YASHA Athalladhira Irawan

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FINAL REPORT

1) PRISONER’S DILEMMA
At the beginning of the second quarter of the class, the new members were assigned a
task by the Professor to present possible solutions in mitigating the free-riders problem in
the Seminar class by referring to the Nash Equilibrium. First thing first, we have to
understand the basic concept of Nash Equilibrium, along with the matrix. Nash
Equilibrium is a concept of a game theory that determines actions mathematically and
logically by revealing each player’s strategy to other players.
Essentially, knowing and understanding the accurate model of the Nash Equilibrium
matrix is crucial. There are a lot of Nash Equilibrium matrix examples provided on the
internet, some are true and some are misleading. The most correct form of the Nash
Equilibrium’s matrix approved by the Professor is as shown below:

Cooperate Defect

Cooperate (8, 8) (0, 10)

Defect (10, 0) (2, 2)

Both parties will get a score of 8 if both of them cooperate and will get a score of 2 if
both of them defect. However, if only one party cooperate or defect, then the defected
party will get the score of 10, while the cooperated party will only get the score of 0,
which is worse. We are allowed to tamper with the matrix to find the perfect solutions to
make both parties want to cooperate instead of defect or choose to be a free-rider within
the group. We successfully came up with two solutions, which are:
a) Preventive Reinforcement Project, where we will give the award for “Best
Seminar Member” and “Best Presenter” for 1 male and 1 female; and
b) Virtual Catch Up, where all the members will meet for 30 minutes before or
after class every 2 weeks and do activities together, ranging from a game
night, movie night, sharing session, or heart-to-heart session.
In the case of these solutions are implemented, this will create incentives for all
Seminar members to actively participate and avoid being a free-rider to the class, which
will change the matrix to the form of as follows:

Cooperate Defect

Cooperate (8+2, 8+2) (0, 10)

Defect (10, 0) (2, 2)

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2) BLOCKCHAIN AND ISLAMIC TRADE FINANCE

Over the years, financial services have emerged from many fintech start-ups. The
confidence in fintech has accelerated venture capital in the US, UK, and India. A
relatively small number of startups have captured most financial services investments in
the bitcoin and blockchain space. Following that, the use of AI, cognitive platforms, and
blockchain have become a major part of any meaningful solution in the future, where the
quality of data is considered crucial. The existence of blockchain could reduce costs and
improve the ability of financial institutions to synchronize data and transactions.
However, this can only work if everyone has successfully implemented the technology
effectively.
Blockchain has 3 components consisting of transactions, transaction records, and a
system that verifies and store the transaction. It can be used as smart contracts where the
system decentralized transaction ledger to register, confirm, and transform. In the
traditional ways of payment settlement, settlement and clearing are occupied by banks
only because the swift network is solely operated by banks. In exchange for the bank’s
services, we have to pay a monopoly rent or monopoly stick fee. This is where blockchain
could act as the perfect solution, make it possible for us to avoid paying the fee, and break
through the traditional way of banking.
Furthermore, trust plays a significant role in traditional trade finance to the extent of
if there is no trust, then no trade will be executed. Trust plays an important role as a
lubricant to reduce transaction costs. If a high degree of trust exists within the
community, then a general clause of a contract would suffice.

Tawarruq is a financial instrument used when a buyer purchases a commodity from a

seller on a delayed payment basis, while the buyer selles the same commodity to a third
party on paid-on-the-spot payment basis. In a nutshell, it means that the buyer borrows
cash needed to make the initial purchase. After the buyer secures cash from the second
transaction, the buyer will pay the original seller the installment or lump sum payment
that the buyer owes (that is a cost plus markup, or better known as murabahah). The
illustration of tawarruq can be seen below:

Source: https://www.dummies.com/personal-finance/islamic-finance/reverse-murabaha-tawarruq-in-islamic-finance/

3) MARKET MECHANISM AND MARKET FAILURE

The main reason why we study economics is to learn how to economize our scarce
resources, and the answer to that is economic equilibrium. In the market mechanism or
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price mechanism, the supply curve is drawn as an upward slope, the demand curve is
drawn as a downward slope, and the point of intersection between the demand curve and
the supply curve is called the equilibrium. In the equilibrium, there is no occurrence of
deadweight fair loss, which signals inefficiency. If the information is not perfectly
available in the market, it means that the market mechanism is operating ineffectively,
thus led to Market Failure.
Firstly, it is obvious that a credit crunch by banks, which is the condition when there
is excess demand in loanable funds, lenders’ hesitations for granting loans appear because
of the asymmetric information regarding the project for which the loan is required
between the lender and the borrower. Secondly, adverse selection is also considered as an
effect of market failure. Looking from the risk management’s point of view, banks should
decide a separate interest rate for each borrower, based on the screening result of
individual firm’s creditworthiness. However, in reality, it is difficult to collect complete
information of each borrower since it requires a huge transaction cost in analyzing and
collecting data. Therefore, the banks usually categorize each firm based on their capital
strength, business type, and so on, to make it easier to decide a standard lending rate
applicable for each firm class. Thirdly, the moral hazard caused by interest rates is also
highlighted. Naturally, banks cannot monitor completely how a firm conducts its business
or project. In this case, a moral hazard is a risk that the firm may implement a business or
project with higher risk, without giving heads up to the bank regarding whether the
interest rate is raised for some reason.

