Showing papers on "Financial sector development published in 2013"

Do microfinance institutions accomplish their mission? Evidence from the relationship between traditional financial sector development and microfinance institutions’ outreach and performance

Abstract: This article analyses the relationship between outreach and performance of Microfinance Institutions (MFIs) on the one hand and traditional financial sector development on the other. The results indicate that MFIs reach more clients and are more profitable in countries where access to the traditional financial system is low. This finding is in line with the market-failure hypothesis: MFIs respond to a need that banks do not fulfill and MFIs flourish where the formal financial sector fails. Along the same line, the results demonstrate that MFIs serve poorer people in countries with well-developed financial systems. The results suggest that in countries with well-developed financial systems, the two sectors stand in more direct competition with each other. This competition pushes MFIs down the market and makes mission drift by MFIs less likely.

Impact of Foreign Banks

Abstract: This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-)examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence accounting for heterogeneity, including bilateral ownership, is crucial.

Resolving the African Financial Development Gap: Cross-Country Comparisons and a Within-Country Study of Kenya

Abstract: With extensive country and firm-level data sets, this paper first documents that the financial sectors of most Sub-Saharan African countries remain significantly underdeveloped by the standards of other developing countries. The paper also finds that population density appears to be considerably more important for banking sector development in Africa than elsewhere. To better understand how countries can overcome the high costs of developing viable banking sectors outside large metropolitan areas, the analysis focuses on Kenya, which has made significant strides in financial inclusion and development in recent years. The paper finds a positive and significant impact of Equity Bank, a leading private commercial bank, on financial access, especially for underprivileged households. Equity Bank's business model -- providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process -- can be a potential solution to the financial access problem that has hindered the development of inclusive financial sectors in many other African countries.

Revisiting the Link Between Finance and Macroeconomic Volatility

Abstract: This paper examines the impact of financial depth on macroeconomic volatility using a dynamic panel analysis for 110 advanced and developing countries. We find that financial depth plays a significant role in dampening the volatility of output, consumption, and investment growth, but only up to a certain point. At very high levels, such as those observed in many advanced economies, financial depth amplifies consumption and investment volatility. We also find strong evidence that deeper financial systems serve as shock absorbers, mitigating the negative effects of real external shocks on macroeconomic volatility. This smoothing effect is particularly pronounced for consumption volatility in environments of high exposure - when trade and financial openness are high - suggesting significant gains from further financial deepening in developing countries.

Financial Sector Development and Economic Growth: Evidence from Zimbabwe

Abstract: The relationship between financial system development and economic development has attracted interest of a number of researchers all over the world, however institutional differences and capital allocation variations between and within economies, make it very difficult to generalize findings and thus increasing the need for country-specific studies. This study examines the causal relation between financial system development and economic growth from a Zimbabwean perspective, based on two inter-related broad aims, the first being the established of cointegration relationship between the two and the ultimate direction of the causal relationship. Using multivariate Granger causality test the study finds existence of demand following financial development in Zimbabwe, there is unidirectional causality from economic growth to financial development. Financial system development is therefore an outcome of the pressure for institutional development in capital markets and introduction of modernized financial instruments. As such policy concern should focus on trade liberalization and other related activities in order to spur economic growth, since financial system development is a passive reaction to economic growth. Such policies might include investment promotion and removal of barriers for foreign investments. Keywords: Financial system development; economic growth; poverty alleviation; granger causality JEL Classifications: C22; E44; G10; O11; O40

This Time They Are Different; Heterogeneity and Nonlinearity in the Relationship Between Debt and Growth

Abstract: We study the long-run relationship between public debt and growth in a large panel of countries. Our analysis takes particular note of theoretical arguments and data considerations in modeling the debt-growth relationship as heterogeneous across countries. We investigate the issue of nonlinearities (debt thresholds) in both the cross-country and within-country dimensions, employing novel methods and diagnostics from the time-series literature adapted for use in the panel. We find some support for a nonlinear relationship between debt and long-run growth across countries, but no evidence for common debt thresholds within countries over time.

