brand (Xie et al., 2014). Moreover, IB has been considered as one of the key antecedents of brand trust (Erkmen & Hancer, 2015a; Hasni, Salo, Naeem, & Abbasi, 2018). For instance, by conducting an empirical study, Jo and Shim (2005) revealed that employees who perceive positive internal communication from their supervisors are more likely to build a trusting relationship with the organization. Terglav et al., (2016) argued that brand-oriented leadership, one of the key antecedents of IB, is considered as a critical element in establishing a high level of trust and confdence in the organization. Such positive attachment between the well-treated employees and their positive responses as a trust could be traced back to the Equity Theory (Walster, Berscheid, & Walster, 1973). The Equity Theory argues that when individuals are justly and fairly treated, an inequitable employee–organization relationship will engender and they will feel guiltier and try to restore equity by gratitude and rewarding the deprived partners by involving in company-favoring behaviors such as trust. Thus, IB is a tool that could be used to increase the willingness of employee to rely on an organization in which they have confdence and have a feel that the organization is paying a genuine effort to address their interests, which then contributes in increasing their trust toward the organization’s brand. Second, we posit that a high level of employee trust is benefcial in increasing their citizenship behavior toward the corporate brand. To develop a high level of BCB, frms need to change employee perceptions of the frm’s brand (Xie et al., 2014). According to the cognitive consistency theory (Heider, 1946), individuals strive to maintain psychological harmony among their beliefs, attitudes, and behaviors when they perceive conficts tensions. If an employee recognizes the trustworthiness of a company, they are more likely to exhibit voluntary behaviors (i.e., BCB) conforming to their existing beliefs and attitudes. Empirical evidence seems to support this argument. For instance, using a sample of 523 airline employees, Erkmen and Hancer (2015b) indicate that brand trust contributes to employee BCB. Overall, IB promotes BCB via the mediating role of brand trust. Thus, IB with a high level of brand trust will contribute to enhancing employee’s BCB. Hence, we hypothesize: H2: Brand trust mediates the relationship between IB and BCB
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Internal Branding and Brand Citizenship Behavior 447
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2.3. The Mediation Role of Brand Commitment The concept of brand commitment has gained considerable attention by scholars and considered one of the key indicators in the organization’s success (Aljarah, Emeagwali, Ibrahim, & Ababneh, 2018; Burmann & Zeplin, 2005; Kemp, Williams, & Bordelon, 2012; Nyadzayo et al., 2015; Porricelli et al., 2014). Brand commitment refers to the psychological bond between employee and corporate brand, which strengthens the willingness of the employee to involve in initiatives that achieve the brand goals (Burmann & Zeplin, 2005). The absence of brand commitment will result in negative consequences such as the negative worth of mouth (Mangold & Miles, 2007), while the existence of it will contribute to strengthening the corporate-favor behaviors (Fullerton, 2009; Piehler, 2018). In this vein, IB initiatives of a frm are seen as a tool that ensures a high level of brand identity in the mind of employee (Burmann & Zeplin, 2005; Löhndorf & Diamantopoulos, 2014; Punjaisri & Wilson, 2017), which leads to increase the employee commitment toward the corporate brand (Burmann, Zeplin, et al., 2009; Louis & Lombart, 2010). The results of IB studies indicate that IB has a signifcant infuence on brand commitment. For instance, the study of King and Grace (2010) shows that when an employee perceives the high level of IB such as the clarity of roles, a disseminated brand-related knowledge among employees, and give the importance to employees’ provided feedback, they would exhibit a strong commitment to the organization. On another hand, brand commitment is seen as one of the key motivators of BCB (Burmann, Zeplin, et al., 2009; King & Grace, 2012; Piehler et al., 2016). For instance, recently the study of Piehler (2018) empirically shows that when an employee is psychologically attached to a brand, they are more likely to comply with brand-related behaviors and engage in voluntary behaviors such as making a suggestion for brand improvement and recommending the organization to potential employees and customers. In this respect, brand commitment increases the feeling of employee obligation to the brand and their compliance with the organizations’ rules, which is the basis of BCB (Burmann & Zeplin, 2005). Meanwhile, using a sample of 790 employees of German tourism companies, Piehler et al. (2019) indicate that employee with a high level of commitment, those who hold a high level of emotional attachment to the brand, will be more likely to engage in brand-strengthening behaviors such as BCB. Provided that, we expect that the positive impact of IB on BCB might be also explained be brand commitment. Thus, IB with a high level of brand commitment will contribute to enhancing BCB. Thus, we hypothesize: H3: Brand commitment mediates the relationship between IB and BCB
2.4. The Serial Multiple Mediating Effects of Brand Trust and Brand Commitment The commitment-trust theory (Morgan & Hunt, 1994) suggests that the trust and commitment of employees to a frm are the key determinant of a successful
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448 Ahmad Aljarah and Pelin Bayram long-term relationship. It also argues that employee trust is seen as pre-requisites to achieve their commitment in an organizational social exchange. Thus, if employees have a high level of trust to the exchange partner, they will be more inclined to develop a long relationship and be committed with the exchange partner as trust consequence from the employee beliefs of the reliability, fairness, responsibility, and integrity of an organization toward its employees (Larzelere & Huston, 1980) that could be the cornerstone of them to build long-term relationship. Given that the mutual social trust and the consequent commitment are critical to building a successful employee–company relationship (McDonald, 1998), the willingness of employees to engage in brand-supporting behavior – such as BCB – would be increased as a consequence of trust and commitment. Bringing all together, we anticipate that employee will encounter a strong attachment to a brand through trust as a result of organization’s effectiveness in managing its IB; thus, increasing the willingness of an employee to build a long relationship and be committed toward the brand, which may result in a higher level of BCB. Thus, we hypothesize H4: The relationship between IB and BCB is sequentially mediated by brand trust and brand commitment.
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2.5. The Moderating Role of Organizational Climate The concept of organizational climate has attracted the intention of the researcher and been seen as one of the drivers of employee behavior toward an organization, particularly in the service industry (Datta & Singh, 2018). Organizational climate refects the employee shared perception about the organization and work environment (Robbins & Judge, 2018). It represents the cognitive evaluation of their working environment in terms of policies, practices, and procedures (James & Jones, 1974). Generally, organizational climate is seen as one of the critical factors that impact the effectiveness of corporate initiatives toward its employees as it captures the employee’s feelings, thoughts, and behaviors toward an organization (Bock, Zmud, Kim, & Lee, 2005). Hence, organizational climate may limit the effectiveness of IB initiatives on employee outcomes. Here, we posit that when an employee perceives a high level of positive organizational climate, IB initiatives will establish stronger BCB for many reasons. Organizational climate serves as a fundamental mechanism for promoting organizational citizenship behavior through increasing the employee sense of belonging and promoting employees feeling of competence and empowerment (Marinova et al., 2019). By extension, the received positive organizational climate might also strength employee BCB. In other hand, drawn on Equity Theory, employees rationally compare and balance ratios of their inputs into the organization to their outcomes from the organization (Burmann & Zeplin, 2005). The more inequitable a relationship, the more harder they will try to restore equity (Walster et al., 1973). Thus, when an organization deliver high level of IB with a positive organizational climate, employees will be felt guilty due to the inequitable outcomes. Hence, employees may endeavor to regain balance by rewarding the organization with equity-restoring behaviors, such as BCB. Therefore, we hypothesize:
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Internal Branding and Brand Citizenship Behavior 449
Brand Trust
Brand Commitment
Organizational Climate Internal branding
Brand citizenship behavior
Fig. 1. The Conceptual Model of the Research.
H5: Organizational climate moderates the relationship between IB and BCB.
3. Methodology
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3.1. Sample and Procedures for Data Collection A Convenience sampling method has been applied for collecting data by selecting the fve largest hotels in Northern Cyprus by capacity. The hotel context was chosen because of its high contribution to the economy of the country and the high level of diversity of its employees which, in turn, enable us to get more generalizable results. Because the majority of hotels employee in Northern Cyprus are from Turkey, the questionnaire has been translated into the Turkish language by three independent native English and Turkish speakers. To ensure the content clarity and validity of our questionnaire, we conducted a pilot test with 21 employees of one of our targeted hotels (10 questionnaires written in Turkish language and 11 questionnaires written in the English language). Some minor revisions have been incorporated in the fnal questionnaire based on the result of our pilot test. Respondents rated items on seven-point Likert scales with endpoints of 1 = “Strongly Disagree” and 7 = “Strongly Agree.” Data collection was carried out through a structured questionnaire aimed at the hotel employees working in different departments (i.e., front offce, food and beverage, housekeeping, technical, public relationship). A well-trained group of 25 students has been assigned to the data collection task (5 students for each hotel). The questionnaires have been distributed to employees during breakfast, lunch, and dinner time. The period has been chosen intentionally to ensure the comprehensiveness of our data to include employees in all departments since it’s a time where all employees in different departments meet in one place. Out of 450 questionnaires distributed over six weeks period, we returned 425 questionnaires. We removed 48 questionnaires due to the missing data issue. A sum of 377 complete and vailed questionnaires was obtained resulting in a response rate of 83.7%. The majority of employees’ ages ranged between 18 and 25 years old. Respondents were more likely to be male (68%). The majority of respondents obtained a
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450 Ahmad Aljarah and Pelin Bayram high school degree (57%). Most of the respondents (63%) had a monthly income ranged between $430 to $530.
3.2. Measurement IB was modeled as a second-order construct of HR activities, internal communication, and brand leadership. HR activities were measured by adopting fve items from Aurand, Gorchels, and Bishop (2005); internal communication was measured by adopting three items from Buil et al., (2016); while the items of brand leadership have been adopted from Du Preez, Bendixen, and Abratt (2017) and Du Preez and Bendixen (2015). The term BCB has been measured by adopting seven items from King and Grace (2012). To measure brand trust, we employed Chaudhuri and Holbrook’s (2002) measurement instrument. The brand commitment was measured through a fve-item scale adopted from Piehler et al. (2019) which originally has been drawn from Meyer and Allen (1997). Finally, the organizational climate scale was formed by four items from Gould-Williams (2007) and Gould-Williams and Mohamed (2010)
4. Results
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4.1. Validity and Reliability Analysis The hypothesis testing procedure has been done by applying the two-step approach recommended by (Anderson & Gerbing, 1988), which consisted of conducting the measurement models and then conducting structural equation modeling. To ensure the instrument, convergent, and discriminant validly for the measurements of the study construct, we applied the confrmatory factor analysis. The adequacy of the overall model ft has been examined to ensure the instrument validity following the cutoff criteria of Hair, Black, Babin, and Anderson (2009). As shown in Table 1, the goodness of ft had reported a satisfactory level X(2362) = 1.77 < 3.00, p < 0.05; GFI = 0.904 > 0.90; comparative ft index (CFI) = 0.96 > 0.90; normed ft index (NFI) = 0.92 > 0.90; root mean square error of approximation (RMSEA) = 0.05 < 0.08; PCLOSE = 0.90 > 0.05). The convergent validity has been examined by adopting the recommendation of (Fornell & Larcker, 1981) that we should check for the factor loading of each item, the composite reliabilities and the average variance extracted (AVE) value for each construct. As shown in Table 2, the majority factor loading of each item exceed the recommended threshold of 0.65, the composite reliabilities for all constructs are above 0.70, and the AVE value, which measures the amount of variance for each item that is accounted by the item’s variable, exceed 0.50 for all construct of the study. Such results ensure the lack of our measurements of the convergent validity issues (Fornell & Larcker, 1981). The discriminant validity has been widely used among scholars (e.g., Aljarah & Alrawashdeh, 2020; Ibrahim & Aljarah, 2018) to ensure that all items are strongly correlated with their indicator (Fornell & Larcker, 1981). As illustrated in Table 2 that the square root of the AVE for each variable exceeds variance shared between the variable and another variable. Which, in turn, indicates to the discriminant validity of the measurements (Anderson & Gerbing, 1988; Fornell & Larcker, 1981).
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Internal Branding and Brand Citizenship Behavior 451 Table 1. Summary of the Measurement Model. Latent Constructs
Λ
Internal branding (α = 0.90; composite reliability (CR) = 0.92; AVE = 0.52) HR activates The values of (brand #) are reinforced through internal communications. *
–
Training is provided to employees of (brand #) to use the brand values. 0.69 Departmental plans include employees’ role in living the brand values.
