Banking on population

In his latest contribution to The Economist's special edition "The World in 2010", HSBC chairman Stephen Green refers to the "demographic window" as an opportunity for the financial services sector to expand towards the developing world. Indeed, there is not one but two demographic windows, which if sufficiently explored could offer a plethora of opportunities not only for those involved in the banking sector but also in developing social security systems, insurance, actuarial business and industries' financial legal frameworks.

In the literature, this unprecedented demographic opportunity is usually referred to as the first and the second demographic dividends. From this year on, the developing world's working population will outnumber their dependent population, thus creating a scenario where the number of workers will be higher than the number of consumers.

Given the right economic conditions, this leads to an exceptional income per head ratio. However, this demographic dividend has its "shelf life" due to longevity, not fertility-related, population growth. In other words, the number of consumers ultimately tends to outpace the number of new entrants into the labour force. This is expected to happen around 2050, which is why the first demographic dividend is only temporary.

A four-decade opportunity for financial services to spread their operations across the continents from Ghana to Guam is nevertheless ample time. Mason and Lee (Genus, LXII, 2, 2006) state that the turn of the millennium has marked an increase of income per effective consumer by 35 per cent in South Korea, 30 per cent in Thailand and 20 per cent in China, merely due to the first demographic dividend.

Unlike the first, the second demographic window is not limited in time. As generations of former working-age population in developing countries themselves have fewer children, in the absence of available informal care they would increase their saving for old age. In the developing world, it is this saving which is usually not channelled through formal banking sectors. This is where Mr Green's bank-ability of the "un-banked" money kicks in.

Given the right policies, this accumulation of parents' wealth, to be passed on to their leaner offspring, occurs perpetually. If these savings were channelled to the productive domestic investment, capital deepening would result in higher rates of economic growth and thus even higher levels of saving. These now formally aggregated, "bank-able" savings could be a "lifeline" for future economic growth in the developing world.

The right social and legal frameworks are necessary to facilitate this scenario, apart from the economic and political prerequisites. The premise is that merely because of their huge relative numbers, the incomes and spending of the elderly population will not be jeopardised, that is, they will not be allowed to decline drastically below the income of other social strata. Needless to say, the progress can be achieved only in the scenario of sustained economic growth - employment growth rate to match the working-age population growth rate.

The questions which come to mind are the following. What are the risks of these openings and what is the size of these financial markets? In the long run, developed countries certainly look less attractive. The low fertility scenario projections for 2050 indicate (Golini in Genus LVIII, 3-4, 2002) that in countries such as Italy or Spain there will be four deaths to each newly born baby - a rather moribund prospect for the banking business venture.

It is not always easy to project the size of the potential market, particularly in the developing world, nevertheless the growth of the middle class with savings potential in the emerging economies is noteworthy. Currently, one in four Chinese people is middle class. Given China's population size of 1.3 billion, this is a massive yet expanding market.

The most recent global collapse of the financial sector teaches us that transparency and prudence matter as much as creativity and innovation. Due to the present and future demographic and economic factors, geography of banking - corporate and individual - is about to change. Therefore, financial services providers with the right knowledge and adequate long-term vision could benefit from this population backdrop for their "out of the beaten track" operations.

Knowledge of the local customs and norms in money management, inheritance rules and pension entitlements in these emerging financial markets could be as important as smart decision-making. While the North and the West are trying to make sense of their risk management and transparency rules, the South and the East will be rounding up stashed cash of their hinterland people and burgeoning middle classes. Immigration can work both ways, it is just a question of stepping in and getting involved.

The author lectures on demography at the University of Malta.