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Households’ use of long-term finance

Claudia Ruiz's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view the entire series at gfdr2015.

The second part of Chapter 2 of the 2015 Global Financial Development Report examines the use of long-term finance by households. The section first discusses the main reasons that households use long-term finance products, while highlighting the risks inherent to their use. Making use of recent data initiatives, it then shows how usage of long-term finance varies substantially both across and within countries, and then outlines a set of policy recommendations that can help develop and promote long-term finance markets.

Why would households use long-term finance? And what are the risks they can incur?

Long-term finance offers households various tools to achieve their changing objectives throughout their life-cycle. Products such as pensions, insurance, or annuities can help households prepare for retirement, smooth their life cycle income, and insure against various life cycle risks. Student loans or mortgages can make lumpy but potentially high-yield investments affordable to households. Long-term savings instruments can allow households to accumulate and reap term premiums.

Firms’ use of long-term finance: why, how, and what to do about it?

Miriam Bruhn's picture

This post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view all the posts in the series at gfdr2015.

The first part of Chapter 2 of the 2015 Global Financial Development Report examines the use of long-term finance from the firm’s perspective. It draws on theoretical and empirical studies to ask why firms would want to use long-term finance and how this use affects their performance. It also relies on the most recent data and evidence to show how use of long-term finance varies across countries and discusses what governments can do to promote the use of long-term finance by firms. Here are the main messages regarding firms’ use of long-term finance:

Firms tend to match the maturity of their assets and liabilities, and thus they often use long-term debt to make long-term investments, such as purchases of fixed assets or equipment. Long-term finance also offers protection from credit supply shocks and having to refinance in bad times. But not all firms need long-term finance. For example, firms with good growth opportunities may prefer short-term debt since they may want to refinance their debt frequently to obtain better loan terms after they have experienced a positive shock.

Understanding the use of long-term finance

Maria Soledad Martinez Peria's picture

This blog post is part of a series highlighting the key findings of the Global Financial Development Report 2015 | 2016: Long-Term Finance. You can view all the posts in the series at

Long-term finance—defined here as any source of funding with maturity exceeding at least one year—can contribute to economic growth and shared prosperity in multiple ways. Most importantly, it reduces firms’ exposure to rollover risks, enabling them to undertake longer-term fixed investments and it allows households to smooth income over their life cycle and to benefit from higher long-term returns on their savings.

But how are we to think about the actual use of long-term finance by firms and households?  Chapter 1 of the 2015 Global Financial Development Report presents a conceptual framework for understanding the use of long-term finance summarized in Figure 1 below. In essence, the use of long-term finance can be best understood as a risk-sharing problem between providers and users of finance. Long-term finance shifts risk to the providers because they have to bear the fluctuations in the probability of default and the loss in the event of default, along with other changing conditions in financial markets, such as interest rate risk. In contrast, short-term finance shifts risk to users because it forces them to roll over financing constantly. Therefore, long-term finance may not always be optimal. Providers and users will decide how they share the risk involved in financing at different maturities, depending on their needs.

Hot off the Press: The Global Financial Development Report 2015/2016 on Long-Term Finance

Asli Demirgüç-Kunt's picture

GFDR 2015 Book CoverIn recent years, long-term finance has increasingly attracted interest from policy makers, researchers, and other financial sector stakeholders. Policymakers are often concerned when they see limited use of long-term finance in their countries since limited availability may adversely affect growth and welfare.  These concerns were further heightened after the global financial crisis since availability of long-term finance was perceived to be reduced following the crisis, adversely affecting the performance of small and medium enterprises and widening financing gaps for investment.

In fact, ensuring more and better long-term finance has become one of the priorities for the post 2015-Agenda (United Nations 2013). Concerns about the detrimental development effects of a potentially constrained supply of long-term finance have been voiced in the Group of Twenty (G-20) meetings and by the Group of Thirty and ensuring more and better long-term finance is one of the priorities for the post 2015-Agenda (United Nations 2013). This year’s Global Financial Development Report (GFDR), the third in the series, is a synthesis of recent and ongoing research aiming to identify those policies that work to promote long-term finance and those that do not, as well as areas where more evidence is still needed.

Macroeconomic policy coordination and central bank independence after the crisis

Biagio Bossone's picture

Breaking the ‘taboo’?

Following the seminal work by Kydland and Prescott (1977) and the vast literature that ensued, [1] central bank independence has become an established, rock solid truth in the theory and practice of monetary policy. A concrete case about the negative consequences of less-than-full central bank independence was recently discussed by Wyplosz (2015), with specific reference to the ECB. However, no discussion has taken place in a long time within academic and policy circles about cases where central bank independence might be called into question, not even after the deep reconsideration of optimal macroeconomic policy prompted by the global crisis.