0.72
The skillset necessary to deliver brand values is considered in staffng decisions.
0.67
Annual performance reviews include metrics on delivering brand values. – * Internal communication The hotel communicates the corporate brand values to employees
0.71
The hotel communicates brand values to my colleagues and me through 0.67 internal mass communications (e.g., newsletters, memos, and brochures) The hotel communicates brand values to me via informal channels (e.g., 0.75 meetings, briefngs, etc.)
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Brand Leadership I know the origin and tradition of (brand#)
0.78
I know the core competencies of (brand #)
0.76
I know the values (brand #) stands for
0.80
I know the personality of (brand #)
0.66
I know the vision for (brand #)
–
I know how I am expected to behave to ensure that (brand #) has a positive brand image with our clients
–
Organization Climate (α = .85; CR = .86; AVE = .62) The managers of (brand #) consider the personal welfare of its staff
0.69
When I am on a diffcult assignment, I can usually count on getting assistance from my manager
0.80
The managers of (brand #) and its staff trust each other
0.83
I am treated fairly by my department
0.81
There’s a friendly, supportive atmosphere amongst staff in my department
–
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452 Ahmad Aljarah and Pelin Bayram Table 1. (Continued) Latent constructs
Λ
Brand Trust (α = 0.91; CR = 0.92; AVE = 0.73) I trust (brand #)
0.78
I rely on (brand #)
0.88
(Brand #) is an honest brand
0.87
(Brand #) is a safe brand
0.89
Brand Commitment (α = 0.92; CR = 0.93; AVE = 0.76) I really feel as if (brand´s #) problems are my own
0.83
I feel like “part of the family” at (brand #)
0.87
I feel “emotionally attached” to (brand #)
0.91
(brand #) has a great deal of personal meaning for me*
–
I fell a strong sense of belonging to (brand #)
0.87
BCB (α = 0.92; CR = 0.92; AVE = 0.61) I take responsibility for a task outside of my own area
0.64
I demonstrate brand consistent behaviors
0.84
I consider my impact on (brand #) before acting
0.77
I show extra initiative to maintain brand behavior
0.79
I regularly recommend (brand #)
0.83
I pass on my knowledge about (brand #) to new employees
0.85
I’m interested to learn more about (brand #)
0.72
2 (362)
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x = 1.77 < 3.00; GFI = 0.90 > 0.90; CFI = 0.96 > 0.90; NFI = 0.92 > 0.90; RMSEA = 0.05 < 0.08; PCLOSE = 0.90 > 0.05 * Items removed because of low loading.
Furthermore, we addressed the reliability issue by using Cronbach’s alpha. Following the cutoff criteria recommended by Hair et al. (2009) a value above 0.70 indicates a satisfactory level of reliability. Table 1 shows the values of Cronbach’s alpha for each construct used in the study. The value of Cronbach’s alpha for constructs ranged from 0.85 to 0.92 (Table 1), which illustrates a satisfactory level of reliability for all constructs of our study.
4.2. Hypothesis Testing Our hypothesized model could explain 38% of the variance in BCB, 11% of the variance in brand commitment, and 28% of the variance in brand trust. We followed several steps to examine our hypotheses. First, to examine our H1, the direct relationship between IB and BCB has been examined. The value of the
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Internal Branding and Brand Citizenship Behavior 453 Table 2. Assessing Discriminant Validity. CR
AVE
BC
Brand Commitment (BC)
0.93
0.76
0.87
Brand Citizenship Behavior (BCB)
0.92
0.61
0.45
0.78
Brand Trust (BT)
0.92
0.73
0.30
0.58
0.86
Organizational Climate (OC) 0.86
0.62
0.23
0.37
0.43
0.78
Internal Branding (IB)
0.52
0.32
0.46
0.58
0.66
0.92
BCB
BT
OC
IB
0.72
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Notes: The bold diagonal values represent AVE; the off-diagonal values are the square of the correlations among the constructs. Signifcant at *p < 0.01.
beta coeffcient of the direct relationship between IB and BCB was signifcant at level 0.05 (β = 0.52, p < 0.05). Therefore, we accept H1. In the second step, we examine the mediation effect of brand commitment and brand trust on the IB-BCB relationship. The direct relationship of IB with brand commitment and brand trust has been examined. The result reported a signifcant relationship of IB on brand commitment at level 0.05 (β = 0.29, p < 0.05) and brand trust 0.05 (β = 0.71, p < 0.05). In the third step, the indirect relationship between IB and BCB has been examined through brand commitment and brand trust separately and then sequentially. The 95% bias-corrected bootstrapped confdence intervals (N = 5,000) have been estimated (Preacher, Rucker, & Hayes, 2007). The fndings indicate that IB has a signifcantly lower indirect impact on BCB through a brand trust (β = 0.25), and a bootstrapped estimate of the indirect effect reported for a statistically signifcant indirect path at 95% CI [0.18, 0.33]. Henceforth, we accept our H2. The value of the beta coeffcient of the indirect relationship between IB and BCB through brand commitment reported for a positive value (β = 0.07) and statistically signifcant path at 95% CI [0.03, 0.12], supporting our H3. Then, we examined the serial mediation effect of brand trust and commitment to the relationship between IB and BCB. The result shows that the indirect effect of IB and BCB through brand trust and brand commitment was statistically signifcant (β = 0.03; 95% CI [0.01, 0.05]). Thus, H4 is strongly supported (Table 3). In the fourth step, we examined the interaction effect of organizational climate on the direct IB-BCB relationship. Our fndings reported a signifcant moderating effect of organizational climate on the relationship between IB and employee BCB (β = −0.08, p < 0.05). Henceforth, we accept our H4.
5. Discussion Beyond investigating the direct effect of the organization’s IB on employee BCB, this study investigated the relationship between IB and BCB by applying the dual and serial multiple mediation methods based on brand trust and brand
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454 Ahmad Aljarah and Pelin Bayram Table 3. Empirical Results. Paths From To
BT
BC
BCB
IB
0.71***
0.29***
0.16**
BT
–
0.15**
0.35***
BC
–
–
0.26***
B
CI low
CI high
0.52
0.42
0.65
IB → BT → BCB
0.25
0.18
0.33
IB → BC → BCB
0.07
0.03
0.12
IB → BT → BC → BCB
0.03
0.01
0.05
Total effect
0.36
0.28
0.47
–0.08
–0.16
–0.02
Direct effect IB → BCB Mediation effect
Moderation effect IB*OC → BCB 2
R
BT
28%
BC
11%
BCB
38%
0.52**
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IB
R2= 0.28 BT
IB
BCB
2
0.15**
R = 0.11 BC
0.16**
BCB –0.08***
2
R = 0.38 OC
Fig. 2. Results of Hypotheses Testing.
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Internal Branding and Brand Citizenship Behavior 455
Brand Citizenship Behavior
5 4.24 4 3 2 1
3.3 2.84
1.62
Low Organization Climate High Organization Climate
Low Internal Branding
High Internal Branding
Fig. 3. The Interaction Effect of Organization Climate. commitment. Our study explored how IB not only affects BCB via brand trust and brand commitment respectively, it also investigates BCB through brand trust and commitment based on a sequential manner. The fndings of our study reveal that IB positively related to BCB. This study also demonstrated that the relationship between IB and BCB is sequentially mediated by brand trust and brand commitment. Furthermore, the interaction effect of organizational climate on IB–BCB linkage reveals that such linkage is high under a high level of organizational climate and it is low under the low level of organizational climate.
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5.1. Theoretical Implications The fndings of our research contribute to the literature in several ways. First, this research addresses some of the gaps in the literature by given empirical evidence for relationships that have not previously analyzed in the tourism and hospitality industry. Our fndings suggest that IB has disproportional effects on brand trust, brand commitment, and BCB in the hotel context. Previous studies in the literature generally concentrated on the role of brand commitment in explaining the relationship between IB and BCB (Burmann, Zeplin, et al., 2009; King & Grace, 2012; Punjaisri et al., 2009). Our study takes a step further to delve into the dual mediation mechanism of brand trust and brand commitment for the IB-BCB relationship. Consistency with past research, the fnding of our study revealed that brand commitment partially mediates the relationship between IB and brand citizenship. Thus, hotels with a high level of brand commitment are more likely to detect IB initiatives to enhance citizenship behavior of their employees. In addition, our fndings indicated that brand trust plays an important role in assimilating and exploiting IB initiatives, as well as in converting such initiatives into improving employee’s voluntary behavior. Consequently, this study confrms that employees’ brand commitment and brand trust act as an internal integration mechanism in the IB–BCB relationship by affecting how organizations fully beneft from the potential of IB initiatives. Second, the result of our study revealed that brand trust and brand commitment only partially mediated the infuence of IB initiatives on BCB. Thus, even when brand trust and commitment were simultaneously controlled for, IB still had
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456 Ahmad Aljarah and Pelin Bayram a direct and positive relationship with BCB. In other words, the social exchange variables (i.e., brand trust and brand commitment) is insuffcient to fully explain the underlying mechanism of how IB promotes BCB. Thus, the result of our study suggests that using another theory might provide better empirical explanations for the underlying mechanism behind the infuence of IB on BCB. For instance, from a social identity view of point, employee-company identifcation with IB, along with appropriate leadership style, may act as role models for an employee to imitate and to behave in a way that is more oriented to the company benefts (i.e., regularly recommend the brand and pass on brand knowledge to new employees), including involving in BCB to promote the mutual relationship. Third, the fndings of our study revealed that IB was a stronger predictor of employee trust than employee commitment. This could be explained through the nature of the relationship between employee’s trust and their commitment. Employee trust functions as a key antecedent of their commitment (Morgan & Hunt, 1994). Thus, the value of commitment is driven by how much the employees are trusted in a frm. Consequently, any initiative from the frm side will have less effect on employee commitment compared with its effect on employee trust. Fourth, little attention has been paid to investigate the potential sequential mediation effect of the mechanisms underlying the association between IB and BCB. In particular, although prior studies have suggested a strong association between brand trust and brand commitment (Chaudhuri & Holbrook, 2002; Morgan & Hunt, 1994), no research has yet examined how these two mechanisms functions together to assimilate and exploit frm’s IB and convert it into improving BCB. Our research confrms the existence of this sequential mediation effect in the hotel context and extends prior research by demonstrating that IB fosters brand trust leading to brand commitment which, in turn, promotes BCB. Thus, this investigation sheds more light on how IB initiatives contribute to BCB in the hospitality context. Fourth, unlike the prior studies on IB and BCB (Buil et al., 2016; Burmann & Zeplin, 2005; Garas, Mahran, & Mohamed, 2018; Piehler, 2018; Piehler et al., 2015), this research uncovers the boundary conditions that qualify the relationship between IB and BCB. Our results suggest that a high organizational climate strengthens the relationship between IB and BCB of employees. The effect of IB on BCB gets stronger when there is a high organizational positive climate. Such a result is consistent with previous studies (Forehand & Von Haller Gilmer, 1964; Momeni, 2009) that the organization climate functions the key antecedent of employee behavior. Thus, our research proposes an integrative model that goes beyond brand commitment through the integration of brand trust and organizational climate into the IB–BCB relationship. Lastly, this study contributes to the literature by expanding the application power of the social exchange theory, cognitive consistency theory, and equity theory in shedding light on the relationship between corporate initiatives and employee behavior.
5.2. Practical Implications The fndings of our study have several practical implications. First, our study reveals that the corporate IB is one of the main drivers of employees to show the
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Internal Branding and Brand Citizenship Behavior 457
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frms’ brand their citizenship behavior that could positively impact the corporate performance (e.g., recommending the organization’s products/services to others, making constructive suggestions, speaking positively about the corporate name). Therefore, frms should consider engaging in IB activities as a strategic tool that could be used to increase the effciency of their resources (e.g., employee). Second, the executives are encouraged to build their IB in a way that increases the BCB of employees toward the corporate brand by appealing to the brand commitment and brand trust toward the organizations. For instance, if the executives fnd that employees showing less commitment or trust toward the organizations, they might stress more efforts to amplify the employee perceptions toward the corporate internal brand activities by better communicating the corporate IB activities and determining such activities as corporate core values amongst their employees. Third, given that the employee turnover rate in the hospitality industry is generally high (Carbery, Garavan, O’Brien, & McDonnell, 2003; Nadiri & Tanova, 2010), it is obvious that there is lack of trust between employees and their workplace. The seasonal nature of the hospitality industry increases the demand for seasonal workforce and this makes it harder to establish trust among employees toward their organization. Hence, the culture of trust should be established in the hospitality industry through systematic IB activities. This implies that executives should improve the level of employee–company emotional attachment via HR activities, internal communication, and leadership style that foster brand trust that would lead to a higher level of commitment and in return higher level of BCB. Last, the fndings of our study also reveal that the interactive effect of organizational climate with IB activities boosts the citizenship behavior of employees toward a specifc brand. Henceforth, the organizations should be designed and managed in a way that sprit a positive climate among employees, which in turn might make the effort of executives in boosting employee citizenship behavior easier and more effcient.
