Competitiveness Strategy in Developing Countries: A Manual for Policy Analysis

By Ganeshan Wignaraja | Go to book overview

Banks will continue to play a leading role in promoting the growth of enterprises, especially the SMEs, although over time stock markets will become increasingly important in most developing and transition economies. Financial system restructuring, as a means of correcting broad policy-induced distortions, is an important ingredient of the symbiotic growth of the financial and corporate sectors. To sustain the momentum for growth, mechanisms for financial sector regulation and supervision have to be in place. Pending the development of domestic capital markets or access to international capital markets, development banking will remain important for funding long-term investment and infrastructural projects. Developing countries will continue to use development banks to tap into international capital flows by offering co-financing prior to the development of fully fledged capital markets. The development banks (or some other agency) should also develop loan guarantee schemes and provide training and other services to the SME sector. In other words, development banks should focus on addressing market failures. As the market failure in the provision of long-term capital to larger enterprises declines in importance (as their access to capital markets increases), the development (and commercial) banks should increasingly focus on meeting the needs of SMEs (Table 7.3). For it is SMEs that will be the engine of future development.


Notes
1
This is notwithstanding the well documented views on the role of banks in economic development (see Cameron, 1972; Edwards and Fischer, 1994; Mayer, 1994).
2
Information collection and processing is costly. Hence, full information may be achieved at such a high cost that in the long run it does not pay to attempt to achieve it because it requires, not only substantial and costly disclosure, but assurance, through auditing, of the quality of the disclosed information.
3
Traditionally, retail banks have predominantly held loans as assets and earned some fee income from providing payments, accounting (statements) and safe-keeping services. As banks diversify into securities (broking and dealing) or 'investment' banking businesses, then the sources of fee income multiply and fee income grows in importance relative to income derived from the 'spread' (or 'margin') between lending and borrowing interest rates.
4
As Miller (1996) has shown with repect to Argentina, explicit rather than implicit deposit insurance may also create instability (of a moral hazard nature) in developing countries.
5
Indeed, as the wider financial system develops, attention must increasingly be paid to its effective regulation and supervision.
6
The real interest rate is usually calculated by approximation as follows: r=i − π where r=real interest rate, i=nominal interest rate, and π=inflation rate.
7
In general, however, financial repression is diagnosed by looking beyond the real interest rate symptoms. It is also characterised by high reserve requirements (which reduces the amount of loanable funds) and misaligned (especially overvalued) exchange rates; see, for example, Lensink et al. (1998) on the simultaneous use of these three measures of financial repression for a sample of African economies.
8
This is partly because the larger SMEs are commonly older and have a 'track record' and partly because of a 'fixed costs' of lending problem. Smaller firms commonly require smaller loans and the size of loan required may simply be too small to cover the (relatively fixed) costs of originating the loan.

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