Impact of Foreign Banks

Abstract: This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-)examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence accounting for heterogeneity, including bilateral ownership, is crucial.

Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe

Abstract: This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.

Financial sector development and inequality: is there a financial kuznets curve?

Abstract: The existing empirical knowledge in the area of financial sector development and income inequality finds evidence for the theoretical work which posits a simple, linear relationship between the two variables. In this article, we subject the extant empirical knowledge to close scrutiny and point out to a potential dynamic and endogenous relationship between financial sector development and inequality. By using dynamic multivariate panel data analysis on a carefully selected data set of income inequality data for developed and developing countries spanning the period 1962–2006, we find robust empirical evidence for the existence of an inverted U-curve relationship between financial sector development and income inequality. In that token, we confirm the theoretical stipulations of Greenwood and Jovanovic (1990) for an inverted U-curve relationship between the financial sector and income inequality.

Banking in Sub-Saharan Africa : the Macroeconomic Context

Abstract: Many countries in sub-Saharan Africa (SSA) have seen accelerated growth for an extended period of time since the mid-1990s, making a clear break with their long stagnant growth during the previous two decades. That said, the region faces significant challenges over the medium to long term, including reducing poverty, overcoming infrastructure bottlenecks, enhancing productivity and skill levels, and improving the business climate, among others. The banking sector remains underdeveloped in SSA, thus reducing its contribution to growth, although its limited integration with global financial markets helped countries weather adverse effects of the global financial crisis. It is imperative that the banking sector plays a more active role in SSA, in order to achieve sustainable growth led by the private sector. This paper, building on the recent literature on SSA, discusses the main features of the region’s growth and macroeconomic performance in recent years and the outlook for the coming years; it then reviews the main features of SSA banking systems and how they were affected by the global economic crisis, while flagging some factors that could influence financial sector developments in SSA in the period ahead.

Equilibrium credit: the reference point for macroprudential supervisors ?

Abstract: Equilibrium credit is an important concept because it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. It uses two stages to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high and middle-income countries over the period 1980-2010, this paper provides empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and experience of a financial crisis. Countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared with other regions of the world.

Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development

Abstract: A likely image of the current state of the literature on financial sector development is that of a Swiss cheese with many holes inside important areas of knowledge. The aim of this synthesis paper is to map the current knowledge and ignorance (i.e., holes) in the literature by providing a narrative for the empirical findings of a comprehensive literature review concerning the quantitative effects of financial development on economic growth and employment, and various determinants of financial sector development. The literature was restricted mostly to high-quality academic research that focuses on developing countries over the period 1960-2012. Because of data constraints, this review also includes cross-country analyses, in which developed and developing countries are considered together. The main findings include (i) a positive relationship between financial development and economic growth and employment, subject to a number of qualifications; (ii) a complicated relationship of regulations and supervision to financial sector development; and (iii) a positive relationship between an enabling institutional environment and financial sector development. This review also identifies some missing avenues in the literature and provides a number of suggestions for future work.

Malaysia's development challenges : graduating from the middle

Abstract: List of tables List of figures List of contributors Preface 1. Malaysian economic development: looking backward and forward - Hal Hill 2. Political challenges in economic upgrading: Malaysia compared with South Korea and Taiwan - Joan M. Nelson 3. The politics and policies of corporate development: race, rents and redistribution in Malaysia - Edmund Terence Gomez 4. The Malaysian economy during three crises - Prema-chandra Athukorala 5. Monetary policy and financial sector development - Michael Meow-Chung Yap and Kwek Kian Teng 6. Public sector resource management - Suresh Narayanan 7. Microeconomic reform in Malaysia - Cassey Lee 8. Services liberalization: the need for complementary policies - Tham Siew Yean and Loke Wai Heng 9. Is Malaysia's electronics industry moving up the value chain? - Rajah Rasiah 10. The crisis in education - Lee Kiong Hock and Shyamala Nagaraj 11. Poverty eradication and income distribution - Ragayah Haji Mat Zin 12. Demographic and labour force dynamics - Gavin Jones 13. Shifting the policy goal from environment to sustainable development - A.A. Hezri and S.R. Dovers References Index