6. Limitation and Directions for Future Studies This research examined the effect of IB on employee BCB taking into consideration the sequential mediation effect of brand commitment and brand trust and the moderation effect organizational climate. As with all research, the present study is subject to several limitations which, in turn, could open the light for future investigations. Opportunities for future studies may arise in terms of how other variables might moderate the relationship between IB and BCB. For instance, the moderating role of culture in the IB–BCB relationship might be examined as it has been widely discussed as a factor that moderate stakeholders– company relationship in different studies (Walsh & Bartikowski, Walsh and Bartikowski, 2013). Furthermore, future research could dive dipper into studying the moderating role organizational climate in our hypothesized model such as examining the conditional indirect effect of organizational climate. Methodologically, the applied convenience sampling method in our study affects the generalizability of our fndings. Furthermore, our proposed conceptual model has not been
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458 Ahmad Aljarah and Pelin Bayram controlled for contextual factors (i.e., age of the employee, gender, tenure, year of experience, corporate age). Future studies could replicate our proposed model by applying a different sampling method and adding some control variables that could infuence the proposed model which, in turn, could increase the generalizability of the fndings. In conclusion, it hoped that this work provides insightful contributions for a better understanding of the natural relationship between IB and BCB in the hospitality context as well as the mechanisms underlying the relationship.
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Internal Branding and Brand Citizenship Behavior 459 Carbery, R., Garavan, T., O’Brien, F., & McDonnell, J. (2003). Predicting hotel managers’ turnover cognitions. Journal of Managerial Psychology, 18(7), 649–679. Chang, A., Chiang, H., & Han, T. (2012). A multilevel investigation of relationships among brand-centered HRM, brand psychological ownership, brand citizenship behaviors, and customer satisfaction. European Journal of Marketing, 46(5), 626–662. Chaudhuri, A., & Holbrook, M. B. (2002). Product-class effects on brand commitment and brand outcomes: The role of brand trust and brand affect. Journal of Brand Management, 10(1), 33–58. Chernatony, L., & McDonald, M. (1998). Creating Powerful Brands in Consumer, Service and Industrial Markets (2nd ed.,). Oxford: Butterworth Heinemann. Datta, A., & Singh, R. (2018). Determining the dimensions of organizational climate perceived by the hotel employees. Journal of Hospitality and Tourism Management, 36, 40–48. de Chernatony, L., Drury, S., & Segal-Horn, S. (2003). Building a services brand: Stages, people and orientations. The Service Industries Journal, 23(3), 1–21. Du Preez, R., & Bendixen, M. T. (2015). The impact of internal brand management on employee job satisfaction, brand commitment and intention to stay. International Journal of Bank Marketing, 33(1), 78–91. Du Preez, R., Bendixen, M., & Abratt, R. (2017). The behavioral consequences of internal brand management among frontline employees. Journal of Product and Brand Management, 26(3), 251–261. Erkmen, E., & Hancer, M. (2015a). Do your internal branding efforts measure up? International Journal of Contemporary Hospitality Management, 27(5), 878–895. Erkmen, E., & Hancer, M. (2015b). Linking brand commitment and brand citizenship behaviors of airline employees: “The role of trust.” Journal of Air Transport Management, 42, 47–54. Feng Jing, F., Avery, G. C., & Bergsteiner, H. (2011). Organizational climate and performance in retail pharmacies. Leadership & Organization Development Journal, 32(3), 224–242.
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460 Ahmad Aljarah and Pelin Bayram Hasni, M. J. S., Salo, J., Naeem, H., & Abbasi, K. S. (2018). Impact of internal branding on customer-based brand equity with mediating effect of organizational loyalty. International Journal of Retail & Distribution Management, 46(11/12), 1056–1076. Heider, F. (1946). Attitudes and cognitive organization. The Journal of Psychology, 21(1), 107–112. Herington, C., Johnson, L. W., & Scott, D. (2006). Internal relationships. European Business Review, 18(5), 364–381. Hopkins, K. M. (2002). Organizational citizenship in social service agencies. Administration in Social Work, 26(2), 1–15. Ibrahim, B., & Aljarah, A. (2018). Dataset of relationships among social media marketing activities, brand loyalty, revisit intention. Evidence from the hospitality industry in Northern Cyprus. Data in Brief, 21, 1823–1828. Iyer, P., Davari, A., & Paswan, A. (2018). Determinants of brand performance: The role of internal branding. Journal of Brand Management, 25(3), 202–216. James, L. R., & Jones, A. P. (1974). Organizational climate: A review of theory and research. Psychological Bulletin, 81(12), 1096–1112. Jo, S., & Shim, S. W. (2005). Paradigm shift of employee communication: The effect of management communication on trusting relationships. Public Relations Review, 31(2), 277–280. Jou, J. Y. H., Chou, C. K., & Fu, F. L. (2008). Development of an instrument to measure internal marketing concept. Journal of Applied Management and Entrepreneurship, 13(3), 66–79. Kemp, E., Williams, K. H., & Bordelon, B. M. (2012). The impact of marketing on internal stakeholders in destination branding: The case of a musical city. Journal of Vacation Marketing, 18(2), 121–133. King, C. (2010). One size doesn’t ft all. International Journal of Contemporary Hospitality Management, 22(4), 517–534. King, C., & Grace, D. (2006). Exploring the implications of market orientation for hospitality employees. Services Marketing Quarterly, 27(3), 69–90. King, C., & Grace, D. (2010). Building and measuring employee-based brand equity. European Journal of Marketing, 44(7/8), 938–971. King, C., & Grace, D. (2012). Examining the antecedents of positive employee brandrelated attitudes and behaviours. European Journal of Marketing, 46(3/4), 469–488. Lacey, R., & Kennett-hensel, P. A. (2010). Longitudinal effects of corporate social responsibility on customer relationships, Journal of Business Ethics, 97(4), 581–597. Larzelere, R. E., & Huston, T. L. (1980). The Dyadic Trust Scale: Toward understanding interpersonal trust in close relationships. Journal of Marriage and the Family, 42(3), 595. Lewicki, R. J., & Bunker, B. B. (1996). Developing and maintaining trust in work relationships. In R. Kramer, & T. Tyler (Eds.), Trust in organizations: Frontiers of theory and research (pp. 114–139). Thousand Oaks: SAGE Publications, Inc. Liu, G., Ko, W. W., & Chapleo, C. (2017). Managing employee attention and internal branding. Journal of Business Research, 79, 1–11. Löhndorf, B., & Diamantopoulos, A. (2014). Internal branding: Internal branding: Social identity and social exchange perspectives on turning employees into brand champions. Journal of Service Research, 17(3), 310–325. Louis, D., & Lombart, C. (2010). Impact of brand personality on three major relational consequences (trust, attachment, and commitment to the brand). Journal of Product and Brand Management, 19(2), 114–130. Luu, T. T. (2017). CSR and customer value co-creation behavior: The moderation mechanisms of servant leadership and relationship marketing orientation. Journal of Business Ethics, 1–20. Mangold, W. G., & Miles, S. J. (2007). The employee brand: Is yours an all-star? Business Horizons, 50(5), 423–433.
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Internal Branding and Brand Citizenship Behavior 461 Marinova, S. V., Cao, X., & Park, H. (2019). Constructive organizational values climate and organizational citizenship behaviors: A confgurational view. Journal of Management, 45(5), 2045–2071. Meyer, J. P., & Allen, N. J. (1997). Commitment in the workplace: Theory, research, and application. Thousand Oaks, United States: SAGE Publications, Inc. Miles, S. J., & Mangold, G. (2004). A conceptualization of the employee branding process. Journal of Relationship Marketing, 3(2–3), 65–87. Momeni, N. (2009). The relation between managers’ emotional intelligence and the organizational climate they create. Public Personnel Management, 38(2), 35–48. Morgan, R. M., & Hunt, S. D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58(3), 20–38. Morhart, F. M., Herzog, W., & Tomczak, T. (2009). Brand-specifc leadership: Turning employees into brand champions. Journal of Marketing, 73(5), 122–142. Nadiri, H., & Tanova, C. (2010). An investigation of the role of justice in turnover intentions, job satisfaction, and organizational citizenship behavior in hospitality industry. International Journal of Hospitality Management, 29(1), 33–41. Nyadzayo, M. W., Matanda, M. J., & Ewing, M. T. (2015). The impact of franchisor support, brand commitment, brand citizenship behavior, and franchisee experience on franchisee-perceived brand image. Journal of Business Research, 68(9), 1886–1894. Organ, D. W. (1988). Organizational citizenship behavior: The good soldier syndrome. England: Lexington Books/DC Heath and Com. Özduran, A., & Tanova, C. (2017). Coaching and employee organizational citizenship behaviours: The role of procedural justice climate. International Journal of Hospitality Management, 60, 58–66. Piehler, R. (2018). Employees’ brand understanding, brand commitment, and brand citizenship behaviour: a closer look at the relationships among construct dimensions. Journal of Brand Management, 25(3), 217–234. Piehler, R., Grace, D., & Burmann, C. (2018). Internal brand management: introduction to the special issue and directions for future research. Journal of Brand Management, 25(3), 197–201. Piehler, R., Hanisch, S., & Burmann, C. (2015). Internal branding – Relevance, management and challenges. Marketing Review St. Gallen, 32(1), 52–61. Piehler, R., King, C., Burmann, C., & Xiong, L. (2016). The importance of employee brand understanding, brand identifcation, and brand commitment in realizing brand citizenship behaviour. European Journal of Marketing, 50(9/10), 1575–1601. Piehler, R., Schade, M., & Burmann, C. (2019). Employees as a second audience: The effect of external communication on internal brand management outcomes. Journal of Brand Management, 26(4), 445–460. Podsakoff, P. M., MacKenzie, S. B., Paine, J. B., & Bachrach, D. G. (2000). Organizational citizenship behaviors: A critical review of the theoretical and empirical literature and suggestions for future research. Journal of Management, 26(3), 513–563. Porricelli, M. S., Yurova, Y., Abratt, R., & Bendixen, M. (2014). Antecedents of brand citizenship behavior in retailing. Journal of Retailing and Consumer Services, 21(5), 745–752. Preacher, K. J., Rucker, D. D., & Hayes, A. F. (2007). Addressing moderated mediation hypotheses: Theory, methods, and prescriptions. Multivariate Behavioral Research, 42(1), 185–227. Punjaisri, K., Evanschitzky, H., & Wilson, A. (2009). Internal branding: An enabler of employees’ brand-supporting behaviours. Journal of Service Management, 20(2), 209–226. Punjaisri, K., & Wilson, A. (2011). Internal branding process: Key mechanisms, outcomes and moderating factors. European Journal of Marketing, 45(9/10), 1521–1537. Punjaisri, K., & Wilson, A. (2017). The role of internal branding in the delivery of employee brand promise. In Advances in corporate branding (pp. 91–108). London: Palgrave Macmillan UK.
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Chapter 24
Integrated Reporting and Combined Assurance: A Qualitative Research on the Awareness in Turkey* Seval Kardes Selimoglu and Gul Yesilcelebi Abstract Purpose: The aim of this study is to reveal the opinions of the auditors, academicians, and institutions that published integrated reports regarding the development and execution of the assurance process of integrated reports. Design/methodology/approach: For this purpose, interviews were conducted using qualitative research technique to determine awareness about integrated reporting and combined assurance. Within the scope of the research, semi-structured interviews were conducted with six auditors, fve academicians, and fve workers in institutions that published integrated reports. Qualitative data analysis method was used to analyze the data.
