Financial systems and development

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they attempted to discipline bank managers; it happens in a subtler form in many countries. Once aware of the scale of a banking problem, govern- Box 6.6 Investment funds in Egypt ments often postpone the day of reckoning. When the fialy at,the cost of putting matters straight The recent experience of Egypt illustrates the need they finally act, for adequate regulation and supervision of nonmay be far greater. bank financial intermediaries that take deposits One sign of political commitment is the amount from the general public. Investment funds were of resources given to the supervisory agency. If the organized in the mid-1970s to handle remittances government means business, it must give the su- from Egyptian workers abroad and the savings of pervisory agency clearly defined responsibilities small investors. These Islamic investment compaand then support that mandate with adequate nies paid profit-related returns, sometimes as funds for staffing and training. Bank supervisors high as 30 percent a year. They were not required to conform to banking regulations and did not must be offered good compensation and career th surisng .conder r of n come under ank. the supervision of the central bank. prospects if they are to resist corruption and com- Some of these institutions have faced increasing mand the respect of the institutions they super- difficulties in the past two years, and their finanvise. If the civil service cannot attract personnel of cial condition has deteriorated. Many had made the required quality, it might be sensible to have large initial profits through trade finance not othbanks examined by private auditing firms and to erwise available to importers or through foreign recoveT the costs through a general levy on banks exchange transactions in the parallel market. recovduer care to avoid conflicts of interest). Some paid high dividends to earlier depositors (with due care to avoid conflicts of interest). out of funds paid in by new depositors. When Regulation of otherfinancial institutions deposit growth slowed, some could no longer pay the promised high returns. To prevent further deterioration, the government had to step in. Many of the principles of bank supervision and A law regulating the investment funds was regulation also apply to other financial institutions, passed in 1988. It restricts deposit taking to jointsuch as finance companies, insurance companies, stock companies, imposes minimum capital stan- , p , ~~~~~~dards, and vests regulatorv oversight with the pension funds, and mutual funds. A vital test in Capitral Markets Authoritv e deciding on the extent of regulation is the number and type of creditors. Financial institutions that do not have deposit-like liabilities to the general public need not be regulated as closely as those that do, because their deposits are not part of the pay- ment bonds, portfolio restrictions should require ments mechanism and their insolvency is not as that risks be adequately diversified. Life insurance costly to the economy. The general provisions of and other contractual savings schemes would then commercial and company laws may therefore be be more attractive to savers. Investments in shares adequate. Conversely, those financial institutions and corporate bonds have often been severely rethat are like banks in all but name (for example, stricted, eliminating a potentially important source some investment funds) should be just as closely of long-term capital. regulated and supervised (see Box 6.6). SECURITIES MARKETS. An appropriate regulatory INSURANCE. Insurance companies are usually framework for securities is needed to increase inheavily regulated in both industrial and develop- vestor confidence. Regulation is unlikely to be sating countries. These regulations have often been isfactory if left entirely to the market. The experiintroduced in response to failures or fraud. Regu- ence of many countries shows that some lations typically provide for compulsory disclosure government guidance is desirable. In Hong Kong, of information, government supervision with im- for example,. the stock market collapsed in 1973 plicit or explicit guarantees of solvency, oversight partly because of insider abuses. A new securities of contract terms and conditions, controls on en- commission helped to restore confidence. It was try, restrictions on investment portfolios, and rules able to persuade brokers and underwriters that an concerning prices or profits. Regulation to pro- orderly market which protected investors was in mote transparency is desirable, but many of these their own long-term interests. measures limit competition and efficiency. For ex- The regulations need to provide for adequate ample, instead of insisting that a large share of disclosure of information about companies so that insurance assets be placed in low-interest govern- investors can make informed decisions; they need 94
to license securities intermediaries and to curtail issues; nor will they be able to work as market improper activities in the market, especially the makers (that is, to buy and sell shares for their own use of privileged information by corporate officers account) and thus provide liquidity for the secondand directors for their personal gain (insider trad- ary market. Brokerage rates, underwriting fees, ing). These regulations are usually embodied in and so on must be high enough for firms to attract the company laws that form the legal framework and train staff and still leave their shareholders for joint-stock companies. with an adequate return on capital. If securities firms and the securities market as a The regulation of companies and securities marwhole are to perform efficiently, the firms must be kets is linked to important social issues. Promoting profitable and well capitalized and have profes- widespread ownership of productive assets may sionally trained staff. This does not happen auto- be one way to forestall greater concentration of matically in an emerging securities market. The wealth and economic power. At the same time, it government has a crucial role. If minimum capital can provide an income for the elderly at a time requirements are set too high in relation to the size when industrialization and urbanization are breakof the market, new securities firms will not appear. ing down the extended family and the traditional But if firms have insufficient capital, they will not transfer of income between generations. be able to take on the risks of underwriting new 95
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~~~~/ , -. \-E:-: - :: 0 0 - PUB768
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Oxford University Press NEW YORK OX
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countries' financial institutions i
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4 Financial sector issues in develo
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7.1 Shares of medium- and long-term
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* Fractional reserve banking. The p
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NTB Nontariff barrier * Growth rate
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and grew even faster in 1988 than i
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etter loan recovery procedures, mor
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l~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~ ;:: ;
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The early years of the recovery wer
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Figure 1.4 Growth of export volume
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Figure 1.6 Saving and investment ra
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edly, in Argentina, Brazil, and Mex
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5~~~~ '~ ' S " ''t.*:'.: .:,0!3gft"
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Box 1.2 Debt concepts A variety of
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Table 1.1 Selected economic indicat
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Figure 1.8 Domestic and external li
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Box 1.3 Foreign equity investment E
