Showing papers on "Financial sector development published in 2006"
TL;DR: In this article, the authors study how foreign bank penetration affects financial sector development in poor countries and find that when foreign banks are better at monitoring high-end customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare.
Abstract: We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when foreign banks are better at monitoring high-end customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration. In the empirical section, we show that, in poor countries, a stronger foreign bank presence is robustly associated with less credit to the private sector both in cross-sectional and panel tests. In addition, in countries with more foreign bank penetration, credit growth is slower and there is less access to credit. We find no adverse effects of foreign bank presence in more advanced countries.
503 citations
TL;DR: This paper examined the relationship between finance and income inequality for 83 countries between 1960 and 1995 and found that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993).
Abstract: Although there are distinct conjectures about the relationship between finance and income inequality, little empirical research compares their explanatory power We examine the relationship between finance and income inequality for 83 countries between 1960 and 1995 Because financial develop ment might be endogenous, we use instruments from the literature on law, finance, and growth to control for this Our results suggest that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993) Although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development, as suggested by Greenwood and Jovanovic (1990), this result is not robust We reject the hypothesis that financial development benefits only the rich Our results thus suggest that in addition to improving growth, financial development also reduces inequality
409 citations
Posted Content•
TL;DR: Workers' remittances to developing countries have become the second largest type of flows after foreign direct investment as mentioned in this paper, and they contribute to increasing the aggregate level of deposits and credit intermediated by the local banking sector.
Abstract: Workers' remittances to developing countries have become the second largest type of flows after foreign direct investment. The authors use data on workers' remittance flows to 99 developing countries from 1975-2003 to study the impact of remittances on financial sector development. In particular, they examine whether remittances contribute to increasing the aggregate level of deposits and credit intermediated by the local banking sector. This is an important question considering the extensive literature that has documented the growth-enhancing and poverty-reducing effects of financial development. The findings provide strong support for the notion that remittances promote financial development in developing countries.
275 citations
TL;DR: In this article, a framework is presented to help explain enforcement, the impact on corporate governance when rules are not enforced, and what can be done to improve corporate governance in weak enforcement environments.
Abstract: More than regulations, laws on the books, or voluntary codes, enforcement is a key to creating an effective business environment and good corporate governance, at least in developing countries and transition economies. A framework is presented to help explain enforcement, the impact on corporate governance when rules are not enforced, and what can be done to improve corporate governance in weak enforcement environments. The limited empirical evidence suggests that private enforcement tools are often more effective than public tools. However, some public enforcement is necessary, and private enforcement mechanisms often require public laws to function. Private initiatives are often also taken under the threat of legislation or regulation, although in some countries bottom-up, private-led initiatives preceded and even shaped public laws. Concentrated ownership aligns incentives and encourages monitoring, but it weakens other corporate governance mechanisms and can impose significant costs. Various steps can be taken to reduce these costs and reinforce other corporate governance mechanisms. But political economy constraints, resulting from the intermingling of business and politics, often prevent improvements in the enforcement environment and the adoption and implementation of public laws.
157 citations
TL;DR: In this article, the authors reviewed the Bank's experience with shelter lending and identified lessons learned so that current demands can be more effectively addressed, focusing more on how the changing policy environment has affected the structure of Bank assistance, rather than on how Bank assistance has changed the policy environment.
Abstract: By reviewing the Bank's experience with shelter lending, this paper seeks to address the question of whether the Bank has helped developing countries deal with the inevitable problems that arise with urbanization, particularly problems with the provision of shelter. It reviews the Bank's performance, with a focus on identifying lessons learned so that current demands can be more effectively addressed. In contrast to earlier studies, however, this review focuses more on how the changing policy environment has affected the structure of Bank assistance, rather than on how Bank assistance has affected the policy environment. This perspective is taken for two reasons. First, in recent years, benevolent changes in the policy environment are helping to ensure that better shelter conditions are provided to the poor in rapidly growing cities. However, despite the generally improved environment, some serious and often long-standing obstacles are impeding and, in some places, preventing progress. The emphasis on the policy environment allows the Bank to give greater weight to these constraints. Second, Bank shelter assistance is no longer an experimental program, as it was when the first review took place. Shelter assistance is now a mature sector, with 278 loans (including International Finance Corporation [IFC] loans). As a result, this review devotes considerably more attention to the outcomes of the Bank's shelter projects than did the earlier studies. Conclusions about shelter lending are by no means completely positive, however. In particular, while the nature of the lending has evolved to embrace the private sector more fully, it has also moved away from the poverty orientation that was for many years the core focus. If the Bank is to make a meaningful contribution to the Millennium Development Goal of affecting the lives of 100 million slum dwellers, this trend will have to change.