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Findings: As a result of the research, combined assurance process criteria were proposed in the integrated reports which in line with the opinions of the participants. Originality/value: Institutions around the world are increasingly publishing integrated reports. However, when institutions publish integrated reports, there is no clear standard or any guidance on how to ensure the reliability of these reports. It is seen that AA1000, ISAE3000, GRI Standards, and some local standards are used to provide assurance. At this point, the combined assurance model can be used for the reliability of the information in *
This research is extracted from doctoral dissertation entitled “Creating Combined Assurance for the Integrated Reports: A Delphi Technique Investigation on the Awareness in Turkey” (Advisor: Prof. Dr. Seval Kardes Selimoglu, Anadolu University, Institute of Social Sciences, Business Administration (Accounting) Department, Eskisehir/Turkey, 2019). New Challenges for Future Sustainability and Wellbeing, 463–482 Copyright © 2021 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-80043-968-920211025
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464 Seval Kardes Selimoglu and Gul Yesilcelebi the integrated reports. Integrated reporting and combined assurance are still relatively new concepts in Turkey. Furthermore, this study is important in terms of the lack of studies on how to provide combined assurance for integrated report when scanned related literature in Turkey. Although readily integrated reporting continued in Turkey, it continues to be an area of application is still under development. In particular, the research refects the level of integrated reporting awareness and how to ensure assurance of these reports. Keywords: Integrated reporting; combined assurance; Turkey; qualitative research; qualitative analysis; academics JEL Codes: M14; M40; M42; Q56
Introduction
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Integrated reporting has become a very noticeable issue in the last decade. It is especially important for businesses due to the developments in the business world and increasing competition. Considering that the main purpose of businesses is to make proft, integrated reporting is also considered as a strategic management approach that provides a competitive advantage to the business. It has become important to report fnancial information and non-fnancial information together, as it is understood that only fnancial information is not suffcient during the evaluation of businesses and the need to consider non-fnancial information as well. With integrated reporting, it is aimed to increase effciency and create value by presenting both fnancial and non-fnancial information in a single report. The integrated report, which is a single type of reporting that covers fnancial and non-fnancial reports, a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term. (The International Integrated Reporting Council (IIRC), 2013a, p. 7) Institutions around the world are increasingly publishing integrated reports. However, when institutions publish integrated reports, there is no clear standard or any guidance on how to ensure the reliability of these reports. Regarding the reliability of the information included in the integrated reports, companies have brought solutions such as management review, internal audit, and ensuring internal data reliability. In this case, it is seen that institutions try to provide the assurance of the reports with the methods they determine without a certain standard. In addition, the reports do not provide clear information on how non-fnancial information and future predictions are audited. It is seen that AA1000, ISAE3000, GRI Standards, and some local standards are used to provide assurance for sustainability reports and integrated reports. At this point, the combined assurance
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Integrated Reporting and Combined Assurance 465 model can be used for the reliability of the information in the integrated reports. Integrated reporting and combined assurance are still relatively new concepts in Turkey. Furthermore, this study is important in terms of the lack of studies on how to provide combined assurance for integrated report when scanned related literature in Turkey. Although readily integrated reporting continued in Turkey, it continues to be an area of application is still under development. In particular, the research refects the level of integrated reporting awareness and how to ensure assurance of these reports. In this study, in order to contribute to the literature related, presented proposals on how to create a combined assurance in the integrated report and it is still quite a new concept to determine awareness about integrated reporting and combined assurance. This study consists of six parts. In the frst section, general information about integrated reporting is given. The second section deals with the conceptual framework of combined assurance. In the third section, the literature is mentioned. In the fourth section, the method of the research is given. Findings are presented in the ffth section. The last section includes the results of the research and recommendations.
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Integrated Reporting and the Framework According to Eccles and Krzus (2010, p. 11), two defnitions of integrated reporting, which emerged as one report, have been made as narrow and broad. In a narrow sense, the integrated report is a single document in the form of a paper or pdf fle provided electronically; in a broad sense, it is the reporting of fnancial and non-fnancial information in a way that shows the effects on each other. With these defnitions, the integrated report has been shown to all stakeholders as a way of informing all stakeholders that it takes a holistic view of the interests of the company while competing with each other. Integrated reporting is defned as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation” (IIRC, 2013a, 33). King III report defnes integrated reporting as presenting the performance of the company in terms of both fnancial and sustainability (The Institute of Directors in Southern Africa [IoDSA], 2009, p. 108). Based on the defnitions made, integrated reporting is the linking of the fnancial and nonfnancial information emerging as a result of an organization’s activities to the report. On the other hand, the integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term. (IIRC, 2013a, p. 7) The International Integrated Reporting Framework was published by The International Integrated Reporting Council (IIRC) in December 2013. This
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framework will be used to accelerate the adoption of integrated reporting worldwide (IIRC, 2020). The framework has adopted a principle-based approach, not a rule-based approach. On the offcial website of the IIRC, there is a translation of the framework in 11 different languages (English, Chinese, French, Italian, Japanese, Korean, Portuguese, Russian, Spanish, Turkish, and Traditional Chinese). The Framework was launched after extensive consultation and testing by businesses and investors in all regions of the world, including 140 businesses and investors from 26 countries participating in the IIRC pilot program. The purpose of the framework is to create Guiding Principles and Content Elements that govern the overall content of an integrated report and explain the key concepts that support them (IIRC, 2020). Within the framework of integrated reporting, the capitals are defned as a stock of values that increase, decrease, or transform with the activities and results of the organization and these items are classifed as fnancial, manufactured, intellectual, human, social and relationship, and natural capital (IIRC, 2013a, p. 11). The capitals are shown in Fig. 1. As shown in Fig. 1, the capitals are not independent from each other. The capitals help the organization create value and form their input in the business model. While preparing an integrated report, it is not mandatory to apply various forms and rules, but it is expected that the information will be disclosed under the relevant headings in line with the principles specifed in the framework.
Fig. 1. The Capitals (Adapted from IIRC, 2013b, p. 3).
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Integrated Reporting and Combined Assurance 467 Table 1. Integrated Reporting Principles (Adapted from IIRC, 2013a, p. 5). Guiding Principles
Content Elements
3A-Strategic focus and future orientation
4A-Organizational overview and external environment
3B- Connectivity of information
4B- Governance
3C- Stakeholder relationships
4C- Business model
3D- Materiality
4D- Risks and opportunities
3E- Conciseness
4E- Strategy and resource allocation
3F- Reliability and completeness
4F- Performance
3G- Consistency and comparability
4G- Outlook
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4H- Basis of presentation In the framework of integrated reporting, integrated reporting principles are classifed as Guiding Principles and Content Elements (IIRC, 2013a, p. 4). As stated in the framework, integrated reporting principles are shown in Table 1. As summarized in Table 1, integrated reporting principles consist of seven guiding principles and eight content elements. The report prepared in 2002 by the Danish company Novozymes, whose main activity is industrial enzymes, microorganisms and bio pharmacy, is accepted as the frst integrated report. Other integrated reporting pioneers are Novo Nordisk (Denmark-2004), United Technologies (USA-2008: The frst US company to publish an integrated report), Natura (Brazil-2008), Philips (Netherlands-2008), American Electric Power (USA-2009), PepsiCo (USA-2009), and Southwest Airlines (USA-2009) (Eccles & Saltzman, 2011, p. 58). In Turkey, a non-governmental organization which Arguden Governance Academy was prepared based on the data of 2015 by the frst integrated report was published on September 26, 2016. This report is the frst integrated report published in Turkey and took place among the top 10 non-proft organizations in the world. Today, the countries that adopt integrated reporting and go to regulations regarding this in their countries are the United States, Brazil, South Africa, England, Germany, India, Malaysia, Singapore, Australia, New Zealand, and Japan (Integrated Reporting (IR), 2020). South Africa became the frst country in March 2010 to require companies registered on the Johannesburg stock exchange to prepare integrated reports. This obligation has made South Africa a leading country in integrated reporting.
Combined Assurance Model The concept of combined assurance was frst defned in the King III report published in 2009. The concept is proposed in the report for management practices. In the King III report, combined assurance processes in a company to maximize risk and governance audit and optimize overall trust in the audit and risk
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468 Seval Kardes Selimoglu and Gul Yesilcelebi
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committee to control effciency, taking into account the risk tolerance (acceptable level of risk) of company directors and partners; and it defnes them as listing them (IoDSA, 2009, p. 50). In the King IV report published in 2016, the scope of the concept of combined assurance was expanded. According to the combined assurance model, the parties constituting the combined assurance are divided into three. These are management, internal assurance providers, and external assurance providers. These are parties responsible for providing assurance in the establishment of combined assurance and the activities of these three parties require coordination and harmony (Huibers, 2015, p. 2). Fig. 2 shows the combined assurance model and the relationship of the three parties to each other. Combined assurance is created by the assurance of these three parties within their own responsibilities. Risk management is at the heart of the combined assurance model. So how to manage the risks affecting the company is very important. According to the King III report, combined assurance should be based on reporting to the board of directors’ information on the identifed risks and how the assurance is established through the audit committee. Each party in the combined assurance model has its own specifc roles and responsibilities. It is important that each party works in harmony with each other in terms of increasing the effectiveness of combined assurance practices. These three parties play important roles within the combined assurance structure.
Fig. 2. Combined Assurance Model (Adapted from IoDSA, 2009; Nkonki Actualising Empowerment, 2011; PriceWaterhouseCoopers (PwC), 2010).
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Integrated Reporting and Combined Assurance 469 Management is responsible for ensuring that there is a sound risk and control framework in which deviations are identifed in a timely and appropriate manner (Huibers, 2015, p. 2). In the management area, those responsible for ensuring the integrity risk of the management and control system are responsible. Therefore, deviations can be defned on time and adequately controlled (Dmitrenko, 2017, p. 85). Internal assurance providers are responsible for supporting internal audit and management, such as risk management, internal control, and compliance functions (Huibers, 2015, p. 3). Examples of internal assurance providers are internal auditors, audit committee, and early detection of risk committee. The role of internal audit and the audit committee is also mentioned in the King III report. According to this report (principle 7.3.1), internal audit as an internal assurance provider is an integral part of the combined assurance model (IoDSA, 2009, p. 45). Internal audit and internal control play an important role in creating combined assurance. External assurance providers are responsible for independent external assurance just like an independent auditor (Huibers, 2015, p. 3). Examples of external assurance providers are independent auditors. The fact that independent auditors know how to provide a wider range of business risks and assurance means that they can play a key role in a combined assurance framework. In addition to having the best assurance practice experience in different sectors and companies, independent auditors can use their knowledge of good governance frameworks such as COSO (Committee of Sponsoring Organizations) in the design of the assurance framework (PwC, 2010, p. 12). According to the King III (principle 3.5.2) report, the relationship between external assurance providers and the company should be monitored by the audit committee. The implementation of the combined assurance model requires a series of processes. In order to apply the combined assurance model, internal audit’s data and information gathered from other units in the organization (such as Management, Risk Management, Legislation Compliance, Finance and Information Technologies) are synthesized to provide a control environment to Senior Management, Board of Directors, Audit Committee and Regulatory and Supervisory Authorities. They are expected to give assurances about the issue from a broad perspective (Kahyaoglu, 2016, p. 10). Combined assurance creation process is given in Fig. 3. As shown in Fig. 3, the combined assurance process consists of the assurance providers (defense lines) combining the information obtained from other units in the organization and giving assurance to the board of directors and the audit committee by evaluating the risks about the risk management and control environment and business objectives. In the fgure, the risks affecting the organization are grouped under three groups as operational risk, fnancial risk, and other risks. Examples of other risks are reputational risk, strategic risk, political risk, and compliance risk. Risk management forms the basis of the combined assurance process.
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Combined Assurance Process
Board of Directors
Audit Committee
Fourth Line of Assurance Providers Third Line of Assurance Providers
Combined Assurance
Second Line of Assurance Providers First Line of Assurance Providers Risk Management and Control Environment Business Objectives Operational Risk Operational Risk Control Environment
Financial Risks
Other Risks
Financial Risks Internal Financial Controls
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Fig. 3. Combined Assurance Process (Adapted from Lewis, 2013, p. 55).
Literature Review In order to determine the studies carried out to ensure the assurance of integrated reports, literature review was made, and the results of the studies reached were evaluated. In this section, integrated reports and combined assurance for work that is directly related to a study by research in Turkey have been investigated separately. In abroad, studies directly related to the research were examined together. When looking at the researches on integrated reporting, in addition to the researches that explain and defne the concept of integrated reporting, it is possible to fnd both national and international research on the importance and future position of integrated reporting, revealing its benefts, how to create value and how to integrate fnancial and non-fnancial information in a single report.
