Friday, July 01, 2005
Financial Systems, Property Rights and Financial Services for Micro, Rural and Small Enterprises in Developing Countries
By: Paul Holden, The Enterprise Research Institute
For: The International Finance Corporation, 2001
There is increasingly powerful evidence that well developed financial systems are a key element in promoting economic growth that is the only hope for the vast numbers of poor who characterize many developing countries. Yet financial markets in these countries are shallow and dominated by commercial banks who rarely lend to any but the most secure borrowers. This failure of financial markets in developing countries is primarily the result of weak institutions that underlie their financial systems. The deficiencies run the gamut from lack of information on potential borrowers, to inefficient or non existent deposit taking institutions in poorer areas, to weakly defined property rights for both movable and fixed property and to legal systems which make it extremely difficult to repossess pledged assets in the event of default.
First, the paper examines some characteristics of financial markets in developing countries. Because informality is such a pervasive phenomenon it then looks in some detail at informal sectors, how informality is measured and some of the implications of informality for economic development. It examines some features of the microcredit phenomenon, which serves as a source of finance for the informal sector. It then looks at the small business sector and some of the issues in small business finance. A theme of the paper is that inadequate institutions are at the root of much financial underdevelopment. The next section examines the weak property rights for both fixed and movable property that are a feature of most developing countries and transitional economies and how this leads to financial underdevelopment. The following section relates these issues to risk structures and discusses how regulation of financial institutions impact the provision of financial services. The paper then outlines some types of services that might be needed by MSRBs. Finally it discusses some examples of financial service provision in various countries. In addition, there is an appendix which surveys the issues related to financial markets and poverty reduction.
For: The International Finance Corporation, 2001
There is increasingly powerful evidence that well developed financial systems are a key element in promoting economic growth that is the only hope for the vast numbers of poor who characterize many developing countries. Yet financial markets in these countries are shallow and dominated by commercial banks who rarely lend to any but the most secure borrowers. This failure of financial markets in developing countries is primarily the result of weak institutions that underlie their financial systems. The deficiencies run the gamut from lack of information on potential borrowers, to inefficient or non existent deposit taking institutions in poorer areas, to weakly defined property rights for both movable and fixed property and to legal systems which make it extremely difficult to repossess pledged assets in the event of default.
First, the paper examines some characteristics of financial markets in developing countries. Because informality is such a pervasive phenomenon it then looks in some detail at informal sectors, how informality is measured and some of the implications of informality for economic development. It examines some features of the microcredit phenomenon, which serves as a source of finance for the informal sector. It then looks at the small business sector and some of the issues in small business finance. A theme of the paper is that inadequate institutions are at the root of much financial underdevelopment. The next section examines the weak property rights for both fixed and movable property that are a feature of most developing countries and transitional economies and how this leads to financial underdevelopment. The following section relates these issues to risk structures and discusses how regulation of financial institutions impact the provision of financial services. The paper then outlines some types of services that might be needed by MSRBs. Finally it discusses some examples of financial service provision in various countries. In addition, there is an appendix which surveys the issues related to financial markets and poverty reduction.