140 citations
TL;DR: In this article, the authors examine the ways in which financial sector development policy might contribute to poverty reduction, particularly by supporting the growth of micro and small enterprises (MSEs).
Abstract: This paper examines the ways in which financial sector development policy might contribute to poverty reduction, particularly by supporting the growth of micro and small enterprises (MSEs). Specifically, the paper draws on case studies and empirical work on the changing role of MSEs in the development process and the access of MSEs to informal and formal finance, including the role of microfinance. A number of research priorities relating to the links among financial policy, small enterprise development and poverty reduction are identified for the immediate attention of researchers engaged in contributing to the achievement of the Millennium Development Goal (MDG) of halving global poverty by 2015. Copyright © 2006 John Wiley & Sons, Ltd.
122 citations
Posted Content•
TL;DR: The authors investigated the finance-inequality nexus in urban China using Chinese provincial data over the period of 1986-2000 and applying the Generalized Method of Moment (GMM) techniques.
Abstract: Financial development has strongly influenced the pattern of income distribution in post-reform China. In this paper, using Chinese provincial data over the period of 1986-2000 and applying the Generalized Method of Moment (GMM) techniques, we investigate the finance-inequality nexus in urban China. Empirical results show that China’s financial development significantly helps to reduce urban income inequality. However, these positive distributional gains from financial sector development have been severely offset by the increased urban unemployment and massive layoffs brought about by the implementation of radical urban reforms and the restructuring of state-owned enterprises.
90 citations
TL;DR: The authors found that most of the variation in bilateral remittance flows can be explained by a few gravity variables, suggesting that remittances may not play a major role in limiting vulnerability to shocks.
Abstract: This paper creates the first dataset of bilateral remittance flows for a limited set of developing countries and estimates a gravity model for workers' remittances. We find that most of the variation in bilateral remittance flows can be explained by a few gravity variables. The evidence on the motives to remit is mixed, but altruism may be less of a factor than commonly believed. Most strikingly, remittances do not seem to increase in the wake of a natural disaster and appear aligned with the business cycle in the home country, suggesting that remittances may not play a major role in limiting vulnerability to shocks. To encourage remittances and maximize their economic impact, policies should be directed at reducing transaction costs, promoting financial sector development, and improving the business climate.
76 citations
TL;DR: Workers' remittances to developing countries have become the second largest type of flows after foreign direct investment as discussed by the authors, and they contribute to increasing the aggregate level of deposits and credit intermediated by the local banking sector.
Abstract: Workers' remittances to developing countries have become the second largest type of flows after foreign direct investment. The authors use data on workers' remittance flows to 99 developing countries from 1975-2003 to study the impact of remittances on financial sector development. In particular, they examine whether remittances contribute to increasing the aggregate level of deposits and credit intermediated by the local banking sector. This is an important question considering the extensive literature that has documented the growth-enhancing and poverty-reducing effects of financial development. The findings provide strong support for the notion that remittances promote financial development in developing countries.
64 citations
Posted Content•
TL;DR: In this paper, the authors examined the relationship between remittances and growth and found that remittance can substitute for a lack of financial development and hence promote growth in less financially developed countries.
Abstract: There has been little systematic empirical study on the relationship between remittances and growth. This paper attempts to examine this relationship. Using a newly constructed cross-country of data series for remittances covering a large sample of developing countries, we relate the interaction between remittances and financial development and its impact on growth. We analyze how a country's capacity to use remittances and its effectiveness in doing so might be influenced by local financial sector conditions. Given the difficulty of borrowing in developing countries, we explore the hypothesis that remittances can substitute for a lack of financial development and hence promote growth. The empirical analysis shows that remittances can promote growth in less financially developed countries. This relationship controls for the endogeneity of remittances and financial development using a Generalized Method of Moments (GMM) approach, does not depend on the particular measure of financial sector development used, and is robust to a number of sensitivity tests.
61 citations
TL;DR: In this article, the authors study how foreign bank penetration affects financial sector development in poor countries and find that when foreign banks are better at monitoring highend customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare.