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Integrated Reporting and Combined Assurance 471 Considering the related researches in the feld of accounting in the national literature, the scarcity of studies on combined assurance (Kahyaoglu, 2011, 2016; Senal & Ates, 2018) draws attention. The combined assurance approach and the responsibilities of internal audit for the implementation of this approach were mentioned in Senal and Ates (2018). According to the researchers, the biggest role in the implementation of this approach falls to the internal audit in organizations. Kahyaoglu (2016) states in order to apply the integrated assurance model, by combining the data and information gathered by internal audit from other units in the organization, by synthesizing it, she gave a broad explanation to the top management, the board of directors, the audit committee and regulatory and supervisory authorities about the control environment. She mentioned the need to be expected to give assurances from a perspective. Kahyaoglu (2011) mentioned the role of internal audit with the combined assurance model. When it examined as a result of research conducted in the accounting and audit feld, that deals with integrated reporting the presence of several investigations in Turkey, it is noteworthy scarcity of studies on combined assurance. In addition, although not seen any studies examining a combination of integrated reporting and combined assurance in Turkey, and only there is a study (Agdeniz, 2018) examining the relationship between integrated reporting and internal audit. Agdeniz (2018) aimed to highlight the contribution of internal audit, which has an important role in enterprises, to integrated reporting. In the study, it was seen that internal audit will make signifcant contributions in the integrated reporting process, especially in areas such as corporate governance, risk management, and internal control. It has also been concluded that internal audit can be an important source of assurance for the information presented in integrated reporting. When the international literature is examined, there are two studies directly related to the research subject (Briem & Wald, 2018; Maroun, 2017). Briem and Wald (2018) examined the reasons why companies voluntarily assure integrated reports by third parties and the role of independent auditors in the assurance process. They conducted 25 in-depth semi-structured interviews and discussed many important actors in the assurance process of integrated reports. They also considered archival material. Researchers have used theoretical theory, agency theory, and innovation theory to analyze integrated report assurance. Companies face compelling pressure from their stakeholders while obtaining external assurance. They aim to use non-fnancial indicators and increase their reliability. Auditors play an important role in taking different actors in the implementation of IR assurance, for example by supporting the correct interpretation of IIRC standards and supporting IR. Maroun (2017) has developed three possible models by using the principles provided by the International Standards on Auditing (ISA) and the International Standard on Assurance Engagements (ISAE) in ensuring the assurance of the integrated report. Semi-structured interviews with 20 auditors and report preparers were held to reveal possible approaches to ensuring the assurance of the information contained in the companies’ integrated reports. Three assurance strategies were determined in the research. A separated assurance model focuses
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472 Seval Kardes Selimoglu and Gul Yesilcelebi solely on auditing the fnancial statements and reporting discrepancies between the fnancial statements and other information included in an integrated report on the organization’s management. An integrated assurance approach relies on different control and balance systems that include the external and internal audit services of the board of directors to take responsibility for the integrated reports of organizations. Finally, a Delphi-inspired model relies on a series of expert panels to express their views on the methodology used by reporting organizations to prepare integrated reports.
Research Methodology Research Design Integrated reporting and combined assurance regarding the determination of awareness in Turkey and the development of integrated reporting and assurance processes carried out for the purpose of this study is designed according to the qualitative research approach. Qualitative research, as stated by Patton (2014), is a research approach to examine the problem in depth and in detail. Interview questions, prepared in line with the theoretical explanations made, were applied to experts and evaluations regarding the assurance process were made. In this context, the interview form was applied to the participants using an open-ended and semi-structured interview technique. The data obtained from the interview forms were analyzed by qualitative analysis methods (Fig. 4). The purpose of the research is to identify the stages in the process of providing assurance to integrated reports and to understand the roles of assurance standards in the assurance process.
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Population and Sample Purposeful sampling method has been adopted in sample selection. Purposeful sampling methods have emerged fully within the qualitative research process. Purposeful sampling allows for in-depth study of situations that are thought to have rich information (Yildirim & Simsek, 2000). In this sampling, criteria considered to be important for selection are determined and it is thought that the sample
Qualitative
Qualitative Research semi-structured interview
Qualitative Data Analysis
Results
Fig. 4. Research Design (Adapted from Yesilcelebi, 2019).
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Interpretation
Integrated Reporting and Combined Assurance 473 selected according to these criteria can represent the research universe with all its qualities (Tavsancil & Aslan, 2001). Therefore, a suitable sampling method was chosen in the study. Accordingly, the population of the study was determined as auditors working in independent audit frms, legal organizations, employees with knowledge and experience in organizations publishing integrated reports, and academicians. The sample of the study consists of 16 participants who are within the scope of the research population and who agree to participate in the study. In particular, obtaining the opinions of the people who are knowledgeable about the integrated report is important in terms of refecting the opinions about the assurance process of the integrated reports.
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Data Collection Tool In this study, semi-structured interview technique was used as data collection method. The semi-structured interview technique is neither as rigid nor as fexible as fully structured interviews; it is located between two extremes (Karasar, 2011, p. 165). Since it provides this fexibility to the researcher, semi-structured interview technique was used in the study. Sixteen participants were interviewed in order to fnd the answers to the questions used in the study. The interviews were recorded with a tape recorder with the permission of the participants and then resolved. In addition, the participant consent form prepared indicating that the participants agreed to participate in the study was signed and collected by the researcher. In line with the purpose of the research and the framework of the theoretical explanations made, adapting from Maroun (2017) and applying the interview questions prepared by the researcher to experts, the assurance process was evaluated. In this context, using an open-ended and semi-structured interview technique, the interview form was prepared and re-prepared again after being shown and approved to experts. The prepared interview form is composed of two parts. While the frst is intended to obtain personal information about the participant, the second is to identify the stages in the process of providing assurance to integrated reports and to understand the roles of assurance standards in the assurance process. While preparing the second part questions, it was formed from related literature research and questions adapted from Maroun (2017).
Data Analysis Qualitative data were collected in the study. As a result, qualitative data analysis was used to analyze the data. After the interview form was applied to 16 participants, the part of documenting and analyzing the data started. In order to determine the content validity of the interview form, two experts from the feld examined the forms, and as a result of this examination, the interview form was fnalized. In order to achieve this goal, experts examined the question items, checked whether the questions covered the subject being researched and whether the questions were understandable.
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474 Seval Kardes Selimoglu and Gul Yesilcelebi As a result of these examinations, the validity of the question items was determined, and the questions were found to be suffcient to achieve the purpose of the study. In qualitative data analysis, semi-structured interview data were subjected to content analysis. At this stage, the data obtained by the voice recorder during the interview were transferred to the computer environment. In order to ensure the validity of the data transferred to the interview form, the opinion of an expert in the feld was consulted.
Research Credibility While validity in qualitative studies refers to the control of the researcher for the accuracy of the fndings obtained through certain processes, qualitative reliability refers to the consistency of the researcher’s approach in terms of different projects and different researchers (Patton, 2014; Yildirim & Simsek, 2000). In this research, the things done to ensure the credibility of the research are listed as follows: ⦁⦁ The questions prepared within the scope of the research were clearly expressed
and the research stages were carried out in parallel.
⦁⦁ This research has been shaped in line with the relevant literature and the
⦁⦁
⦁⦁ ⦁⦁
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⦁⦁
⦁⦁ ⦁⦁ ⦁⦁ ⦁⦁
requirements of the process have been considered in data collection, analysis, interpretation, and result processes. Participants in the study were determined by purposeful sampling method and participated in the study on a voluntary basis. Participants were made to sign a voluntary participation form stating that they can leave the study at any time. Indeed, three participants agreed to participate in the study, but then dropped out. Participants in the research are experienced, knowledgeable, and experts in the feld in accordance with the subject and purpose of the research. Data collection tools (interview form) were reviewed by feld experts after they were created. During the data collection phase, face-to-face interviews were made with the participants, note taking and triangulation was carried out by voice recording upon the participant’s permission. The collected data were checked by frst transferring to printed media and then to electronic media. During the data analysis phase, the data were analyzed by a different feld expert than the researcher. The methods and processes followed in the data collection and data analysis stages were explained in detail. The data collected in the study were archived and stored.
Findings Within the scope of the research, nine questions were asked during the interviews with the participants. These questions include identifying the stages in the assurance process for integrated reports and understanding the roles of assurance
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Integrated Reporting and Combined Assurance 475 standards in the assurance process. In this section, the fndings obtained as a result of evaluating the assurance provided to the integrated reports according to the opinions of the participants are presented. The fndings were given in line with the opinions of the participants.
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“What does the concepts of integrated thinking, integrated reporting, sustainability and integrated assurance remind you?” The answers given by the participants to the question are as follows: P1- Integrated thinking is a strategic management approach. The integrated report is a value indicator. P8- Integrated thinking evokes the interactions and benefts of all functions. I think a very important concept of strategy is integrated thinking. Integrated reporting is the refection of integrated thinking on corporate reporting. In other words, with this awareness, with this awareness and the way of describing and reporting such a system is integrated reporting. Combined assurance is the frst thing that comes to my mind here is the concept of reliability that it evokes. In other words, it comes to my mind that more than one partner institution confrms that a job is done properly and correctly, the information in it is correct and the framework is correct. An assurance needs to be given that this job is correct. P14- Integrated thinking means abandoning the silo approach in decision-making processes in enterprises and taking into account the interactions in different areas in these processes. Integrated reporting is a reporting approach that emerges as a result of the integrated thinking approach, in a short and concise manner, which includes the value creation processes and models of the enterprise in reporting by carrying the capital used by the enterprises beyond the fnancial capital. Sustainability is an understanding that takes into account the continuity of fnancial and non-fnancial resources used in the execution of business activities, and the effects and results of the activity results on these fnancial and non-fnancial resources are evaluated from this perspective. Combined assurance, enterprise risk management, control etc. combination of more than one assurance party to provide independent assessment of their processes. According to the answers given by the participants, it was underlined that integrated thinking is a strategic management approach. It was emphasized that integrated thinking is effective in decision-making processes as a whole and guides the process management through in-house interactions. According to the answers given by the participants, integrated reporting is considered as a product that emerges as a result of integrated thinking. According to the responses of the participants, combined assurance is the combination of more than one party to verify the accuracy of the information contained in the integrated reports, that is to provide assurance. “For what purpose do you think integrated reports are prepared and what is expected with these reports? Also, who are the responsible persons in the integrated report preparation process?” The answers given by the participants to the question are as follows: P1- It is aimed to reduce capital costs with integrated reports. P8-In my opinion, the frst
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476 Seval Kardes Selimoglu and Gul Yesilcelebi expectation is stakeholder relations, the second expectation is trust, that is, because it is stakeholder-oriented, the frst is to establish better relations with stakeholders, and the second is to become a more reliable institution, and the third and the main expectation is to increase proftability. The decision to preparation integrated reporting is a decision taken at the level of the board of directors. P9- The main purpose of the transition to the integrated annual report is to keep up with the radical change and transformation experienced all over the world due to the rapid technological progress on a global scale. It is the Sustainability Committee responsible for the preparation of the integrated report. P12- The integrated report should be prepared under the responsibility of all units in the business, but under the ownership of senior management. P14- The responsibility of all units in the enterprise should be prepared as a result of the integrated thinking approach, but under the ownership/ coordination of senior management. P16- All stakeholders should be involved in the integrated report preparation process (Table 2).
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If you think that integrated reports are subject to some kind of assurance, how should the assurance of integrated reports be ensured? Who can be assured about these reports and on which subjects? What should be the relevant criteria and how should the subject be defned? The answers given by the participants to the question are as follows: P1- While providing assurance to integrated reports, assurance can be given on sustainabilityrelated issues. The independent auditor should provide the assurance regarding the integrated reports on the accuracy of the data. P2- The accuracy of past-focused fnancial data in integrated reports should be ensured by independent audit. P3While providing assurance to the integrated reports, the specifc areas in the report should be determined. While providing assurance to integrated reports, the elements included in the report should be taken into account. P4- The management, internal auditor and independent auditor should provide the assurance regarding the integrated reports together. While providing assurance to integrated reports, an integrated assurance model needs to be established. Which standards should be used when providing assurance to these reports? Are current standards (sustainability standards) suffcient to provide assurance? Or should a separate assurance set be created for integrated reports? Why? The answers given by the participants to the question are as follows: P7-I do not think the current standards are suffcient to provide assurance. P9- In summary, ease of use can be achieved by creating a new assurance set that will also cover the existing standards and also cover the integrated reporting needs. P14- On the basis of the assured issue/subject, specifc standards should be considered additionally (greenhouse gas etc.) (Table 3).
