The event that led to shift of banks from ‘Originate and Hold’ (OTH) model to Originate and Distribute’ (OTD) model is the global financial crisis that started in the mid 2008. The financial crisis led to a magnification of financial and real economy that was interlinked. The problems began 2007 when the United States’ financial institutions started collapsing, contributing to a world failure of financial confidence. This spread to Europe and the entire world thus shocking the entire economy. Many credit financial markets started experiencing financial problems with fiscal institutions refusing to lend money to each other. The emerging markets were affected by this crisis resulting to decreased revenues, increased unemployment as well as trade and capital flows being adversely affected. This led to the decoupling theory in the global markets that led to shifting of banks from OTH model to OTD model.
The global banking system was transformed in terms of lending practices. Initially the banking system utilized the ‘Originate to Hold model’ whereby the loans of the borrowers were left on the balance sheet of the lender until the duration of maturity (Berndt and Gupta 726). In the OTD model, banks were allowed to create loans, earn their fees and then distribute them to other investors. The OTD model emerged about two decades ago due to explosive growth in the secondary associated loan market. This model has been widely used since the global financial crisis. This is because of its advantages such as risk diversification, relief of capital and reduced cost of capital.
One of the main reasons of government intervention with comparative advantage is to collect market failure. The government will use the technique of price mechanism through which commodities are not supposed to be sold below or above the price equilibrium level. Another reason is to ensure income and wealth are distributed equally. The government may set laws governing a free market economic system to ensure that scarce resources are well distributed. This will enable them to achieve their objectives of equitable resource allocation. Lastly, this move is applied to ensure there is improvement in economic performance. The use of fiscal policy intervention technique will help them to change the level of demand for different products thus improving economic performance.
The market seekers and political safety seekers are appropriate motives that will make UAE/GCC firms become multinational. First, market seekers will help these firms to decide if they will enter into the market or launch their services in the new market. Understanding the market is crucial because these firms will be able to determine the way new customers will feel about their current services. The firms will also be able to find out what the customers expect and compare their sales performance with their competitors. In case of political safety seekers, the firms will be able to determine the political environment that is favorable for them to carry out their business.
There are recent diverse corporate governance studies and updates for UAE/GCC firms. First, Hawkamah is currently shaping development of corporate governance in countries such as Middle East, North Africa and Central Asia. It has promoted core values of transparency, accountability as well as responsibility. Hawkamah is working on policy and practical aspects in order to reform the corporate governance in the region. Secondly, they have promoted best practices that aim to raise awareness of corporate governance. This has been done through seminars where conferences manuals on superior corporate governance are developed (Hawkamah 2010). Lastly, they are recently focusing on developing legal frameworks with respect to corporate governance and increasing training capacity for their members.
Berndt, Antje and Anurag Gupta. “Moral Hazard and Adverse Selection in the Originate-to-
Distribute Model of Bank Credit.” Journal of Monetary Economics. 56.5 (2009): 725-743. Print.
Hawkamah (2010). Hawkamah the Institute for Corporate Governance. 2009. Web 30 Sep. 2011