Financial sector development

About: Financial sector development is a research topic. Over the lifetime, 1674 publications have been published within this topic receiving 90787 citations.

Weathering the storm : responses by Cambodian firms to the global financial crisis

Abstract: Firms have various ways to cope with external risks. This paper analyzes the risk coping behavior that entails the smoothing of inputs (labor, raw materials, or capital). The theoretical framework shows that, if they face adjustment costs, firms prefer to smooth their inputs, especially if they expect a demand shock to be temporary. However, credit constrained firms will be adversely affected by the presence of liquidity constraints, and this will create a welfare loss due to incomplete smoothing. The authors estimate this behavior using a panel of Cambodian firms at the time of the 2008 global economic crisis. The survey shows that these firms were hard hit by the economic crisis between 2008 and 2009, with an average fall in demand (sales) of 30 percent. Based on the theoretical framework, the analysis can estimate the responsiveness of labor, capital, and raw materials input demand to demand shocks. It finds that firms try to smooth in particular if they believe the shock is temporary; in fact non-credit constrained firms reduce their inputs much less than firms that were credit constrained when the demand shock is expected to be temporary. The paper estimates that the welfare loss from incomplete smoothing due to credit constraints is many multiples of the adjustment costs of the firms that were not credit constrained. This has important policy implications about the role of financial sector development and regulations beyond the capital market. This micro analysis also has macro implications: if all firms expect a shock to be permanent, their combined limited smoothing of inputs will indeed make the shock more likely to be permanent.

Financial Sector Outlook: Financial systems in Western Balkans - Present and future

Abstract: Reflecting the fact that prospects for the Western Balkans and more generally smaller countries around the world are significantly dependent on external developments, the Financial Sector Outlook: Financial Systems in the Western Balkans – Present and Future sets out to address the question ‘What could the world around the financial systems of the Western Balkans look like in 2025?’. It does so not by proposing a single forecast, or view of the future, but by exploring key uncertainties and applying the tool of scenario thinking to create three different visions for the world around the Western Balkans financial systems in 2025 aimed at informing the development of financial sector strategies that contribute to the country`s overall success in sustainable and inclusive growth.

Timor-Leste: independent review of the credit component of the community empowerment project

Abstract: This review analyzes experience with the Community Empowerment Project (CEP) credit component, and draws a number of lessons and general principles. Credit contributed to a revival of rural economic activities, especially petty trading and the supply of manufactured goods, helping to re-establish markets and stimulating production and marketing of foodstuffs and higher-value crops. While CEP was not a financial sector project, its use of credit to achieve post-conflict reconstruction goals had implications for the revival of financial services. Since the latter was also an important reconstruction goal, CEP had an obligation to avoid compromising the re-establishment of financial services. While a badly-conducted credit program may succeed in reviving business activity, it might do so at an unacceptably high cost in terms of negative impact on the credit culture. Whether significant negative impact has occurred in Timor-Leste as a result of the poor repayment performance of the CEP and Small Enterprise project (SEP) projects may only become apparent as microcredit begins to expand throughout the country.

The effect of financial market development on capital and debt maturity structure of firms in selected African countries / Oyebola Fatima Etudaiye-Muhtar

Abstract: Spurred by the finance-growth literature establishing that development of the financial system promotes growth in the economy, some African countries introduced financial sector development policies to accelerate economic growth. Introducing these policies (examples include removal of sectoral allocation of credit, interest rate deregulation, privatisation of state-owned banks, relaxation of foreign participation in investment activities in the domestic stock exchange, cross-listing of shares across different stock exchanges etc.), besides enhancing economic growth also facilitates firms’ access to financial markets for external capital. This is particularly important for firms in Africa because access to external finance is one of the obstacles facing firms in the region. A comparison of financial market development indicators between countries in Africa and other developing regions by earlier studies showed that African financial markets lag behind in some indicators, which may be attributed to some of the issues that besiege financial markets in Africa. These issues include difficulty in accessing external funds by firms, information asymmetry, high transaction costs, and illiquidity of the market. With the introduction of market development measures meant to enhance firms’ access to finance, earlier studies on capital and debt maturity structure decisions of firms in African countries largely overlooked the effect of the development measures on these two key financial decisions. Thus, supply-side factors affecting firms’ re-balancing of capital and debt maturity structure are yet to be researched. Given this scenario, this thesis investigates the effect of financial market development on corporate capital and debt maturity structure within a framework that allows for the determination of adjustment costs and speed of adjustment. The annual financial and accounting data of publicly-listed non-financial firms and country level data in nine African countries over the period 2003-2012 are compiled and analysed. These countries are classified either as emerging or frontier markets. The countries in the study are Botswana, Egypt, Ghana, Kenya, iv Mauritius, Morocco, Nigeria, South Africa and Tunisia. The two-step system generalized methods of moments technique is used in analysing the data. Results of the analysis indicate that the financial intermediation theory of an increase in debt financing following banking sector development is not supported for the banking sector. However, a decline in debt finance supports the hypothesis that development in the stock market leads to a substitution effect with equity being substituted for debt. Furthermore, firm-level data (used as control variables) supports dynamic trade-off theory of capital structure, contracting and signalling theory of debt maturity structure for firms in the study. This reflects the dynamism in capital and debt maturity decisions and indicates that transaction costs due to market imperfections may hinder firms from reaching optimal capital structure. In summary, the results suggest that while stock market development to an extent has been successful in promoting the use of equity, financial system policy makers need to put more effort into developing the banking sector to improve debt usage. This may be achieved by introducing and implementing banking sector development measures that lowers the cost of debt finance making it readily accessible.

Financial Sector Development in Southeast Europe — The Roles of EU Accession and Basel II

Abstract: Recent research has stressed the importance and strength of the link between financial sector development and economic growth in most countries (Levine et al. 2000; Wachtel 2001; Berger, Hasan and Klapper 2003). However, the connection seems empirically weak in transition countries (Berglof and Bolton 2002) and Southeast Europe (SEE). Indicators of banking system development, such as credit to the private sector as a percentage of GDP, have deteriorated as economic growth has improved (Mehl and Winkler 2002). This paradox is probably more apparent than real. Transition countries necessarily had to “clean up” portfolios of bad assets accumulated under communism and the first years of transition in order to stabilise their financial systems and their economies. Thus, it is reasonable to presume that, as in most countries, further economic development in SEE requires further financial development. Even if financial sector development may not have a big impact on growth, due to various other factors impeding business expansion, sensible financial sector policies and further progress in financial development should minimise the likelihood of financial sector instability that could damage growth. Two external factors influence policy issues relating to financial development: the EU accession process and the Basel II Accord. The approach taken by the SEE countries to these policy issues is discussed here in the broader context of how these countries can achieve the desired goals of financial development and economic growth in general. Of course, the SEE countries are economically and politically heterogeneous: there certainly is no one-size-fits-all approach to the issues raised here. The basic themes of this paper are two-fold. First, progress towards EU accession should bring greater political stability to SEE countries and raise investor