Retail capital markets are national and international exchanges, mostly formal though informal in some cases, where individuals can invest or obtain funds; because of the small size of most of these transactions, usually financial intermediaries such as banks or share brokers are involved. Retail capital markets can be broken into two broad segments: (1) debt, which refers to any agreement that obligates a borrower to repay a lender principal borrowed, along with a charge for borrowing the money, typically interest on the principal; and (2) equity, which refers to the issuance of shares in a business enterprise that promises no fixed principal or interest payments but entitles shareholders to the value of the portion of the enterprise that they own. In equity markets, the retail segment will consist largely of investors, each one owning a relatively small number of shares.
With respect to debt, most retail borrowers and investors will use intermediaries such as banks or other nonbank institutions to conduct transactions. Retail customers might be either “lenders” in the sense that they provide funds to intermediaries through deposits or investments in instruments such as certificates of deposit (CDs) or they might be borrowers, taking loans for various purposes such as mortgage loans for residential property purchases or business loans for small business enterprise. The retail segment of the debt market is very heterogeneous from the point of view of lenders, often quite profitable but also potentially very competitive and sometimes quite difficult to assess in terms of borrower creditworthiness.
A very large amount of personal retail borrowing is conducted by individuals through credit card purchases. Total credit card balances in the United States alone were estimated to amount to about US$900 billion in 2007, according to the U.S. Federal Reserve Board. Credit card borrowing offers tremendous convenience to retail customers but if balances are carried the interest charges are generally very high. Much regulation, especially in the United States, focuses on the cost of credit card interest, though not always effectively. There has also been concern about excessive issuance of credit cards to users with poor credit histories and recent turmoil in world financial markets has seen an increase in consumer credit card defaults.
On the equity markets, buying and selling of shares by individuals through brokers engaged in the larger organized stock exchanges in New York, London, and Tokyo is the primary retail activity. In 2005 the U.S. stock market was by far the biggest globally in terms of market capitalization (i.e., total value of shares traded), equaling almost $US17 trillion, or 39 percent of the total of the world’s share market capitalization. The Japanese share markets accounted for 11 percent of the total, followed closely by the United Kingdom at 7 percent. Share markets in developing countries, especially in China, have seen rapid relative growth. Individuals may invest directly in shares by creating and managing their own portfolios or indirectly through managed funds (e.g., mutual funds) that take investment increments from individuals and collectively invest and manage those contributions in a portfolio on behalf of the individuals. To a certain degree these collective vehicles, such as pension funds, blur the distinction between retail and wholesale capital markets, indicating that these distinctions, while practical, are not always stable or easy to draw.
The retail activities described thus far are organized and formal and largely done through intermediaries. Retail capital can also be raised individual to individual and outside organized markets. Two simple examples would be a promissory note between one individual lending funds to another individual; or an equity investment by an investor in a small unincorporated business. Data for the scale of these activities is necessarily very sketchy but it could be a sizable amount and for many borrowers the only alternative in securing funds for business, investment, or consumption.
Microfinance And Remittances
In the developing world, two significant retail capital market institutions bear mention. One is microfinance, which refers to the making of very small loans, perhaps the equivalent of a few dollars, to especially impoverished borrowers who are engaging in or starting to engage in very small enterprise. The terms may be preferential but generally commercial, with the intention of making a profit for the lender.
In countries such as Bangladesh, where the concept was originated, the default rates have been low and the investments generally successful if the process of lending and credit analysis is carefully managed.
Another important source of retail capital flow globally consists of remittances between individuals across national borders. One particular system, referred to by various terms in different countries but most widely known as hawala or hundi in south Asia, relies on exchanges of funds in which an expatriate borrower in one country will receive money from an expatriate lender in the same country by having a related party located in the home country draw down a balance in the home country in return for an increase in a balance to the expatriate lender. Done for commission but without formal paperwork and on “trust,” the hawala system accounts for considerable but immeasurable transactions across national borders. Technically illegal in many countries, much of the exchange is done for legitimate retail capital raising but some portion of it is used for money laundering and other illicit activities.
- Linda Allen, Gayle DeLong, and Anthony Saunders, “Issues in the Credit Risk Modeling of Retail Markets,” Journal of Banking and Finance (v.28/4, 2004);
- Frank J. Fabozzi and Franco Modigliani, Capital Markets: Institutions and Instruments (Prentice Hall, 1996);
- Mohammed El Qorchi, Samuel Munzele Miambo, and John F. Wilson, Informal Funds Transfer Systems: An Analysis of the Informal Hawala System (International Monetary Fund, 2003);
- Standard & Poor’s, “Table 1368. United States and Foreign Stock Markets—Market Capitalization and Value of Shares Traded by Country: 1990 to 2005,” Standard & Poor’s Emerging Stock Markets Factbook (Standard & Poor’s 2006);
- S. Federal Reserve Board of Governors, “G.19: Consumer Credit” (2007), www.federalreserve.gov (cited March 2009).
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