Abstract: We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when foreign banks are better at monitoring highend customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration. In the empirical section, we show that, in poor countries, a stronger foreign bank presence is robustly associated with less credit to the private sector both in cross-sectional and panel tests. In addition, in countries with more foreign bank penetration, credit growth is slower and there is less access to credit. We find no adverse effects of foreign bank presence in more advanced countries.
01 Jul 2006
TL;DR: This article developed a methodology to construct detailed indices of financial sector development across countries and uses it to create a new panel database of financial sector development in Middle East and North Africa (MENA) countries.
Abstract: This paper develops a methodology to construct detailed indices of financial sector development across countries and uses it to create a new panel database of finan-cial sector development in Middle East and North Africa (MENA) countries. It combines existing quantitative data with information from comprehensive surveys undertaken in 2000-01 and 2002-03. The data show that some MENA countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, the nonbank financial sectors and sup-porting institutions are in need of reform. The MENA region ranks far behind industrialized countries and East Asia in financial sector development. Copyright 2006, International Monetary Fund
Book•
08 Sep 2006
TL;DR: In this article, the key issues and constraints faced by East Asian countries in developing their financial markets which are at different stages of development, drawing on global experience, are analyzed in terms of efficiency, access and safety and soundness.
Abstract: This study analyzes the key issues and constraints - in terms of efficiency, access and safety and soundness - faced by East Asian countries in developing their financial markets which are at different stages of development, drawing on global experience. The study takes stock of the initiatives being undertaken at the regional level to foster greater financial integration as a means of deepening and diversifying financial markets, and on the policy issues that need to be addressed at the domestic level to deepen and diversify financial markets and to actually benefit from the actions that are being taken at the regional level.
TL;DR: In this article, the authors empirically examine the determinants of remittance flows at the cross-country level and find that the migration level is the main driver of the remittance flow, even after controlling for the endogeneity bias.
Abstract: The authors empirically examine the determinants of remittance flows at the cross-country level. They consider, among other things, the significance of the level of migration, the education level of migrants, and financial sector development in determining remittances. Given the potential endogeneity problems, the migration and financial development variables are instrumented in the estimation. They find that the migration level is the main driver of remittance flows, even after controlling for the endogeneity bias through instrumental variable estimation. The authors also find that the education level of migrants relative to the population in home countries, the size of the economy, and the level of economic development of recipient countries adversely affect remittance flows. While they find the effect of financial sector development to be positive, its significance is not strongly supported in their analysis.
TL;DR: The authors argue that governments play an important role in building effective financial systems and discuss different policy options to make finance work for development, arguing that countries with better developed financial systems experience faster economic growth.
Abstract: The empirical literature on finance and development suggests that countries with better developed financial systems experience faster economic growth. Financial development-as captured by size, depth, efficiency, and reach of financial systems-varies sharply around the world, with large differences among countries at similar levels of income. This paper argues that governments play an important role in building effective financial systems and discusses different policy options to make finance work for development.
TL;DR: In this paper, the authors discuss three pillars on which sound and efficient financial systems are built: macroeconomic stability, effective and reliable contractual and informational frameworks, and different approaches to government involvement in the financial sector: the laissez-faire view, the market-failure view and the marketenabling view.
Abstract: Financial sector development fosters economic growth and reduces poverty by widening and broadening access to finance and allocating society's savings more efficiently. This paper first discusses three pillars on which sound and efficient financial systems are built: macroeconomic stability and an effective and reliable contractual and informational frameworks. The paper then describes three different approaches to government involvement in the financial sector: the laissez-faire view, the market-failure view and the market-enabling view. Finally, the paper analyzes the sequencing of financial sector reforms and discusses the benefits and challenges that emerging markets face when opening their financial systems to international capital markets.
TL;DR: In this article, the authors show that financial sector development significantly reduces undernourishment (hunger), largely through gaining farmers and others access to productivity-enhancing equipment, translating into beneficial income and general effects.
Abstract: Using cross-country and panel regressions, the authors show that financial sector development significantly reduces undernourishment (hunger), largely through gaining farmers and others access to productivity-enhancing equipment, translating into beneficial income and general effects. They show specifically that a deeper financial sector leads to higher agricultural productivity, including higher cereal yields, through increased fertilizer and tractor use. Higher productivity in turn leads to lower undernourishment. The results are robust to various specifications and econometric tests and imply that a 1 percentage point increase in private credit to GDP reduces undernourishment by 0.22-2.45 percentage points, or about one-quarter the impact of GDP per capita.