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a
X
X
P1
X
P2
X
P3
X
P4
X
P5 X
P6 X
P7
X
X
X
X
P8
X
X
P9
X
P10
X
P11
X
P12
X
P13
X
P14
X
P15
X
P16
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A separate assurance set should be created
Current standards are suffcient
Codes
X
P1
X
P2
X
P3 X
P4
X
P5
X
P6
X
P7
X
P8
X
P9
X
P10
X
P11
X
P12
X
P13
X
P14
X
P15
X
P16
Table 3. Distribution of the Responses of the Participants Regarding the Assurance Provided for the Integrated Reports (Adapted from Yesilcelebi, 2019, p. 170).
b
Establishing better relations with stakeholders. Become a more reliable institution. c Increase proftability. d Integrating integrated thinking and sustainability into business processes. e Relationship capital.
a
Power source
Source
e
Business processesd
Proft
c
Reliability
b
Stakeholder relations
Codes
Table 2. Distribution of Expectations in the Preparation of Integrated Reports According to the Answers Given by the Participants (Adapted from Yesilcelebi, 2019, p. 166).
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Integrated Reporting and Combined Assurance 477
478 Seval Kardes Selimoglu and Gul Yesilcelebi “From whom should the team providing assurance for these reports be formed, and how should the assurance period be determined, and what are the limitations/problems faced by the management/internal auditor/independent auditor while providing assurance regarding these reports?” The answers given by the participants to the question are as follows: P1- An independent auditor should lead the team that provides assurance for the integrated reports. P2- The assurance period for integrated reports should be determined according to the requirements of the sector in which the company operates. P3- Ensuring the reliability of predictive data is one of the problems faced by the independent auditor. P4- External experts should be included in the team providing assurance to integrated reports. P5- The assurance period for integrated reports should be determined between three months and one year. P6- Data, lack of policy affects the communicative (written-oral) audit quality. There is no time limit. Whenever the frm wants. It may take at least one week or two months on average. The team should include experts related to the subject. P9- Environmental engineers should be included in the team providing assurance for integrated reports. P10- The team that provides assurance to integrated reports should include people with statistical knowledge. P14- I think that limitations and problems may differ on the basis of sector and area. P16- A non-fnancier should lead the team that provides assurance for integrated reports.
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“If you think it is possible for an independent professional frm to give a single opinion on the assurance of the integrated report, how should this opinion be shaped and do you think this will add value to the integrated report? Why?” The answers given by the participants to the question are as follows: P1- Financial information should be given separate opinion, non-fnancial information should be given separate opinion. P2- More than one authorized person (according to their feld of expertise) must sign the assurance report. Assurance on fnancial information and non-fnancial information should be given in the form of a single opinion. P5- It is suffcient for only one authorized person to sign the assurance report. P6The lead auditor signs. As with fnancial information, it is not correct for a person to sign, but also needs to be signed by a specialist. In other words, the report should be signed by two people, but it should contain one opinion. “Is it necessary to follow an integrated approach for the assurance provided to integrated reports? If necessary, how should the scope and result of assurance services be communicated to users?” The answers given by the participants to the question are as follows: P1- While providing assurance regarding integrated reports, an integrated approach should be followed. At the end of the assurance report, detailed explanations should be
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Integrated Reporting and Combined Assurance 479 made in Appendix format. It is not mandatory to open the information given in the attachments to the public (users). P2- Risks, defciencies, etc. in the assurance report should be noted. P7- An integrated approach should be followed. I think it should be shared in a short and concise report in a single report. P9- Assurance provided for integrated reports can be made by a single institution or by 3rd party audit institutions with expertise on the subject. Companies that stand out in different areas of expertise can be used to provide assurance on special issues such as water, CO2 and fnancial audit issues. It is also possible to work with a single company that has gained expertise in all subjects. The assurances obtained can be presented to users in a separate section in the report. Thus, users have the chance to examine the scope and content of the assurances. P12- The result regarding the assurance given to the integrated report should be in the format of assurance. P13- The opinion reached as a result of the assurance should be given in the frst paragraph. P14- Required. It should be delivered in the report. “Can you give information about the combined assurance process? What could be the manner and reason for implementing the combined assurance model? How would you structure this model in terms of triple responsibility holders? How does the implementation of the combined assurance model affect integrated reports?” The answers given by the participants to the question are as follows: P7- Those with triple responsibility should work in an integrated manner. I think it is a structure that needs to be executed together. It actually affects the quality of the report. It is an element that increases quality. P14- Integrated reporting tries to answer the question of how the enterprise creates value specifc to its business model. In order to do this, a report is prepared within the framework of certain principles specifc to that enterprise.
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Results and Recommendations This study was carried out in order to develop and carry out the assurance process of integrated reports. This process is planned to be carried out by investigating the roles undertaken by those who publish integrated reports and participate in the assurance of integrated reports and the factors affecting their execution. In this context, semi-structured interviews were conducted with academicians, independent auditors, and employees in organizations that publish integrated reports, which have knowledge and experience on this subject, and conducted surveys. The interview form adapted from Maroun (2017) and prepared by the researcher and the questionnaire prepared from the interview data was used as a measurement tool. In this section, the related literature was scanned in line with the fndings obtained as a result of the research, the assurance process of the integrated reports was evaluated, and some suggestions were developed. The research was conducted with a semi-structured interview form containing nine questions.
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480 Seval Kardes Selimoglu and Gul Yesilcelebi In line with the fndings obtained from the interviews within the scope of the research, it can be said that while the sample has an awareness of integrated reporting, they do not have enough awareness about the combined assurance process. When the related national literature is examined, it can be said that while many studies have already been carried out on integrated reporting, the fact that there are very few studies on combined assurance supports this situation. Legal organizations in Turkey such as Public Oversight Accounting and Auditing Standards Authority, Capital Markets Board of Turkey and Istanbul Stock Exchange are required to make an integrated report about legislative work. In this way, it can be aimed to produce an integrated report with a higher quality and legal basis. According to the responses of the participants regarding the legal authorization theme, it is necessary to issue an integrated report. In this case, it can be said that they do not believe that the number of integrated reports will increase without a coercive force. Participants also authorize the Public Oversight of assurance provided to the integrated report on Turkey. In order for such regulations to be accepted in practice, due to Turkish culture, it must be established in legal legislation. Since these regulations will bring some sanctions with them, they can be carried into practice life more quickly. It may be appropriate to include such regulations in a relevant article in the Turkish Commercial Code. Of course, it will not be enough to transfer this only to the legal legislation and an institution should be authorized to follow the practices related to this application, which may be the Capital Markets Board of Turkey. Due to legal requirements related to corporate governance and corporate sustainability is a follower of the Capital Markets Board in Turkey, if these are thought to be associated with the integrated report, this is the closest institution is still subject to Capital Markets Board of Turkey. As a result, another link of legal legislation and authorization is the dimension of national and international standards to be established in the context of the relevant legislation for the establishment of assurance. If this size is required to undertake the task to publish standards provide assurance that the regulatory agency standards required of the Public Oversight in Turkey. When the research conducted in the related literature is examined, the points to be taken into account regarding the assurance process of integrated reports have been revealed. In this study, it has been reached what the factors related to this process should be. According to this research, the integrated report is seen as an indicator of value. While thought that all stakeholders should be involved in the integrated report preparation process, there was a consensus when the top management was the main responsible party. It was stated among the participants that the integrated reports should be subject to an assurance system, the elements and specifc areas in these reports should be determined, assurance should be given about sustainability, and the management-internal auditor-independent auditor are the persons responsible for providing assurance. In addition, while existing standards seem insuffcient to provide assurance to integrated reports, the opinion that a separate assurance set should be established has emerged. It was concluded that the assurance team should be led by an independent auditor and external experts should be used in the team. While the assurance period varies between three months and one year according to the participants, it is considered
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Integrated Reporting and Combined Assurance 481 diffcult to ensure the reliability of the predictive data. In addition, there was no consensus among the participants on whether to give a single opinion or two separate views to express their opinions. However, it was agreed that the assurance report should be signed by more than one person according to their feld of expertise. The idea that the assurance result should be in an assurance format and the risks should be specifed and some cases should be explained in the annexes. Depending on the results of the research, it may be possible to make suggestions for future studies. Research is intended only for participants in Turkey. With the increasing importance given to the integrated report and issuing more integrated reports, this research can be applied to those who have knowledge in this feld, including management, internal audit, and independent audit, to make a comparison. In addition, the information contained in the integrated report and the reasons for their adoption can be revealed by conducting interviews with investors and senior managers. The population is covered by the inclusion in the legal institutions such as Public Oversight Accounting and Auditing Standards Authority and Capital Markets Board of Turkey, but when interviewed person institution binding on the fact that refuse to negotiate because it will be a meeting of research is deprived the lack of legal establishment size. The fact that these legal institutions are more directive and guiding in the integrated report; it may reveal the need to make arrangements in the country’s legislation on this issue. The research has only been handled in terms of accounting and auditing. It may be useful to examine integrated reporting from cultural, managerial, and legal aspects in researches.
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482 Seval Kardes Selimoglu and Gul Yesilcelebi Kahyaoglu, S. (2016). Creating value with modern internal audit. Denetisim, (9), 9–11. Kahyaoglu, S. (2011). The internal audit profession as an assurance model. Retrieved from http://denetimakademisi.com/wp-content/uploads/2017/10/B%C4%B0R-G% C3%9CVENCE-MODEL%C4%B0-OLARAK-%C4%B0%C3%87DENET%C4%B0M-MESLE%C4%9E%C4%B0.pdf. Accessed on June 20, 2016. Karasar, N. (2011). Scientifc research method (22nd ed.). Ankara: Nobel Publishing. Lewis, I. (2013). The role of internal auditing in providing combined assurance: assessing internal fnancial controls. University of Pretoria, Faculty of Economic and Management Sciences, Department of Auditing. Maroun, W. (2017). Assuring the integrated report: Insights and recommendations from auditors and preparers. The British Accounting Review, 49(3), 329–346. Nkonki Actualising Empowerment. (2011). Combined assurance, http://www.nkonki.com/ images/cmn/assurance_publication.pdf/. Accessed on January 20, 2017. Patton, M. Q. (2014). Qualitative research and evaluation methods (M. Butun and S. Demir, Trans. Ed.). Ankara: Pegem. PriceWaterhouseCoopers [PwC]. (2010). Preparation, perseverance, payoff, Implementing a combined assurance approach in the era of King III. Business School, Risk Assurance. Retrieved from https://www.pwc.co.za/en/assets/pdf/steeringpoint-kingiii-combinedassurance-11.pdf. Accessed on November 20, 2018. Senal, S., & Ates, B. (2018). The combined assurance approach and the role of internal audit (pp. 279–295). International Academic Forum, the Institute of Internal Auditors of Turkey Publication, Publication No. 15. Tavsancil, E., & Aslan, E. (2001). Content Analysis and application examples. Istanbul: Epsilon Publishing. The Institute of Directors in Southern Africa [IoDSA]. (2009). King report on governance for South Africa 2009 (King III Report/Code).Retrieved from http://c.ymcdn.com/ sites/www.iodsa.co.za/resource/resmgr/king_iii/King_Report_on_Governance_ fo.pdf. Accessed on December 14, 2016. The International Integrated Reporting Council [IIRC]. (2013a). The international framework. Retrieved from https://integratedreporting.org/wp-content/ uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf. Accessed on May 03, 2020. The International Integrated Reporting Council [IIRC]. (2013b). Capitals background paper for IR. Retrieved from https://integratedreporting.org/wp-content/uploads/2013/03/ IR-Background-Paper-Capitals.pdf. Accessed on May 20, 2020. The International Integrated Reporting Council [IIRC]. (2020). International framework. Retrieved from http://integratedreporting.org/resource/international-irframework/. Accessed on July 03, 2020. Yesilcelebi, G. (2019). Creating combined assurance for the integrated reports: A Delphi Technique Investigation on the Awareness in Turkey. Unpublished Doctoral Thesis, Anadolu University, Institute of Social Sciences, Eskisehir. Yildirim, A., & Simsek, H. (2000). Qualitative research methods in the social sciences. Ankara: Seckin Publishing.
