Introduction

The Finance industry is one of the biggest industries in the world in terms of profitability. It is extremely important to mention that every industry needs financial backup and that is provided by the financial services industry. Since financing is an integral part of every company operating in the world every industry needs to emphasize this aspect of the business. A commonly believed adage “Money brings money” addresses our thoughts and hence companies rather to say industries focus more on financial investments every time they start a business and want to run their operations smoothly. The financial services industry forms an extremely important industry since it answers not only the needs of the clusters of organizations forming an industry but also the financial wants and needs of common people and hence it becomes an important industry overall (Frank & Goyal, 2009).

The financial industry is one of the biggest industries in the world as it spreads across the entire world and is likely to be there where there is a subject of transaction and monetary discussions going on. So, we can easily understand the kind of importance it holds in the society. The concept of banks and finance is not new and came into existence in medieval times. The history of finance goes back a long way as since man understood the importance of reserving funds for themselves they started coming together and forming ideas to keep and reserve money in their ways (Gill et al., 2010). The bank started operating in 1472 continuing its legacy and still helping people with their deposits and loans et cetera. Since then the development of finance has spread throughout the entire world. Primeval civilizations like Mesopotamian and Greek civilizations had their ways of recording and accounting business transactions and monetary transactions. Hence it could be understood that finance and finance have always been important for people. With time passing by and different organizations creeping in, the importance of financial services increased rapidly As people started earning more and more their need for saving increased, and hence the importance of banks increased (Nazir & Afza, 2009).

Best Essay Writing Service – Center Of All The Essays Writing Writers

The finance industry is also way ahead of other industries in terms of business and profitability because they are directly related to business operations and hence organizations must keep a check on their financials effectively for which the banking and the financial service sectors will come into the picture. The banking and financial system is not only important for companies or industries but also affects the economy of a country and hence the world economy. The financial sector is highly important for the development of the economic conditions of the world and hence it stands important for every industry. Recent statistics by the World Bank show that the finance sector holds the best market capitalization that is around 94.6% in 2014 and remittance of around 510.9 billion received in US dollars which is the most by any industry in the world (Healy & Palepu, 2012). Like every other industry, the financial services industry has had a rough patch during the global recession and had. To lose a chunk of its income but with the world recovering from that period the situation is on its way to stabilization.  Earlier there were not so many banks and other financial institutions but with time passing by and the world realizing the importance of banking and finance there are numerous different financial institutions which has started working within this industry and the industry now controls around 60% of the market share. It is contemplated that the banking and finance industry will gain more importance in the coming future. In the last few years, finance has emerged as a crucial aspect even in the traditional finance system (Anbar & Alper, 2011).

The present discussion will be mainly based on the discussion of the profitability of the financial services industry and will talk about the various factors that are likely to affect the profitability of the industry. The analysis will mainly confine to the different factors involved in gaining profitability in this industry and will not take into account the other related aspects. The boundary of the discussion will be in the fact that it will not entirely analyze the overall banking and finance industry and will only analyze the different factors, their change over time, and their impact on the business. The present study will be done based on the existing literature from present and previous works in the form of articles, journals, and other electronic sources available. The analysis of the gathered literature will help to draw conclusions and recommend measures for improvement of profitability of the finance and financial services industry in the future (Chen & Wang, 2010).

Are You Looking For Urgent Essay Help?

Profitability Assessment of Finance and Finance Industry

In the introduction section, it is clearly said that the banking and finance industry is one of the major industries driving the world economy. This industry has around 60% of the market share which has come out through one of the statistics organized by the World Bank. It is important to understand that the banking and finance industry is an industry that provides financial oxygen to other industries and hence it holds paramount importance in the context of the world economy. Over the years there has been a lot of research that has shown the importance of the finance industry as it helps other industries not only with capital but also helps them to allocate financial resources prudently. There are many countries in the world for instance the United States who highly rely on their banking and finance industry to make economic welfare in the nation and hence it could be said that the finance industry plays a huge role in the economic development of a nation. The finance sector has gained new heights after its deregulation in the last couple of decades (Hasan & Dridi, 2010). During the global recession every industry had to face hurdles and the banking and finance industry was no different but it is important to mention that the world finance sector has kind of recovered from the glitch created by the global recession. Even though the finance sector has gained importance over the years it had to face serious pressure from the external and internal environments. Certain factors drive the aspect of profitability in the banking and finance sector. These factors are extremely important to be analyzed effectively to understand the trend in the finance industry and the impact of these factors on the profitability of this sector.  The financial services industry has different sectors of financial businesses under it. Banking stands to be one of the most important sectors in the finance industry. Banking has sub-sectors and commercial and domestic insurance is a crucial subgroup of the banking sector (Novy-Marx, 2013). It is important to mention that banking alone is a huge section of the finance industry and stands to be a key sector for the earnings and revenue generated in the business. Consumer banking, commercial banking, and diversified financial services from other parts of the finance industry. The real estate investment trust is a contemporary section of the financial services industry. The financial performance of the finance industry and its profitability are driven by several attributes that need to be discussed to meet the demands of this paper.