From Microfinance to Inclusive Financial Markets: The Challenge of Social Regulation

Abstract: Policy towards microfinance has undergone a shift away from building financial institutions focused on serving poor people to an “inclusive” agenda for financial sector development, operationalized by some donors in an approach entitled “Making Markets Work for the Poor”. This approach is located in New Institutional Economics and the enabling environment focus of the post-Washington Consensus. Despite the way in which this inclusion agenda echoes social exclusion discourse, it engages with a residualist rather than relational understanding of poverty. This leads to an analytical disjuncture between its discourse and analysis, overlooking the root causes of poverty and exclusion in relational processes. Arising from this is the failure to recognize that developing institutions and “enabling” environments require an understanding of social institutions and their influence as social regulatory structures. The author illustrates how analysis can proceed to address this disjuncture using the example of gender...

Does access to finance matter in microenterprise growth ? evidence from Bangladesh

Abstract: In less-developed economies such as Bangladesh, the farm sector is the major source of employment and income, while the rural nonfarm sector provides as an additional source of income But the rural nonfarm sector increasingly plays an important role in fostering the development of the rural economy A significant share of this sector is made up of microenterprise activities, which requires investment and access to adequate funds This paper investigates the role access to finance plays in promoting the efficiency and growth of microenterprise activities The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans The research suggests that credit constraints may reduce the enterprises' profit margin by as much as 136 percent per year As the returns to microenterprise investment are found to be high, microfinance institutions can play a larger role in supporting microenterprise growth in Bangladesh

Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe

Abstract: This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.

Determinants of Credit Risk in the Banking Industry of Ghana.

Abstract: This paper examines bank-specific, industry-specific and macroeconomic factors that influence credit risk (CR) in commercial banks in Ghana using unbalanced panel data set from 33 commercial banks covering the 21-year period 1990 to 2010. The study employed annual time series data from 1990 to 2010. The paper is the first of its kind in Ghana, a developing country with emphasis on macroeconomic tools relied on by the central bank for creating a stable macroeconomic environment. Results suggest that credit risk in Ghana is significantly influenced by management efficiency, GDPPC, Government borrowing and the financial sector development. Government borrowing and financial sector development have a negative relationship with credit risk while management inefficiency and GDPPC have a positive relationship. Keywords : Ghana, Credit risk , Bank-specific factors, Industry-Specific factors, Macroeconomic variables

Impact of Financial Sector Development on the Nigerian Economic Growth

Abstract: An efficient financial system is essential for building a sustained economic growth and an open vibrant economic system. Countries with well developed financial institutions tend to grow faster; especially the size of the banking system and the liquidity of the stock markets tend to have strong positive impact on economic growth. This study examines the impact of financial sector development and economic growth in Nigeria. It seeks to know the impacts of the sector in the Nigerian economy and whether the sector has been able to achieve its main objective of intermediation as a result of the inability of the sector to assist the real sector despite the huge profits declared yearly & also the short term lending of the banks instead of long term investment that can boost the economy. The OLS method of the regression analysis was employed; the financial development was proxied by ratio of liquidity liabilities to GDP (M2GDP), real interest rate (INTR), ratio of credit to private sector to GDP (CPGDP) while the economic growth was measured by the real GDP (RGDP).The study finds that only the real interest rate is negatively related. All the explanatory variables are statistically insignificant. Though the overall statistic shows that the independent variables were able to explain 74 percent variation in the dependent but contrary to a priori expectation, it is statistically insignificant. The link between the financial and real sector still remains weak and could not propel the needed growth towards the vision 202020. There is therefore the need for consistent, transparent, fair policy, and also a resilient& strong institutional development of the sector. Normal 0 false false false EN-US X-NONE AR-SA /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:8.0pt; mso-para-margin-left:0in; line-height:107%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;}

Benchmarking Financial Systems : Introducing the Financial Possibility Frontier

Abstract: Across the world, supply for financial services rarely matches the demand, given multiple market frictions. This paper discusses the concept of the financial possibilities frontier as a constrained optimum to categorize different problems of shallow financial markets or unsustainable expansion. The paper offers three examples of how to use different data sources to apply the frontier concept to assess the state of financial systems.