4) FINANCIAL RESTRAINT
Financial restraint is a policy where the Japanese government had to intervene in the
credit market. Under this policy, the bank plays a role as financial intermediaries, hence if
banks collect 100, then banks can provide loans of 100 as well. If the rate is low, then
there will be less incentive to deposit, as shown in the supply curve by the banks.
Following that, if the rate is high, then there will be less incentive to borrow, as shown in
the supply curve by the firms. To understand it clearly, please take a look at the figures
below:

When the government intervenes in the deposit market, it sets the policy in R D, where
no banks are allowed to set a higher deposit rate than R d (ceiling rate). The availability of
funds in the market is symbolized as Q 1, banks could offer at the RL, and the gap between
these two is called bank rents. Bank rent opportunities (excess) will be captured by banks.
The government only regulates the protective financial restraint policy to protect the
banks. Thanks to the government intervention, banks could reach to R L1 level, resulting in
gaining more profits. Under financial restraint, the opportunity of depositors will be
hampered for paying the cost. Thus, the elasticity rate of deposit against quantity should
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be low, depicted in a steep supply curve. To comprehend it more clearly, please take a
look at the figure below.

5) JAPANESE MAIN BANK SYSTEM

The main bank system is the reciprocal delegation of monitoring among banks.
Without the main bank, there will be less possibility of success. There are 5 important
aspects in the main bank system, which are bank loans, bond issue related activities,
shareholdings, payment settlement account which becomes the key factor, and supply of
management, information, and resources. The main bank is expected to be in the position
of controlling, monitoring, and governing who acts as the debt-provider. The followings
are the 5 types of banks, which consist of:
a) City banks, who are allowed to set up branches all over Japan and able to
provide short term loans. The examples among others are Mitsui Sumitomo,
Mitsubishi UFG, and Mizuho Bank;
b) Regional banks, who are not allowed to operate all over Japan or can only
operate within their prefecture and able to provide short term loans. The
examples among others are Oita Bank and Fukuoka Bank;
c) Long Term Credit Banks (LTCBs), who are not allowed to provide short term
lending. The examples among are Industrial Bank of Japan (IBJ) and Long
Term Credit Bank of Japan (LTCB);
d) Trust banks; and
e) Governmental banks, such as JP Bank.
The most important aspect for banks when deciding to provide loans to firms is to ask
the question of “how is your main bank responding to your loan request?”. This is
important since the main bank will provide the remaining parts on repayment to the
firm’s other banks in providing a fresh new loan for the firm. Other banks don’t need to
worry about the firm’s credibility or ability to repay because the party who will pay the
firm’s loan back is the main bank. Therefore, the main bank should never be bankrupted.
The unique point of the main bank system is the integrated monitoring. However, this
concept goes against the concept of division of work and specialization, or so-called the
American way. Under the Japanese way, Japanese bankers are demanded to master all
tasks, sometimes they play the role of underwriters, and sometimes as incubators for
SMEs. Japanese bankers do all of ex-ante, interim, and ex-post monitoring. On the other
hand, in the American way, one person is assigned to do one task only. Under the Anglo-
American system, investment bankers play the role of underwriters, venture fund
managers act as incubators, and rating agencies play the role of evaluators.
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Lastly, the main bank system is very much endorsed by the Convoy system, where the
Minister of Finance conducts everything. The Convoy system is the collateral or security
of the main bank system; therefore, no banks should ever experience bankruptcy.

6) FINANCIAL SLUMP
Over time, the Japanese main bank system became inefficient and unproductive for
the economy. Overall, the Japanese economy was divided into 3 periods:
a) “Catching-up” period (1960-1975):
It is when Japan’s economy enjoyed the “high economic growth” until
the mid-1970s, which were almost all efforts are likely to be rewarded.
During this period, many Japanese corporations have to allocate their
resources to the R&D department to compete with the European and
American economies after not being able to utilize cheap labor due to the
economic growth over the era.
b) “Frontier” economy period (1975-1990s):
Around the mid-1970s, many major firms in manufacturing have
successfully become financially matured, where it becomes unnecessary to
borrow money from banks since they issue more corporate bonds. This
affected Japanese banks to lost many of their clients. To maintain the profit,
banks started expanding loan exposures to manufacturing SMEs and non-
manufacturing SMEs, thus resulting in the role of SMEs in Japan is quite
large.
The birth of the Plaza Accord has encouraged Japanese manufacturers
to ship their production base overseas, thus creating a significant rise in the
overseas production ratio. To operate the overseas production base, many
Japanese manufacturers need to create new banking relationships with local
banks, which led to 9 Japanese banks being ranked as the top 10 largest banks
in the world. Japanese banks were quite dominant back then, while major
American banks were nearly bankrupted because American banks have
already gone through the financial deregulation era, while the Japanese
government still conducted the financial restraint policy. The United States
thought that it was not fair and forced the Japanese government to go under
financial deregulation to level the playing field or have a fair competition.
Moreover, after the savings and loans crisis (S&L Crisis) in the 1980s
where many US banks were bailed out using taxpayers’ money, a new policy
was developed to monitor banks, better known as Capital Adequacy
Requirement (CAR) policy. The United States demands this policy to be
universal, requiring all banks across the globe to have a minimum capital of
8%.
c) Extraordinary prolonged economic/ financial stagnation period

7) CONTRIBUTIONS
In this Seminar class, I assume that I have actively contributed to the group
presentation regarding Prisoner’s Dilemma, revising slides three times and helping my
group mates tampered with the Nash Equilibrium matrix to find the perfect solutions, as
well as doing Financial Restraint presentation with Diandra, and often ask and answer
questions during the lecture class and in the Facebook group discussion.