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Index Absolute poverty, 245–246 Access to fnance, 412 Account inactivity ratio (AIR), 419 Account ownership of any type, 379–380 in fnancial institution, 380 Account usage ratio, 419 Accounting practices, 87 during pandemic, 89–91 Accounting-based criteria, 134 Acquisitions, 434–435 Ad hoc model, 185 Affective commitment, 58 Affective organizational commitment (AOC), 51, 57–58 (see also Normative organizational commitment (NOC)) and KSB, 59–60 reciprocity and, 58–59 Akrah, 347 Amana Funds, 354 Antakya Long Bazaar, 153, 155–156 Anthropomorphism, 355 Appraisal, 280–300 Arduino, 369 Arellano bond estimation, 32, 41 Asia Pacifc Energy Research Centre (APERC), 181 Asian fnancial crisis, 278 Asset Management Company (AMC), 300 Assets in funded private pension plans and public pension reserve funds, 25–28 Association of Southeast Asian Nations (ASEAN), 184 Asymmetric impact, 320 Asymmetry, 322, 325 Atmosphere, 268, 271
Attitudes, 218 use of crypto currency, 218–220 Autoregressive Distribution Lag (ARDL), 299 Autoregressive distribution lag approach (ARDL approach), 320, 325 CUSUM stability test results, 339 result post-crisis period, 332 Autoregressive fractionally integrated moving average (ARFIMA), 323 Autoregressive Integrated Moving Average (ARIMA), 299 Ave Maria Catholic Values Fund (AVEMX), 352 Average variance extracted values (AVE values), 229, 450 Bailout funds, 90 Balance sheet, 90 Bank of Canada, 308 Bank of England, 308 Banks, 278 specifc determinants, 278–280 Bartlett’s tests, 225 Basel norms, 300 Behavior, 442 Big-bath accounting, 90 BIST Informatics index, 138 Bitcoins, 11, 214 analysis of study, 224–233 conceptual model and hypotheses development, 218–222 implications for practice, 235 implications for theory, 233–234 instrument development and data collection, 223–224
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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484 Index methodology, 222–233 sampling procedure, 222–223 wallets, 214 Bivariate correlation, 68–70 Blockchain, 214, 218 Blocking factor, 371 Bombay Stock Exchange (BSE), 320 Bonding SC, 153–154, 162 Borrowing from family or friends, 380 Borrowing from fnancial institution, 380 Borsa Istanbul, 399 data and methodology, 401–403 empirical results, 403–406 literature review, 399–401 Brand citizenship behavior (BCB), 442–443 limitation and directions for future studies, 457–458 methodology, 449–450 practical implications, 456–457 results, 450–453 theoretical background and hypothesis development, 444–445 theoretical implications, 455–456 Brand commitment (see also Internal branding (IB)) mediation role of, 447 serial multiple mediating effects, 447–448 Brand trust, 443 mediation role, 446 serial multiple mediating effects, 447–448 Bridging SC, 153–154, 162 Business owners, fndings of interviews conducted with, 159–172 Capital (Gavras), 204 Capital markets, 18 Capitalism and Freedom, 201 Carbon dioxide (CO2), 268
Cash Conversion Cycle (CCC), 399–400 Cash payments, 12 Cash-in-hand, 11–13 Cement, 398 Cement industry, 398, 401 Central Bank of Nigeria (CBN), 383 Central Banking, 269–270 Central banks, 269, 272 (see also Policy options for central banks) in fnancial sector, 311 responsibility, 270–273 risks for, 269 Chimera, 207 Christianity, 345–347 Classical energy security, 180 Climate bank, 315–316 Climate change, 269–270 diffculty in measuring, 271–272 events, 308 in fnancial sector, 310–311 origins, 309–310 risk, 268 shifting responsibility to others, 273–274 Climate change capital surcharge (CCC surcharge), 311–315 Climate change impact ratio (CCI ratio), 312 Climate change risk assets (CCRAs), 312 Climate mitigation, 273 Cognitive consistency theory, 446 Collective action, fndings for, 168–170 Combined assurance, 464–465 fndings, 474–479 literature review, 470–472 model, 467–470 research methodology, 472–474 results and recommendations, 479–481 Commitment, 51–52, 56–57, 63–64, 443
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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Index 485 Commitment-trust theory, 443, 447–448 Common method bias (CMB), 64 Communication sub-sector fndings, 144–146 Communities of practice, 50 Competition, 430 concentration of companies, 433–435 EU rules on concentration control, 436–437 implementation of concentration procedures, 437–438 law, 430–431 legal aspect of competition in Kosovo, 431–433 literature review, 430–431 negative consequences, 435 relevant market, 435–436 types of concentrations and consequences on, 435 Composite reliability (CR), 229 Compound index, 184 Concentration of companies, 433–435 implementation of concentration procedures, 437–438 Confdence intervals, 124 Confrmatory factor analysis (CFA), 67–68, 225 ConocoPhillips (COP), 352 Consumer price index (CPI), 320 Consumer trust, 200–201 Content analysis, 280–300, 350–351 Cooperation category, fndings for, 168–170 Coordinated consequences, 435 Coronavirus, 88 Corporate social responsibility (CSR), 200, 342–345 approach, 201–204 measures, 343 studies, 200 Coverage of funded and private pension plans, 21–25 COVID-19, 87–88
Credit card ownership, 380 Critical sampling, 251 Criticism of fnancial inclusion, 4–13 Cronbach’s alpha, 101, 452 coeffcients, 224, 229 Crypto currencies, 11, 212 dis-adoption of, 212–213 link between attitude toward and intention to use, 221 link between perceived risk and attitudes toward use of, 218–220 link between perceived risk and intention to use of, 220–221 literature review, 213–214 Cryptographic money, 213 Cultural sensitivity, 99 Current ratio (CR), 399 Customer-oriented applications, 364, 366 DALI systems, 372–373 Dash, 214 Days of inventory outstanding (DIO), 400 Days payables outstanding (DPO), 400 Days sales outstanding (DSO), 400 Debit card ownership, 380 Decent lives, 246 Defned contributions (DC), 22 Dependency index, 184 Depression, 250 Descriptive statistics, 224 Developmental Model of Intercultural Sensitivity (DMIS), 98 Dharma, 347–348 Digital currency, 11 Digital fnance, 9, 11, 382 Digital money, 10–11 Digital payment technology, 384 Digital wallets, 11 Division of labor, 201 Domestic production index, 184 Dominant position, 431
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
486 Index
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Dot. com bubble, 2 Double translation method, 224 Downward social comparison, 249 Durbin–Watson test, 140–143 E-wallets, 11 Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), 398–399, 401 Earnings Before Interest and Taxes (EBIT), 401 Earnings management, 90 Earnings per share (EPS), 135–136 Econometric analysis, 39–44 Econometric models, 32–33 Economic competition, 153, 155 Economic crisis, 88 Economic Development Foundation (IKV), 208 Economic enterprises, 201 Economic gains, 120 Economic growth, 34–39 effect of fnancial inclusion on, 391–392 Economic reforms, 320 Economic value added (EVA), 137 Educational Volunteers Foundation of Turkey (TEGV), 208 Elected offcials, 273 Electronic Cards, 382 Electronic money (e-money), 213 Employee commitment, 56–57 in tourism enterprises, 97 Empowerment of women, 385 Energy Balance Tables, 183 Energy imports, 180, 182 Energy policies, 180 Energy saving, 372–373 Energy security, 180, 184–185 basic elements, 181 defnitional framework, 180–183 index, 186 indicators, 182
Energy Security Index, 185 Energy Security Physical Availability Index (ESPAI), 183 Energy Security Price Index (ESPI), 183 Energy supply security, 184 empirical literature review, 183–185 empirical results, 187–189 index methodology and data set, 185–187 in Turkey, 184 Enterprise, 432 Environment, 271 Environmental issues, 204, 207 Environmental responsibility, 342, 345 Ethereum, 214 Ethnocentrism, 98 Ethnorelativism, 98 European Central Bank (ECB), 268 European Commission (EC), 29 European Union (EU), 431 law, 431 rules on concentration control, 436–437 Evaluation criteria, 134 Exchange rate and SPs, 323–324 Exchange-traded funds, 349 Exclusive control, 434 Exploratory factor analysis, 224 External assurance providers, 469 Extrinsic motivation, 51 ExxonMobil, 352 Fair value accounting, 89–90 Faith-based environmental accountabilities, 345–349 Faith-based funds, 342 conceptual framework, 342–349 research method and data analysis, 349–355 Finance, 6–7 Financial access ratio (FAR), 418–419 Financial crisis, 89 Financial education, 6, 390–391 Financial exclusion, 412–413
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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Index 487 Financial inclusion, 2–3, 412–413 benefts, 7–8 critical dimensions, 3 criticism, 4–13 in Nigeria, 378–379 theoretical perspectives, 3–14 Financial institutions, 269–270, 308 activities, 272 Financial literacy, 5–6 training, 386 Financial performance, 398 Financial regulator, 383–384 Financial reporting, 87 Financial risk, 216, 218–219, 310 Financial sector, 269–270 central bank and risk in, 311 climate change in, 310–311 Financial technology (Fintech), 381, 385 Financialization of poverty, 6–7 Financially excluded population (FEP), 417 Financially included population, 416–417, 420, 424–425 Finnet database, 401 Firms, 398 Fixed-rate risk capital, 312–315 Forced fnancial exclusion ratio (FFER), 418 Foreign Economic Relations Board (DEIK), 208 Fossil fuels, 183 short-term risks, 186 Turkey’s imports of, 193–198 Franciscansim, 346 Free and effective competition, 431 Free market economy, 430 “Friday for the Future” movement, 206 Gaining control, 434 Gallipoli war, 122 GARCH, 324 Gender inequality, 3 General Energy Balance Tables, 186
General Model of Workplace Commitment, 60 General Workplace Commitment, 61 Generalized Estimating Equations (GEE), 32 Generalized Method of Moments (GMM), 32, 41, 299, 403 Global warming, 205 (see also Climate change) Globalization, 99 Goodness of ft indices, 228 Governments, 274 Great Britain, 127–128 Great World War, 120–121 Gross domestic product (GDP), 18, 41, 152, 414 Guidestone Funds, 352–353 Hardware marketing sub-sector fndings, 142–144 Harman’s single factor test, 66–67, 229 Hausman–Taylor Regression, 32 Herfndahl-Hirschman Index (HHI), 184–185 Hindu Heritage Endowment, 354–355 Hinduism, 347–348 Holt–Winters, 123 Hotel enterprises, 97, 99 Hypothesis testing, 452–453 Inclusion, 3 proponents, 3–4 Income inequality, 3 Income smoothing, 90 Income–increasing earnings management, 91 Independent variables (IVs), 320 Index of fnancial inclusion (IFI), 412 literature on, 413–414 and measurement, 414–419 Industrial production index (IIP), 320 Industrial productivity index and SPs, 324–325 Industrial Revolution, 201
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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488 Index Industry production index (IPI), 406 Infation, 19, 41 and SP movement, 322–323 Instagram, 248 Institutions, 163–165 Integrated reporting, 464 479 and framework, 465–467 literature review, 470–472 research methodology, 472–474 results and recommendations, 479–481 Intellectual company, 203–208 Intensity index, 184 Intention to use, 212 use of crypto currency, 220–221 Intercultural communication, 96–98 Intercultural sensitivity, 96–97 conceptual perspective toward, 97–100 data collection tools, 100–101 distribution of reliability analysis, 101 distribution regarding demographic characteristics, 104 distribution regarding factor analysis, 102–103 fndings and evaluation, 101–114 levels of hotel employees, 99 purpose and method of research, 100 Intercultural Sensitivity Scale (ISS), 100 Interest rate (Irate), 320 and SP, 323 Internal assurance providers, 469 Internal audit, 471 Internal branding (IB), 442–443 limitation and directions for future studies, 457–458 methodology, 449–450 practical implications, 456–457 results, 450–453