Financial Sector Development-Economic Growth Nexus: Empirical Evidence from Nigeria

Abstract: There has been controversy whether financial sector development constitutes a potentially important mechanism for long run economic growth. Thus, the study empirically examines the financial sector development-economic growth nexus in Nigeria. In doing this, the study employed the cointegration/Error Correction Mechanism (ECM) with annual dataset covering the period, 1980-2009. Five variables, namely; ratios of broad money stock to GDP, private sector credit to GDP, market capitalization-GDP, banks deposit liability to GDP and Prime interest rate were used to proxy financial sector development while real gross domestic product proxy growth. The empirical results show that there is a positive effect of financial sector development on economic growth in Nigeria. However, credits to private sector and financial sector depth are ineffective and fail to accelerate growth. This signifies the effect of government borrowings, the problem of huge non-performing loans, and a deficient legal system on the private sector. These inefficiently and severely limit the contribution of Nigeria’s financial sector development to economic growth. To sustain and enhance the existing relationship between financial sector development and economic growth in Nigeria, there is need to adequately deepen the financial system through innovations, adequate and effective regulation and supervision, a sound and efficient legal system, efficient mobilization of funds and making such funds available for productive investment and improved services.

Implementing agriculture for development : World Bank Group agriculture action plan (2013-2015)

Abstract: The future needs an agricultural system that produces about 50 percent more food to feed the world's 9 billion people by 2050; that provides adequate nutrition; that substantially raises the levels and resilience of incomes and employment for most of the world's poor, 75 percent of whom live in rural areas and most of whom rely on agriculture for their livelihoods; that provides environmental services such as absorbing carbon, managing watersheds, and preserving biodiversity; and that uses finite land and water resources more efficiently. It can be done with more and better investment in the sector, with more attention to reducing gender inequality in access to resources and opportunities, and to addressing cross-sectoral linkages between agricultural actions and outcomes for economic growth, livelihoods, the environment, nutrition, and public health. Such linkages were addressed in depth in the World Development Report (WDR) 2008, Agriculture for Development. More recently, the already-urgent need for action in agriculture has been amplified by recurrent spikes in global food prices, their lasting impact on poverty and nutrition, and the associated risk of social and political tensions. And for each degree Celsius of global warming, the potential grain crop yield loss is about 5 percent. Investment returns in the sector can be high. Income gains in agriculture are no more costly to achieve than income gains in other sectors, and the associated growth originating from agriculture has been two to four times more effective at reducing poverty than growth originating from other sectors.

Financial development in Latin America and the Caribbean : stylized facts and the road ahead

Abstract: The paper documents the major trends in financial development in Latin America and the Caribbean since the early 1990s. The paper compares trends in Latin America and the Caribbean with those in Asia, Eastern Europe, and advanced countries and compares countries within Latin America and the Caribbean. The findings show that financial systems in the Latin America and the Caribbean region have become more diversified and more complex. In particular, domestic financial systems have become less bank-based, with bond and stock markets playing a larger role; institutional investors have gained some space in channeling domestic savings, thus increasing the availability of funds for investment in capital markets; and several economies in the region have started to reduce currency and maturity mismatches. Nonetheless, a few large companies continue to capture most of the domestic savings. And because these trends have unfolded more slowly than pro-market reformers had envisioned, broad, market-based financial systems with dispersed ownership have yet to materialize fully in the region. As a result, convergence is still largely failing to happen and the region's financial systems remain less developed than those of the advanced economies and several other emerging economies, most notably those in Asia.