MBA Integrated Communication Assignment 2 Sample

• Central bank policies: Most of the banking and finance companies are major lenders and investors in different fields. One of the major parts of the income of the finance industry comes from the return on investment from other industries. With the world undergoing globalization different industries have expanded their operations overseas and hence the scope and opportunity for the finance industries have increased vastly. In this scenario, central bank policies have become extremely important for finance companies to operate smoothly and develop their profitability. The central banks of different countries are responsible for setting capital requirement plans tax rates and interest rates which help the finance companies to increase their profitability. It is important to mention that central bank policies stand to be of paramount importance for finance companies to improve their business and increase profitability (Trujillo‐Ponce, 2013).
• Government Regulations: Government regulations are extremely important for better profitability of finance companies. The different financial rules and legislations laid down by the governments of respective countries play a huge part in the development of businesses and increase their profitability. Normally governments tend to be lenient towards the financial sector of a country which helps the government to have proper and smooth financial resources at their disposal helping the country to operate properly hence governmental regulations stand to be important. It is essential to mention that it depends on the governments of countries to decide how they want to use financial services and banking facilities. Most of the governments use finance to build up the infrastructure which the other industries thrive on so, it could be concluded that the finance industry is key for the development of other industries and hence this industry’s return on investment will naturally be high (Boyacioglu, 2009).
• Competition: Competition is an extremely important attribute that affects the profitability of companies and hence finance industry. The finance market is perfectly elastic and hence the competition in the market has increased which shows that better competition means higher profitability. The finance industry has several bigger companies that have affected the profitability of the industry. The financial industry is perfectly competitive and hence it could be said that perfect competition is a crucial factor in driving profitability. Though it is said that perfect competition could affect the profitability of the companies since the financial market is an even market it could be said that competition is important for better profitability.
• Substitutes: The substitutes of financial products are an important aspect that affects the profitability of the industry. The threat of substitute products is an extremely essential aspect of this industry. The aspect of profitability depends on the substitute product available in the market. An increase in the costs of substitute products stands to be an important aspect of the profitability of the industry. There are different substitute financial products in the market for example commercial banking, retail banking, et cetera (Hoberg & Phillips, 2010).
• Profitability strategies: The increase in profitability is extremely important for companies and hence for an industry. Especially in the finance sector, it is important to know that several profitability strategies could be used to increase profits. The finance industry paradigm shifts from time to time depending on the market structure. There are different strategies that companies make use of, effectively to understand the nerve of the market. Easy banking facilities and insurance services are effective ideas to offer the consumers that help in increasing the profit of a business and inevitably for an industry.

HI6008 Business Research – Research Methods

Apart from these, it is extremely important to mention that external factors are also important indicators of profitability for the finance industry. Hence a macro analysis will be adequate to comprehend the profitability of the finance industry. A PEST analysis of the finance industry will give a better idea of the external environment of the industry.

Political: The political platform is an extremely important aspect for every industry to grow and develop and hence every industry must get political favor. The financial industry is one industry that is the backbone of every country and hence the political backbone must provide ample support to the finance industry. The world political condition needs to be regulated to ensure that the financial industry runs smoothly as this provides the financial backbone to other industries, As the industry earns mostly from investment returns it is important that the politically the financial industry is upright (Davydenko, 2010).

Economic: The finance industry is extremely important in terms of the economy. The finance industry has become a huge contributor to the economic development. It is one of the service industries that ensure economic development as this industry mobilizes funds in the economy. The finance industry is an industry that supports other industries through proper financial resources. The economic infrastructure of the world depends on the activities of the finance industry and hence it could be said that the finance industry is an important sector that ensures economic development.

