Financial Sector Development in Africa: Opportunities ... - World Bank

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 189
A major focus of public action has been on developing contractual and
informational institutions. At the top of the agenda are collateral and
bankruptcy law reforms that aim to protect the rights of both borrowers
and lenders in order to facilitate lending. Other major reforms aim at
improving the court system or building alternative dispute resolution
mechanisms and establishing asset and collateral registries. Public action
also focuses on strengthening independent bank regulation and supervision,
including the formulation and implementation of accounting and
disclosure standards. Such measures intend to increase not only the stability
of the financial system but also its capacity for competition and innovation,
two key determinants of outreach.
It has become part of mainstream economic thinking that there is
room for pro-market activism in the form of carefully designed, marketfriendly
government interventions in the financial sector to address
specific market failures “while the fruits of ongoing institutional reform
are still unripe” (De la Torre, Gozzi, and Schmukler 2007). In contrast to
the earlier market-replacing approach, pro-market activism is based
on the assumption that markets can broaden access to finance, and therefore
the goal of government interventions is to develop or enable markets,
not to replace them (Beck, Fuchs, and Uy 2009; De la Torre, Gozzi, and
Schmukler 2007). To improve the intermediation of financial resources
into higher levels of investment, proponents of pro-market activism recommend
that governments use a combination of sticks (disincentives),
such as moral suasion, and carrots (rewards), such as tax incentives.
Considerations of financial sustainability have become central to the
design of pro-market interventions (De la Torre, Gozzi, and Schmukler
2007). Although government interventions are acknowledged to possibly
create inefficiencies in the short-term allocation of resources, the key
underlying assumption is that time-bound pro-market activist policies
may increase long-term productivity.
Pro-market activism can take the form of affirmative regulatory policy.
One of the most prominent examples of such policy is the establishment
of credit registries. Credit registries give access to clients’ credit history
and increase the transparency of borrower quality, which makes it safer
for financial institutions to lend to new customers. Credit registries also
allow borrowers to build reputational collateral that increases their bargaining
power for the terms of credit. Banks are not always supportive of
building credit registries, if doing so will entail the compulsory sharing of
their information with other lenders, thereby increasing competition.
In some countries the authorities have therefore started to push beyond