Finance, Growth and Fragility: The Role of Government

Abstract: This paper offers a critical survey of the literature on the role of financial deepening in economic development, focusing on the role of government. Specifically, I distinguish between the policy view that relates financial sector development to an array of necessary policies and institutions, the historic view that relates financial sector development to historic and cultural factors, and the politics view that explains financial sector development as the result of political conflicts and decisions. These three views of financial sector deepening imply a different role for government. I discuss examples from the developed and developing world and repercussions for current reform discussions.

Making sense of financial capability surveys around the World : a review of existing financial capability and literacy measurement instruments

Abstract: Financial capability has recently emerged as a strategic policy objective that complements the financial inclusion and financial consumer protection agendas. Deeper and more inclusive financial markets require better informed and more confident consumers, a financial infrastructure that promotes easy access to high quality financial services and their active use, and financial consumer protection mechanisms that effectively address the risks to consumers. In 2012, in order to promote financial capability around the world, G20 Leaders endorsed the High-level Principles on National Strategies for Financial Education developed by the OECD/INFE. According to an OECD study, among the countries that designed and adopted their national strategies for financial education, 80 percent have used financial capability surveys to identify the key priorities for policy intervention. A broad variety of survey methodologies have been developed to support policy making and research in the areas of financial capability, financial inclusion, and financial consumer protection. This Review aims to identify, compare, and contrast the existing survey methodologies that have been used in the process of designing national strategies for financial education according to the OECD/INFE 2012 Principles. This Review will be particularly useful for policy makers, practitioners, and researchers who prioritize financial inclusion and/or financial literacy objectives and need to identify the appropriate combination of analytical tools.

Bangladesh development update

Abstract: Progress on reducing extreme poverty and boosting shared prosperity through human development and employment generation has continued. This needs to be further consolidated in the near-term by sustaining Gross Domestic Product (GDP) and remittances growth recovery, creating jobs, containing inflation, and making progress on improving the quality of service delivery in health and education. To sustain growth in the near- and medium-term, private investments need to increase significantly. At the same time, the quality of public investment needs to be substantially enhanced to alleviate the infrastructure constraints on private investments and to expand service delivery. Moving forward in the immediate future, stronger attention is needed to (a) swiftly complete the transition in the garment industry, (b) finish the critical ongoing road development projects, (c) enact the Public Private Partnership (PPP) law, and (d) award contracts to build Special Economic Zones (SEZs).

Reversal and reduction, resolution, and reform : lessons from the financial crisis in Europe and Central Asia to improve outcomes from mandatory private pensions

Abstract: This report examines the impact of the financial crisis on privately funded pensions in the Europe and Central Asia region. It describes their pension systems and the impact of the crisis. It explores whether funded private systems have a continuing role to play in meeting the pension challenge. It then focuses on why the crisis led to the changes that took place and the policy implications of those changes. The report is structured as follows: chapter one sets out the key facts. It describes the original pension reforms and what the pension systems looked like before the recent financial crisis. It then briefly describes the global financial crisis and the changes that were made to the private pension system as a result. A companion paper sets out the longer and deeper historical context in which these events occurred. Chapter two asks what these facts tell about the role, if any, that privately funded pension pillars have in a country’s overall pension system. It argues that a funded second pillar mandatory private pension has a role to play in a diversified approach to meeting the pension challenge. A diversified approach entails a mix of state and privately funded pensions as well as pension and non-pension sources of income and consumption in retirement. Chapters three and four build on the premise that funded systems have a critical role to play as one part of a diversified system. Chapter three highlights the weaknesses in the mandatory funded schemes that were exposed by the crisis. Chapter four describes policy responses to these weaknesses. It sets out an agenda for change. The report distinguishes between three main responses to the crisis: reversals, which end mandatory funded private plans by collapsing them back into the state pension system; reductions (both permanent and temporary), which reduce contributions to the privately funded systems but keep the second pillar; and resolution, where countries have made no adjustments to the privately funded pension system despite the challenges of the crisis.