Informal economies are a significant part of developing countries across the world and according to some estimates can represent around 60 percent of countries’ official GDP (Schneider, et al. 2010). IFC estimates suggest that some 80 percent of micro, small, and medium enterprises in emerging markets and developing countries are informal today. Access to finance is by far the biggest obstacle these firms face (Figure 1). This obstacle is more acute for firms that would like to register, and it becomes critical as firms grow in size (Figure 2). Considering that about two-thirds of full-time jobs in developing economies are provided by such firms, it is essential to better understand issues around access to finance for informal firms. A paper that I recently wrote on the subject (Farazi 2014) as part of the work on the 2014 Global Financial Development Report is an attempt in this direction.
Credit is actively used by only about 8 percent of people in developing countries and about 14 percent in developed countries (World Bank Findex). The observed gaps in financial inclusion thus suggest that greater access to credit is warranted.
However, finance can be a double-edged sword. Rapid financial development and deepening can cause accumulation of systemic risk and lead to costly financial crises (Reinhart and Rogoff 2009). Banking crises in Thailand (1997), Colombia (1982), and Ukraine (2008), for example, were preceded by excessive credit growth of 25 percent, 40 percent, and 70 percent per year, respectively. Providing the right amount of credit—not too much and not too little—is thus a major concern for countries and their policy makers.
When credit provision becomes excessive or insufficient is judged against an unobserved benchmark known as equilibrium credit. Estimating equilibrium credit is one of the most challenging tasks of determining excessive or insufficient credit provision.
- WDR 2014
Attend a seminar or read a report on Islamic finance and chances are you will come across a figure between $1 trillion and $1.6 trillion, referring to the estimated size of the global Islamic assets. While these aggregate global figures are frequently mentioned, publically available bank-level data have been much harder to come by.
Considering the rapid growth of Islamic finance, its growing popularity in both Muslim and non-Muslim countries, and its emerging role in global financial industry, especially after the recent global financial crisis, it is imperative to have up-to-date and reliable bank-level data on Islamic financial institutions from around the globe.
To date, there is a surprising lack of publically available, consistent and up-to-date data on the size of Islamic assets on a bank-by-bank basis. In fairness, some subscription-based datasets, such Bureau Van Dijk’s Bankscope, do include annual financial data on some of the world’s leading Islamic financial institutions. Bank-level data are also compiled by The Banker’s Top Islamic Financial Institutions Report and Ernst & Young’s World Islamic Banking Competitiveness Report, but these are not publically available and require subscription premiums, making it difficult for many researchers and experts to access. As a result, data on Islamic financial institutions are associated with some level of opaqueness, creating obstacles and challenges for empirical research on Islamic finance.
- Financial Sector
(Non-)rationality in economic decisions
As last year’s choice of the Nobel award for economic sciences well reflects, economists are deeply divided as to whether, and how, rationality should be modified as a basic assumption for modeling asset allocation and pricing decisions.
The three Nobel laureates for 2013 — Eugene Fama, Lars Peter Hansen, and Robert Shiller — epitomize the economics profession’s broad spectrum of positions currently existing on the subject: from Fama’s unflinching faith in the full rationality of economic action to Shiller’s recognition of the influence of non-rational and irrational factors upon human economic determinations, passing through Hansen’s acceptance of “distorted beliefs” as explanations of some otherwise inconsistent economic behaviors empirically observed.
The unresolved differences bear on the scientific status of contemporary macroeconomic analysis, especially since the crisis of 2007-09 has demonstrated the inadequacy of its underlying microfoundations. Particular attention has since been placed by economists on what they really know about asset bubbles, as these cannot be endogenized within purely rational choice models, and policymakers have re-considered whether bubbles can (or should) be managed in the public interest.