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j Box 2.1 Life without money "Some
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other ways too. By imposing direct
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Box 2.2 Transaction costs and the s
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Box 2.3 Real interest rates and gro
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I Box 2.4 Swapping risk All economi
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Box 2.5 Deposit insurance Most high
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GOVERNMENT. As well as being regula
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and receivables, whereas developmen
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with the expansion of nonlocal trad
Page 58 and 59: over. Even so, bankers and industri
Page 60 and 61: Box 3.3 Financial swindles i Swindl
Page 62 and 63: Box 3.4 Financial underdevelopment
Page 64 and 65: Box 3.6 Universal banking One of th
Page 66 and 67: 1960s. They speeded the internation
Page 68 and 69: 4 Financial sector issues in develo
Page 70 and 71: Box 4.1 Directed credit in Turkey ,
Page 72 and 73: Box 4.2 Lending program for small e
Page 74 and 75: Box 4.4 The Botswana Development Co
Page 76 and 77: markets to finance their deficits,
Page 78 and 79: 0~~~~~ = == X .. _- -- = -_ _ _ __
Page 80 and 81: Figure 4.3 Financial savings and th
Page 82 and 83: Box 4.8 Financial indexation in Bra
Page 84 and 85: Financial systems in distress Not s
Page 86 and 87: t !< 4> - !: e z u- >as uei- i.e_.S
Page 88 and 89: tem. They have succeeded in stemmin
Page 90 and 91: governments gave too little thought
Page 92 and 93: Box 5.4 The U.S. savings and loan c
Page 94 and 95: or take a step in the other directi
Page 96 and 97: have been even larger. The cost of
Page 98 and 99: ~Foundations offinancial systems If
Page 100 and 101: (an issue closely related to the as
Page 102 and 103: several centuries. The spread of su
Page 104 and 105: Bankruptcy and reorganization monit
Page 106 and 107: Box 6.5 Elements of a bank supervis
Page 110 and 111: Developing financial systems What s
Page 112 and 113: Figure 7.1 Shares of medium- and lo
Page 114 and 115: Box 7.3 The financial history of a
Page 116 and 117: Box 7.4 Housing finance The formal
Page 118 and 119: Box 7.5 Bank modernization: Indones
Page 120 and 121: DEVELOPMENT FINANCE INSTITUTIONS. T
Page 122 and 123: esources in government securities o
Page 124 and 125: strides in recent years in establis
Page 126 and 127: Issues in informal finance Small-sc
Page 128 and 129: Box 8.2 Rotating savings and credit
Page 130 and 131: original amount to the renter by th
Page 132 and 133: cooperatives' managers because it a
Page 134 and 135: Box 8.4 The Badan Kredit Kecamatan:
Page 136 and 137: Toward more liberal and open financ
Page 138 and 139: a brief period firms faced rapid ch
Page 140 and 141: Box 9.2 Financial reform in Korea K
Page 142 and 143: In the next stage, financial reform
Page 144 and 145: industry, policy reforms and the re
Page 146 and 147: Conclusions of the Report challenge
Page 148 and 149: tion "Risks and costs of finance" d
Page 150 and 151: Montes-Negret, Fernando. "The Decli
Page 152 and 153: D.C.: International Monetary Fund a
Page 154 and 155: Harberger, Arnold C. 1985. "Lessons
Page 156 and 157: croenterprises: Programs or Markets
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Douglas Graham, and J. D. Von Pisch
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Table A.2 Population and GNP per ca
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Table A.5 GDP structure of producti
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Table A.8 Growth of export volume,
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Table A.10 Growth of long-term debt
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Table A.12 Composition of debt outs
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Contents Key 157 Introduction and m
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Introduction The World Development
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Throughout the World Development In
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Population _ 0-15 million The color
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Table 1. Basic indicators __ GNP pe
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Table 2. Growth of production______
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Table 3. Structure of production __
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Table 4. Agriculture and food Value
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Table 5. Commercial energy ~~Energy
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Table 6. Structure of manufacturing
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Table 7. Manufacturing earnings and
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Table 8. Growth of consumption and
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Table 9. Structure of demand Distri
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Table 10. Structure of consumption_
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Table 11. Central government expend
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Table 12. Central government curren
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Table 13. Money and interest rates
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Table 14. Growth of merchandise tra
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Table 15. Structure of merchandise
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Table 16. Structure of merchandise
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Table 17. OECD imports of manufactu
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Table 18. Balance of payments and r
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Table 19. Official development assi
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Table 20. Official development assi
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Table 21. Total external debt Long-
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Table 22. Flow of public and privat
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Table 23. Total external public and
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Table 24. External public debt and
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Table 25. Terms of external public
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Table 26. Population growth and pro
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Table 27. Demography and fertility
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Table 28. Health and nutrition popu
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Table 29. Education Percentage ofag
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Table 30. Income distribution and I
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Table 31. Urbanization Urban popula
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Table 32. Women in development_____
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Technical notes This twelfth editio
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Box A.1. Basic indicators for count
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Box A.2. Selected indicators for no
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from the Food and Agriculture Organ
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Exports of goods and nonfactor serv
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spectively. Since 1987 data are not
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The table reports the value of manu
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teed, and private nonguaranteed lon
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the Demographic and Health Surveys,
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also the one used within the global
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Bibliography Production and domesti
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Country classifications: World Deve
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I i
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