TL;DR: In this paper, the authors discuss the development of the financial sector in South Africa from the early 1970s to 2002, a period that comprises about two decades of the apartheid period and more or less a decade of democracy.
Abstract: The importance of financial sector development to overall economic development is well documented in the literature. Financial sector development literature has historically emphasized the connection between a country's financial superstructure and economic development. In this paper we discuss development of the financial sector in South Africa from the early 1970s to 2002, a period that comprises about two decades of the apartheid period and more or less a decade of democracy. We use various indices of financial development to draw some conclusions as to where the country is heading. Pertinent positive findings suggest a move towards the cashless economy, a trend of increasing credit allocation to the private sector as well as the ability of banks to extend mortgage loans, short term savings being better and more effectively mobilized than before, and the deepening of the JSE Securities Exchange. On the negative side, long-term savings which were on the decline have now stabilized; the banking sector has not been quite successful in attracting more savings from the wider population; the entry of new banks and the introduction of financial instruments have not significantly impacted on interest rate spread.
01 Dec 2006
TL;DR: In South Asia, the modern micro-finance movement was born in Bangladesh in the 1970s as a response to the prevailing poverty conditions among its vast rural population as discussed by the authors, and the remarkable growth rates in Bangladesh, particularly during 1990s, created a new dimension for micro finance worldwide as microfinance institutions grew to include millions of clients.
Abstract: In South Asia, the modern microfinance movement was born in Bangladesh in the 1970s as a response to the prevailing poverty conditions among its vast rural population. Astonishing growth rates in Bangladesh, particularly during 1990s, created a new dimension for microfinance worldwide as microfinance institutions grew to include millions of clients. The start of the Twenty-first century reinforced this trend as the Bangladesh numbers continued to grow impressively; in India, a substantial microfinance system based on Self-Help Groups (SHGs) developed. Other countries of the region made slower and later starts but have since established active microfinance sectors. This working paper includes the following headings: the financial landscape and the emergence of microfinance; limitations and challenges; institutional structures and delivery systems; financing structures; product diversity; transparency and performance; impact and social performance; systems that support microfinance; and conclusions and future perspective.
Posted Content•
TL;DR: In this article, the authors empirically examine the determinants of remittance flows at the cross-country level and find that the migration level is the main driver of the remittance flow, even after controlling for the endogeneity bias.
Abstract: The authors empirically examine the determinants of remittance flows at the cross-country level. They consider, among other things, the significance of the level of migration, the education level of migrants, and financial sector development in determining remittances. Given the potential endogeneity problems, the migration and financial development variables are instrumented in the estimation. They find that the migration level is the main driver of remittance flows, even after controlling for the endogeneity bias through instrumental variable estimation. The authors also find that the education level of migrants relative to the population in home countries, the size of the economy, and the level of economic development of recipient countries adversely affect remittance flows. While they find the effect of financial sector development to be positive, its significance is not strongly supported in their analysis.
Posted Content•
TL;DR: In this article, the authors provide an overview of conceptual issues and recent research findings concerning the structure and the role of financial systems and an introduction into the new research area of comparative financial systems.
Abstract: This paper provides an overview of conceptual issues and recent research findings concerning the structure and the role of financial systems and an introduction into the new research area of comparative financial systems. The authors start by pointing out the importance of financial systems in general and then sketch different ways of describing and analysing national financial systems. They advocate using what they call a “systemic approach”. This approach focuses on the fit between the various elements that constitute any financial system as a major determinant of how well a given financial system performs its functions. In its second part the paper discusses recent research concerning the relationships between financial sector development and general economic growth and development. The third part is dedicated to comparative financial systems. It first analyses the similarities and, more importantly, the differences of the financial systems of major industrialised countries and points out that these differences seem to remain in existence in spite of the current wave of liberalisation, deregulation and globalisation. This leads to the concluding discussion of what the systemic approach suggests with respect to the question of whether the financial systems of different countries are likely to converge to a common structure.
TL;DR: In this paper, the relationship between financial development and economic growth in 9 EU accession countries, mostly transition countries, was investigated using a production function approach, and it was shown that domestic credit and bond markets together with real capital stock growth stimulate economic growth.
