Cross-border banking has grown dramatically in recent decades through financial liberalization, consolidation, and integration around the world. In the pursuit of higher profitability and diversification, many banks extended their activities beyond their home countries, opening branches or subsidiaries abroad and making the global banking landscape more international. The share of foreign banks in host countries increased from around 25% in 2000 to 33% in 2007. Even though the share of assets owned by foreign banks declined from 13% in 2007 to 10% in 2013, the share of foreign banks as the total number of banks was still 36% in 2013 (Claessens and Van Horen, 2015).
Numerous research studies on micro and small firms from around the world have shown that (a) microenterprises are ubiquitous; and (b) only a very small percentage of such firms scale up to become SMEs.
The obvious question is why?
It is not for want of help. Each year billions of dollars in aid is given to developing economies to help entrepreneurs establish and grow their ventures. Yet evidence suggests that this money is having little impact in some of the key areas it is directed towards improving.
Take microcredit for example. A recent review of six randomized evaluations from four continents suggests that, while microcredit has some benefits, it has not led to the transformative improvements in business performance and poverty reduction widely expected.
Both financial inclusion and financial stability are high on international policy makers’ agenda. For instance, the G-20 has called for global commitments to both advancing financial inclusion (the Maya Declaration and the Global Partnership for Financial Inclusion) and enhancing financial stability (the Financial Stability Board, Basel III Implementation, and other regulatory reforms). One challenge is that there can be important policy trade-offs between the two objectives.
A rapid increase in financial inclusion in credit, for example, can impair financial stability, because not everyone is creditworthy or can handle credit responsibly—as illustrated in the last decade by the subprime mortgage crisis in the United States and the Andhra Pradesh microfinance crisis in India. In addition, trade-offs between inclusion and stability could arise as an unintended consequence of bad or badly implemented polices.
The extent to which firms borrow short versus long term has generated much interest in policy and academic discussions in recent years. For example, concerns of a shortage of long-term investment in the corporate sector have led several institutions to promote policy initiatives aimed at extending the maturity structure of debt, which is often considered to be at the core of sustainable financial development (World Bank, 2015). There is also evidence that more short-term debt increases around financial crises, both as a cause and as a result of financial instability. However, there is little evidence on the actual maturity at which firms borrow around the world.
In a new working paper (Cortina, Didier, and Schmukler, 2016), we study how firms in developed and developing countries have used the expansion in different debt markets (domestic and international bonds and syndicated loans) to obtain finance at different maturities, and how their borrowing maturity evolved during the global financial crisis of 2008–09.
Surging account ownership among the poor. The highest rate of account ownership among women in developing countries. Widespread formal saving.
Those are some of the key financial inclusion trends in East Asia and the Pacific, as outlined in a new policy note drawing on the 2014 Global Findex database.
Since 2011, about 700 million adults worldwide have signed up for an account at a formal financial institution (like a bank) or a mobile money account. That means 62 percent of adults now have an account, up from 51 percent three years ago.
East Asia and the Pacific made an outsized contribution to this global progress. About 240 million adults in the region left the ranks of the unbanked; 69 percent now have an account, an increase from 55 percent in 2011 (figure 1). Poor people led the regional advance, as account ownership among adults living in the poorest 40 percent of households surged by 22 percentage points — to 61 percent. Much of the growth was concentrated in China — which saw account penetration deepen on the bottom of the income ladder by 26 percentage points — but China was hardly alone. In both Indonesia and Vietnam, account ownership doubled among adults living in the poorest 40 percent of households.
Massive amounts of private finance will be needed to achieve the Sustainable Development Goals (SDGs). At the same time, there is understandable pressure on official sector entities to demonstrate that their use of scarce public resources is having impact. While this makes it important for them to show how they are catalysing private investment, as discussed in a recent article, measuring this contribution is fraught with challenges.
The first challenge is definitional. Words like “mobilise,” “catalyse,” “leverage” and “additional” are often used interchangeably, with varying degrees of precision and consistency. A number of these concepts appear in the World Bank Group (WBG) “corporate scorecards” — an integrated performance and results-reporting framework — which has presented us with a platform to distinguish the terms.
Since the global financial crisis, credit to the private nonfinancial sector in emerging markets and developing economies (EMDEs) has surged. Within this overall surge, however, there has been considerable divergence between commodity-exporting and -importing economies. In commodity-importing EMDEs, credit-to-GDP ratios are high by historical standards but are now stable or declining. In commodity-exporting EMDEs, in contrast, credit growth has been near a pace associated with past credit booms, but private sector credit levels are still moderate, and, with a few exceptions, still well below thresholds identified as warning signs.
Institutional investors have become the majority owners of most large corporations and are expected to play a key role for financial development by providing funding for firms, enhancing market liquidity through more active trading, and by promoting better corporate governance in the companies in which they invest.
For developing countries, while most of the literature has focused on the impact of foreign institutional investors on capital markets, little is known about the relation between domestic institutional investors and trading activity, transactions costs, and governance practices. Understanding the role of domestic investors is particularly important since in many of these countries, business groups, which are typically collections of publicly traded companies with significant amount of common ownership, dominate private sector activity. In such context, money management institutions which belong to these business groups are prone to conflicts of interest between their fiduciary responsibilities and the objectives of their own management. For example, business groups’ relations can be used by controlling managers as a mechanism to enhance the entrenchment of corporate control. Alternatively, an institutional investor which belongs to a business group might have access to private information in affiliated firms. Ownership concentration and business group ties potentially exacerbates information asymmetries, discouraging investment.
Giant leaps in financial inclusion driven by private sector innovation and supportive regulation have made Kenya a case study in financial sector development. A new book brings together a group of academics to investigate the myriad of dimensions of and issues that lie beneath Kenya’s much-touted financial inclusion success story. The book is available at this link: Kenya’s Financial Transformation in the 21st Century.
Kenya: A World Leader in Financial Inclusion?
Headline figures from survey data place Kenya at the top of the financial inclusion index both regionally and globally. Data from the last Global Findex survey shows that 75% of Kenyan adults have a formal account that allows them to save, send or receive money. In 2014 Kenya outperformed both the global average and many middle-income countries such as Chile, Brazil, India, Mexico and Russia.
Unemployment often rises during an economic crisis and policymakers take a range of actions to try to mitigate this increase. For example, 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent crisis. Many studies have looked at the effect of wage subsidies on employment in non-crisis times, with mixed findings. But, there is not much evidence on whether wage subsidies can raise employment in the wake of a crisis.
Conceptually, wage subsidies during a crisis may make sense since layoffs could slow down the recovery as re-hiring and training workers may be costly for firms. This is particularly true for workers with job-specific skills. For these workers, it may be beneficial for firms to not let them go in the first place. However, as firms face lower demand for their products, they may not have the financial means to keep paying these workers, particularly in the presence of credit constraints, which are often exacerbated during a crisis. This is where wage subsidies come in. But, ultimately, we just don’t know whether these subsidies really cause firms to retain workers they otherwise would not have retained.