Social: The finance industry is an extremely important industry for the society. The finance industry is one of the biggest employers in the world market and hence it could be said that it has been able to provide satisfactory employment to the world and reduce the problem of unemployment. It is also important to say that economic corruption has increased and the main reason for this is an increase in the importance of the value of money. The finance industry will have to mitigate the risk of corruption which will help in the development of the society.

Technological: The technological aspect of the finance industry has been given paramount importance. The integration of technology in this industry has helped the consumers as well as allowed them to run the industry sustainably. Online banking facilities have helped to reduce the use of paper and enforce green banking (Albertazzi, & Gambacorta, 2009).

In the recent past despite innovative ideas and plans the finance industry has not been able to capitalize on them which is a problem. It is important to mention that the above profitability factors in the industry have serious implications. In the future, the finance industry is expected to increase and hence the competition in the industry will increase further and hence the profitability will tend to decrease, On the other hand, substitute products will give people more and more options which will increase sales of finance products. With the increase in competition, the central bank policies will develop and will become much tougher for newer companies and hence will keep the market stable for a long time. These profitability factors must be likely to change shortly and hence it is likely to increase the profitability of the industry (Staikouras & Wood, 2011).

Current Human Resource Management

Conclusion

The present situation in the finance industry is highly competitive and hence to increase its profitability it is important to take measures. The central bank of a country plays an important role in developing ideas and plans to keep the finance industry stable hence it should keep the policies strict and whichever company passes through the tests and stands abide by the rules and laws should only be given entry. On the other hand, it is also important for finance organizations to come up with constantly new products to fulfil the needs and demands of the consumers. Overall it could be said that the above factors of profitability are effective for this industry and will be effective even in the future (Staikouras & Wood, 2011).

References

Albertazzi, U. and Gambacorta, L., 2009. Bank profitability and the business cycle. Journal of Financial Stability, 5(4), pp.393-409.

Anbar, A. and Alper, D., 2011. Bank specific and macroeconomic determinants of commercial bank profitability: Empirical evidence from Turkey. Business and Economics Research Journal, 2(2), pp.139-152.

Boyacioglu, M.A., Kara, Y. and Baykan, Ö.K., 2009. Predicting bank financial failures using neural networks, support vector machines, and multivariate statistical methods: A comparative analysis in the sample of savings deposit insurance fund (SDIF) transferred banks in Turkey. Expert Systems with Applications, 36(2), pp.3355-3366.

Chen, M.K. and Wang, S.C., 2010. The critical factors of success for information service industry in developing international market: Using analytic hierarchy process (AHP) approach. Expert Systems with Applications, 37(1), pp.694-704.

Davydenko, A., 2010. Determinants of bank profitability in Ukraine.Undergraduate Economic Review, 7(1), p.2.

Frank, M.Z. and Goyal, V.K., 2009. Capital structure decisions: Which factors are reliably important? Financial management, 38(1), pp.1-37.

García-Herrero, A., Gavilá, S. and Santabárbara, D., 2009. What explains the low profitability of Chinese banks? Journal of Banking & Finance,33(11), pp.2080-2092.

Gill, A., Biger, N., & Mathur, N. 2010. The relationship between working capital management and profitability: Evidence from the United States.Business and Economics Journal, 10(1), 1-9.

Hasan, M.M. and Dridi, J., 2010. The effects of the global crisis on Islamic and conventional banks: A comparative study. IMF Working Papers, pp.1-46.

Healy, P. and Palepu, K., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Hoberg, G. and Phillips, G., 2010. Fundamental and financial industry booms and busts. The Journal of Finance, 65(1), pp.45-86.

Nazir, M.S. and Afza, T., 2009. Impact of aggressive working capital management policy on firms’ profitability. IUP Journal of Applied Finance,15(8), p.19.

Novy-Marx, R., 2013. The other side of value is the gross profitability premium. Journal of Financial Economics, 108(1), pp.1-28.

Staikouras, C.K. and Wood, G.E., 2011. The determinants of European bank profitability. International Business & Economics Research Journal (IBER),3(6).

Trujillo‐Ponce, A., 2013. What determines the profitability of banks? Evidence from Spain. Accounting & Finance, 53(2), pp.561-586.