Abstract: We use a production function approach in investigating the relationship between financial development and economic growth in 9 EU accession - mostly transition countries. These findings are compared with the results for the group of 18 developed countries, and separately, with the results for a group of less developed EU countries - structural fund recipients. We use aggregate measures of financial development as well as measures for single segments of financial sectors. In context of transition countries, bond markets are, to our knowledge, taken explicitly into account for the first time. We find that domestic credit and bond markets together with real capital stock growth stimulate economic growth in transition. With progress in cohesion, educational attainment becomes the next important factor that contributes to economic growth followed by labor participation in mature market economies. For the developed countries, financial sector did not play any positive role for growth over the period under study. We conclude that transfer mechanisms for growth differ over the development cycle. This is important to growth theory, to the sequencing of economic reforms and to financial sector development priorities.
TL;DR: The authors examines the features of the financial globalization phenomenon and the challenges they pose for national financial sector development, and stresses the need for sound macroeconomic policies, orderly liberalization of capital accounts, adequate preparation of national financial systems and meeting other pre-conditions for countries to reap the benefits of financial globalization at minimum costs.
DOI•
01 Dec 2006
TL;DR: This paper found that most of the variation in bilateral remittance flows can be explained by a few gravity variables, suggesting that remittances may not play a major role in limiting vulnerability to shocks.
Abstract: This paper creates the first dataset of bilateral remittance flows for a limited set of developing countries and estimates a gravity model for workers' remittances. We find that most of the variation in bilateral remittance flows can be explained by a few gravity variables. The evidence on the motives to remit is mixed, but altruism may be less of a factor than commonly believed. Most strikingly, remittances do not seem to increase in the wake of a natural disaster and appear aligned with the business cycle in the home country, suggesting that remittances may not play a major role in limiting vulnerability to shocks. To encourage remittances and maximize their economic impact, policies should be directed at reducing transaction costs, promoting financial sector development, and improving the business climate.
TL;DR: In this article, the authors argue that the government should move from its role as an operator and arbiter in the financial system to a facilitator role, which requires not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation.
Abstract: While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government's role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.
Posted Content•
TL;DR: In this article, the authors studied the relationship between remittances and growth and found that remittance boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints.
Abstract: Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and growth has not been adequately studied. This paper studies one of the links between remittances and growth, in particular how local financial sector development influences a country’s capacity to take advantage of remittances Using a newly-constructed dataset for remittances covering about 100 developing countries, we find that remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints. The study also explores some common myths about remittances and suggests that they are predominantly profit-driven and mostly pro-cyclical.
Posted Content•
TL;DR: In this paper, the impact of economic diversification on the development of finance is investigated and the authors suggest that a large and robust role for diversification in shaping financial development can be found.
Abstract: An influential theoretical literature has observed that economic diversification can reduce risk and increase financial development. But causality operates in both directions, as a well functioning financial system can enable a society to invest in more productive but risky projects, thereby determining the degree of economic diversification. Thus, ordinary least squares (OLS) estimates of the impact of economic diversification on financial development are likely to be biased. Motivated by the economic geography literature, this paper uses instruments derived from topographical characteristics to estimate the impact of economic diversification on the development of finance. The fourth estimates suggest a large and robust role for diversification in shaping financial development. And these results imply that, by impeding financial sector development, the concentration of economic activity common in developing countries can adversely affect financial and economic development.
Posted Content•
TL;DR: In this paper, the authors examined the impact of sovereign credit ratings on domestic financial sector development and international capital inflows to emerging countries and found that long-term foreign currency ratings stimulate domestic market growth but discourage international capital flows.
Abstract: How does the sovereign credit ratings history provided by independent ratings agencies affect domestic financial sector development and international capital inflows to emerging countries? We address this question utilizing a comprehensive dataset of sovereign credit ratings from Standard and Poor's from 1995-2003 for a cross-section of 51 emerging markets. Within a panel data estimation framework, we examine financial sector development and the influence of sovereign credit ratings provision, controlling for various economic and corporate governance factors identified in the financial development literature. We find strong evidence that our sovereign credit rating measures do affect financial intermediary sector developments and capital flows. We find that i) long-term foreign currency sovereign credit ratings are important for encouraging financial intermediary development and for attracting capital flows. ii) Long-term local currency ratings stimulate domestic market growth but discourage international capital flows. iii) Short-term ratings (both foreign and local currency denominated) retard all forms of financial developments and capital flows. There are important implications in this research for policy makers to encourage the provision of longer-term credit ratings to promote financial development in emerging economies.