theoretical background and hypothesis development, 444–445 theoretical implications, 455–456 International climate change organizations and groups, 273–274 International Energy Agency (IEA), 181 International Integrated Reporting Council (IIRC), 465 International Monetary Fund (IMF), 205, 269 International Standard on Assurance Engagements (ISAE), 471 International Standards on Auditing (ISA), 471 Internet of Things (IoT), 364 architectural structure and operating system of IoTbased smart home systems, 367–369 diffculties encountered within the scope of smart home systems and, 373–374 and energy saving, 372–373 fndings, 367–374 IoT-based alarm and security systems, 371–372 literature review, 364–366 and mobile-supported customerfocused smart home systems applications, 369–373 research methodology, 366–367 smart home systems, 365–366 Intrinsic motivation, 51 Investing, 342 Investments, 20 performance of private pension funds and public pension reserve funds, 28–29 Iota, 214 Islam, 347
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Index 489 Istanbul Culture and Art Foundation (IFCA), 208 İzmir Culture, Art and Education Foundation (IKSEV), 208
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Jewish Socially Responsible Investing, 355 Johansen Cointegration technique, 323 Joint control, 434 Joint venture, 434 Judaism, 348–349 Kaiser–Mayer–Olkin tests (KMO tests), 101, 225 Karma, 348 Knowing process, 50 Knowledge, 50, 52, 56 creation and innovation, 53 of employees, 50 sharing, 50, 53 Knowledge management systems (KM systems), 52 Knowledge sharing behavior (KSB), 51–54, 63 affective organizational commitment, 57–60 bivariate correlation, 68–70 confrmatory factor analysis and measurement model, 65 data collection tool, 63 employee commitment, 56–57 fndings, 72 Harman’s single factor test, 66–67 limitations and future recommendations, 75 management strategies, 53 measuring instrument, 63–64 mediation of organizational commitment, 61 methodology, 62 normative organization commitment, 58, 60 population and sample size, 62–63 rationale of study, 52
reciprocity and, 55–56 relationship among reciprocity, KSB, and AOC, 70–71 relationship among reciprocity, KSB, and NOC, 71–72 research design, 62 results, 64 sample characteristics, 64–65 skewness and kurtosis, 65–66 social exchange theory, 54–55 KNX system, 368 Kolmogorov–Smirnov test, 101 Kosovo, 430 legal aspect of competition in, 431–433 market, 430 Kruskal–Wallis test, 108, 108 Kurtosis, 65–67 Lagrance Multiplier test (LM test), 402 Law on the Protection of Competition (LPC), 432 Learning, 248–249 Learning category, fndings for, 170–172 Lending restriction to businesses in industries, 315 Liability risks, 310 Linear autoregressive distribution lag approach, 320 LISREL statistical program, 224, 225 Litecoin, 214 LKCM Aquinas funds, 351–352 Log of consumer price (LNCPI), 320 Log of Industrial Production index (LIIP), 320 Log of Interest rate (LIN), 320 Log of Real exchange rate (LREER), 320 Log of stock market index (LSTK), 320 Long-term energy security, 181 Loss avoidance accounting, 90
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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490 Index Macroeconomic determinants, 278–280 Macroeconomic policies, 271 Mann–Whitney U test, 111–112 “Mark to market” accounting rules, 89 Market capitalization (MC), 19 Market economy, 430 Market value added (MVA), 134, 137–138 Market-to-Book Ratio (MB), 136, 399 Massachusetts Institute of Technology (MIT), 181 Material possessions, 257 Maturity, 343 Measurement model, 65 scales, 240–241 Merger and acquisitions, 433 Meta-analysis of pension reforms in OECD countries, 29–32 Meyer and Allen model, 57 Micro and small businesses (MSBs), 152 Mis-measurement of risk, 271–272 MMA Praxis Mutual Funds, 353 Mobile Bank Apps, 382 Mobile systems, 366 Modern energy security, 180 Monero, 214 Multinational enterprises, 96 Mutual funds, 349, 353 Nem, 214 Neo, 214 Net operating proft after taxes (NOPAT), 137 Networks, 154–155 fndings for participation in networks category, 165–168 for Greening Financial System, 268 New Covenant Fund, 352
Nigeria, fnancial inclusion in, 378–379 areas for improvement, 384–388 barriers to, 389–391 factors, 381–384 effect of fnancial inclusion on economic growth, 391–392 literature review, 388–391 trends and analysis, 379–381 Nigerian studies, 388–389 Nobel Prize in Economics (Friedman), 201 Non-autoregressive distribution lag (NARDL approach), 320, 322, 325, 327, 332 Non-cash payment alternatives, 12 Non-fnancial business sector (NFBS), 152 Nonperforming loans (NPLs), 278 critical analysis and fndings, 280–300 empirical studies related to NPLs and determinants for risk management, 281–298 practical implication for Asian countries, 302–303 recommendation of study, 300–302 research design, 279–280 Normative commitment, 60 Normative organizational commitment (NOC), 51, 58 and KSB, 60 reciprocity and, 60 Norms, 154–155 Norms, 163–165 North Cyprus, 442 Optimistic envy, 250 Ordu Yardımlaşma Kurumu pension fund (OYAK pension fund), 22 Organisation for Economic Co-operation and Development (OECD), 18, 21–22, 25
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
Index 491
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comparative analysis of linear trends for assets of pensional funds and economic growth, 34–39 meta-analysis of pension reforms in, 29–32 Organizational climate, 443 moderating role, 448–449 Organizational commitment, 51–52, 56–57 mediation of, 61 Organizational communications, 50 Ottoman Empire, 120 data and methodology, 123–124 facts, 121–123 fndings, 124–129 in war time, 123 Ottoman government, 121–122 Pakistan pharmaceutical industry, 51 Pandemic, 87–88 accounting practices during, 89–91 relaxing accounting rules during, 91 Pay-as-you-go schemes (PAYG schemes), 20–21 Pearson correlation coeffcient, 40–41 Pension funds, 18 assets, 20 comparative analysis of linear trends for assets of pensional funds and economic growth, 34–39 econometric analysis and study fndings, 39–44 impact, 20 literature review, 19–21 meta-analysis of pension reforms in OECD countries, 29–32 methodology, 32–34 performance, 19 private pensions and reserve funds of public pensions, 21–29 Pension savings, 19
Perceived risks, 213, 215–218 use of crypto currency, 218–221 Performance risk, 216 Personal interactions, 50 Pessimistic envy, 250 Phenomenological approach, 250 Physical appearance, 256–257 Physical risks, 217, 310 5-point Likert Scale, 224 Policy options for central banks, 308, 311 climate bank, 315–316 climate change capital surcharge, 311–315 fxed-rate risk capital, 312–315 important assets, 316 lending restriction to businesses in industries, 315 literature review, 309–311 Political psychology, 4 Politicians, 273 Population, 62–63 Post-achievement slack hypothesis, 8 Poverty, 4–6, 245–247, 412 (see also Relative poverty) reduction, 378 Price to earnings ratio (P/E ratio), 136, 399 Privacy risk, 217, 220 Private pension fund assets (PPA), 25 Private pensions of public pensions, 21 assets in, 25–28 coverage of, 21–25 investment performance of, 28–29 Professional pension systems, 22 Professional/academic career, 257–258 Prospectuses, 349–350 Psychological risk, 217 Public debt (PB), 19 Public Disclosure Platform (KAP), 138 Public relations, 200
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
492 Index
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Qualitative analysis methods, 472 Qualitative research approach, 472 Qualitative study method, 250 Quick fx hypothesis, 7–8 Random-effect panel regressions, 402 Rate of fnancial exclusion (RFE), 417 Rate of fnancial inclusion index (RFI index), 414–415, 420–433 Ready mixed concrete industries, 398 Real effective exchange rate (REER), 320 Reciprocity, 51–52, 55, 63 and AOC, 58–59 and knowledge sharing behavior, 55–56 and NOC, 60 Regression analysis, 69–70 model, 134 Regulatory sandbox for fnancial innovation, 386–388 Relative deprivation, 246 Relative poverty, 244–247 analysis and results, 253–254 data collection tool, 252 limitations and assumptions, 252–253 methodology, 250–253 result models of study, 260–262 sample of study, 251–252 statements of belonging to themes, 254–258 validity–reliability, 252 Relaxing accounting rules, 91 Relevant market, 435–436 Reliability analysis, 450 tests of scales, 224–225 Religion-based organizations, 345 Reputation management, 203 Reserve funds of public pensions, 21 assets in, 25–28 coverage of, 21–25 investment performance of, 28–29
Return on assets (ROA), 135, 401 Return on equity (ROE), 135, 399 Return on sales rate, 136 Review, 280 Richness of Nations (Smith), 201 Ripple, 214 Risks, 215 in fnancial sector, 311 management, 268, 271–272, 468 Risky external energy supply (Rees), 187 Robo-advisors, 385 Rohm Bank, 312 Rural fnancial inclusion rate index (RFIR index), 416 S&P 500 companies, 310 Sample size, 62–63 Sanctions, 163–165 Saved at fnancial institution, 380 Saved using savings club or person outside family, 380–381 Security, 364–365 Sensors, 366 Shannon Weiner-Neumann indices (SWN indices), 185 Shannon-Wiener Index (SW Index), 185 Short-term energy security, 181 Skewness, 65–67 Smart home systems, 365–366, 373 Social capital (SC), 152 benefts, 155 data analysis, 157–159 explanation of scales, 156–157 fndings of interviews conducted with business owners, 159–172 literature review, 153–155 research methodology, 155–172 Social comparison, 249 Social constructivist theory, 4 Social exchange theory (SET), 52, 54–55 Social learning theory (SLT), 245 social media and, 247–249
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
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Index 493 Social life, 256 Social media envy on, 250 platforms, 248 and SLT, 247–249 Social networking sites (SNSs), 258 Social networks, 154–155 Social Responsibilities of the Businessman (Bowen), 202 Social responsibility, 201 Social risk, 217 Socially responsible investments (SRIs), 342–343 Socially responsible mutual funds (SR mutual funds), 355 Software sub-sector fndings, 139–142 Specialization, 201 Stabilisation and Association Agreement (SAA), 436 Steward Mutual Funds, 354 Stimulus packages, 90 Stock price (SP), 320 literature review, 322–325 methodology, 325–326 movements, 320 research objective, 325 results, 327–331 source of data and techniques, 325 Stock-fow-fund ecological macroeconomic model, 310 Supportive knowledge sharing, 56 Sustainability, 202 Sustainable development, 183 Sustainable pension development, 19 Systemic banks, 89 Task Force on Climate-related Financial Disclosures, 268 Technology Acceptance Model, 234 Thrivent Financial, 353–354 Time risk, 216–217, 219 Timothy plan funds, 354 Tokyo Exchange Index, 323 Total invested capital (TC), 137 Tourism, 97
Tourism enterprises, 96 employees in, 97 Traditional performance evaluation criteria, 134 performance evaluation criteria, 135–138 research, 138–146 Transaction account, 8–10 Transition risks, 310 Travel/vacation, 254–256 Triple exponential smoothing (see Holt–Winters) Trust, 154, 443 fndings for trust category, 159–163 fndings for trust promoting mechanisms, 163–165 Turk Administration Association (TSID), 208 Turkey, 406, 465 energy resources in, 180, 183 energy supply security, 184 Turkey Combating Soil Erosion, for Reforestation and the Protection of Natural Assets (TEMA), 208 Turkey Economic and Social Studies Foundation (TESEV), 208 Turkey Family Health and Planning Foundation (TAPV), 208 Turkey third Sector Foundation (TÜSEV), 208 Turkish Education Foundation (TEV), 208 Turkish Industrialists and Business People’s Association (TUSIAD), 208 Turkish industry, 208 Türkiye Çimento Müstahsilleri Birliği (TCMA), 398 UNESCO Climate Change Initiative, 268 Unilateral consequences, 435 United States Conference of Catholic Bishops (USCCBs), 351
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.
494 Index Upward social comparison, 249 Urban fnancial inclusion rate index (UFIR index), 416 USSD Codes, 382
Wealth of Nations, The (Smith), 202 Weighted average cost of capital (WACC), 137 Wheat prices, 124–125 Written contributions, 50 Z-Wave mesh network structure, 368 Z-zones, 206 Zcash, 214
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Validity analysis, 450 tests of scales, 224–225 Value at Risk Methodology (VAR), 299 Vector Error Correction Model (VECM), 299 Venezuela crisis, 278 Virtual money, 213
Voluntary fnancial education, 6 Voluntary fnancial exclusion (VFE), 417–418
New Challenges for Future Sustainability and Wellbeing, edited by Ercan Özen, et al., Emerald Publishing Limited, 2021.