Transcript Issues in the development assessment

Overview of Financial
Development Issues
Thorsten Beck
World Bank
Outline



Goal of the development assessment
Analytical/research underpinning
Conducting the development
assessment



Linking functional and institutional
approaches
Typical components
Characteristic messages
Functions of financial markets

Ease the exchange of goods and services


Mobilize and pool savings



Savings services
Produce information ex ante about possible
investments and allocate capital


Payment services
Credit services
Monitor investments and exert corporate
governance after providing finance
Facilitate the trading, diversification and
management of risk
Financial institutions and markets

Financial intermediaries


Financial markets


Collect savings and intermediate in the form of debt,
collect proprietary information about debtors and
monitor them directly
Attract savings in the form of debt or equity
instruments to provide resources for firms; information
collection and dissemination through price mechanism
Contractual savings and insurance

Mobilize savings through contingent contracts, offer
risk management services, provide investment
resources in different forms (institutional investors)
Goal of development assessment



Benchmark provision (quantity, quality and
cost) of the key financial functions and
services that support growth
Identify obstacles to efficient provision
Recommend policy actions
-4
-2
0
2
4
6
Finance helps foster growth…
-3
-2
-1
0
E( Private Credit | X )
coef = 1.0144739, (robust) se = .22245392, t = 4.56
1
2
… and alleviate poverty
Benchmarking

Available quantification covers both quantitative
measures of performance…
(e.g. depth, activity, reach, cost and price efficiency)

…and some qualitative indicators of infrastructures
(e.g. on legal, regulatory and informational infrastructures)

… and more recently, some quantification of
penetration

More on this later
Quantitative Data

Financial depth of financial
institutions and markets
M2 to GDP
 Private Credit to GDP


Efficiency of service provision
Interest spreads
 Market liquidity

Qualitative Data on Infrastructures

Legal


Informational



Payments and settlements
Government


Accounting & auditing / transparency
Credit & property registries
Transaction technology


Creditor protection; bankruptcy; corporate governance…
Including regulatory “style”
Ownership
Typical Obstacles

Gaps in the financial infrastructure



Flaws in regulatory or tax policy


legal, information and regulatory systems (soft)
transactional technology (incl payments &
settlements; communications generally (harder)
(including competition policy)
Deeper governance issues impeding policymaking

(esp. favoring incumbents over newcomers).
Issues in the development
assessment (1)

Market Infrastructure for Access




Collateral and bankruptcy laws; competent and
impartial courts;
Information infrastructure (e.g. credit registry,
accounting and auditing, rating agencies)
Payments: is the system competitive & reasonable in
cost?
Monopoly Power and Related Distortions

Detecting evidence of market power




(e.g. use of cross-country regressions)
Positive and negative policy to limit damage
Permissive entry and legislative environment
Minimum scale issues and globalization
Issues in the development
assessment (2)

Special Institutions for Access



E.g. development banks, microfinance
Issues include subsidies, incentives, burdensome
regulation
The Demand Side

Assessing unmet needs of corporates & households
(not easy - data deficiencies, including for crosscountry benchmarking)
Issues in the development
assessment (3)

Other cross-cutting aspects of policy
environment

Taxation/subsidization of intermediation


Missing products/markets


E.g. leasing/factoring, why missing: underlying laws,
regulations, tax?
Cross-sectoral competition aspects


Distorting or inhibiting subsectors or key instruments
E.g. banking vs. NBFIs; banking vs. securities markets
Damaging side-effects of over-heavy prudential rules
The methodological challenge:
functions versus silos



Statistics, regulation and market performance
remains segmented along lines defined by
institutional/organizational form (“silos”).
Though cross-cutting infrastructures are also
central.
But development aspects need to be analyzed
and reported along functional lines.
Combining the perspectives
(of functions and sectoral silos)
The development assessment has two phases:
Information gathering phase
1.

Including infrastructural and sectoral
Analytical and reporting phase
2.

Evidence to be distilled by mission leaders using
functional perspective
1. Information gathering phase
a)
b)
c)
d)
Infrastructural reviews
Sectoral reviews (industry & regulation)
The demand side
Missing markets & other cross-cutting issues
a) Infrastructural reviews

Legal


Informational



Payments and settlements
Government


Accounting & auditing / transparency
Credit & property registries; rating agencies
Transaction technology


Creditor protection; bankruptcy; corporate
governance; competent & impartial courts…
Including regulatory “style”
Ownership
b) Sectoral reviews

(examples)
Banking etc. (also devt. banks, mortgage finance
& other specialized institutions & MFIs)


Insurance and contractual savings



Including competitiveness, ownership, efficiency, entry,
unneeded regulatory impediments (e.g. on microfinance)…
Including public pension funds
E.g. market penetration, product range, asset portfolio
Securities markets

E.g. liquidity, transactions costs, scale, linkage to ROW
c) The demand side

Corporate sector assessment


Infer unmet service needs from their financing
patterns etc.
Households

Reach of mainstream and microfinance (including
credit cooperatives etc)
2. Analytical and reporting phase
Delivering the message:
 Describe the functional gaps



E.g. lack of term finance; no venture capital; high
intermediation costs; limited access; nascent
insurance industry…
Pinpoint the source(s) of the gaps and
deficiencies
Propose strategic approach to solution

highlighting cross-sectoral aspects
Development versus stability?
Usually mutually supportive


(An insolvent banking system cannot provide the
needed service)
Occasionally conflicting



“Belt-and-braces” approach may damage
effectiveness of banks without helping safety
Example: Powerful bank supervisors might help
stability, but are also associated with higher
corruption in lending