In fact, the crisis has offered an important opportunity to discuss if and under what circumstances, and rules, central bank independence might be temporarily revoked or suspended, so that the central bank and government would coordinate their action for the purpose of achieving some specific priority macroeconomic objective. Regrettably, this debate has not happened thus far. In summarizing the conclusions of last April’s IMF conference on ‘Rethinking Macro Policy’, Blanchard (2015) noted that there was general consensus among participants “that central banks should retain full independence with respect to traditional monetary policy”.[2]

Decision day for Greece?

Thorsten Beck's picture

There have been many days over the past five years characterized as the final decision day, climax in a drawn-out attempt to resolve the Greek debt crisis and lead the country back onto a sustainable growth path. Today’s emergency summit of eurozone’s heads of government seems to be yet another of these days. Will Greece exit the euro or will there be another short-term respite? Are we really in the endgame? In the following, I will argue that whatever outcome, Greece will be on fiscal life support from the European Union for many years to come and that, ultimately, growth can only be restarted in Greece and not with externally imposed adjustment programs.

Financial development can boost fiscal response after disasters: insurance more efficient than debt market development

Martin Melecky's picture

The frequency of natural hazards has increased over time. From 1970 to 2010, approximately 3.3 million people were killed (on average, 82,500 deaths per year), and the property damages exceeded US$2,300 billion, or 0.23% of the cumulative world output. After a disaster, governments should be able to respond fast with robust emergency relief aid as well as reconstruction. In fact, they should rebuild better. However, the average fiscal response after disasters across countries and time is close to zero (Melecky and Raddatz 2008, table 2). [1] This result can stem from very heterogeneous responses of countries, including due to the varying available fiscal space and ability of the private sector to respond alongside the government. In addition to good preparation, having available resources to respond after disasters is key, and financial development could help.  

The short-term objectives of long-term investors

Alvaro Enrique Pedraza Morales's picture

Effective management of retirement savings is fast becoming an important agenda in many countries due to a rapidly ageing population. In addition to fulfilling this critical function, pension funds, which are theoretically long-only investors, perform an important role by providing long-term financing and liquidity to the rest of the financial system.

These large institutional investors are often thought of as stabilizers for the financial system and are expected to behave in a patient, counter-cyclical manner, making the most of cyclically low valuations to seek attractive investment opportunities. Moreover, since pension funds are expected to invest with a long-term perspective, these institutions have generally not been thought of as adding to systemic risk.

Updated Global Findex: 62% of adults have an account; 2 billion still unbanked

Asli Demirgüç-Kunt's picture

Today we release our new research paper and the 2014 Global Findex dataset, an updated edition of the world’s most comprehensive gauge of global progress on financial inclusion. It’s based on interviews with almost 150,000 adults in more than 140 countries worldwide.

We have plenty to celebrate:

  • Account penetration is deepening in every region. Sixty-two percent of the world’s adult population has an account, up from 51 percent in 2011, when the Global Financial Inclusion database (as it’s known formally) was launched.
  • The ranks of the unbanked are shrinking Worldwide, the number of adults without an account tumbled by 20 percent, to 2 billion.
  • Mobile money accounts — accessed via mobile phone — is powering Sub-Saharan Africa’s march toward financial inclusion. While just 1 percent of adults globally use a mobile account and nothing else, 12 percent of adults in Sub-Saharan Africa have a mobile account — versus just 2 percent worldwide. Of those adults in Sub-Saharan Africa with a mobile account, 45 percent rely on that account exclusively.

Optimal tax policy in a high evasion context: evidence from Pakistan

Anne Brockmeyer's picture

Despite pressing needs for spending on social services and public investment, most developing countries struggle to raise sufficient tax revenues to meet their needs. Pakistan raises only 10% of GDP in tax revenue, whereas the United Kingdom raises more than twice as much, 25% (WDI 2012. In large part, this is due to the fact that tax evasion is widespread in developing countries. Estimates are scant, but we know that a significant share of firms are not even tax-registered (Bruhn et al 2013), and many firms that are tax-registered misreport their taxable income and transactions (Pomeranz 2013, Carillo et al 2014). What is less well known is that the tax instruments used in developing countries also differ significantly from those in developed countries (Gordon & Li 2009). For instance, many developing countries use production-inefficient taxes such as turnover taxes, which can distort firms’ input choices, and which standard prescriptions based on developed country contexts would discourage. What motivates these policies, and could they actually be an optimal response to the presence of evasion? In a paper forthcoming in the Journal of Political Economy, we shed light at this question, using theory and evidence from Pakistan.