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Financial Sector

Financial Access and the Crisis: Where Do We Stand?

Asli Demirgüç-Kunt's picture

Do you wonder how the recent global crisis affected access to financial services? Well I do, and a report by the World Bank Group and CGAP just provided the answer: Data show that even as countries were suffering because of the financial crisis, access to formal financial services grew in 2009.  Indeed, the number of bank accounts grew world-wide, while at the same time the volume of loans and deposit accounts dropped. The physical outreach of financial systems— consisting of branch networks, automated teller machines (ATMs), and point-of-sale (POS) terminals—all expanded.

That’s a relief. Readers of this blog know by now that I am a strong believer in expanding access. Lack of access to finance is often the critical element underlying persistent income inequality as well as slower growth. But the recent global financial crisis has led us to question many of our beliefs and re-opened old debates. It also exposed an important tension between access and stability. Were we wrong to emphasize access in the light of what happened?

Prospects Daily: US initial claims decline, trade deficit narrows sharply in July

Global Macroeconomics Team's picture

Important developments today:

1.  Emerging market equities rebound as European debt concern ease

2.  U.S. initial claims decline

 

 

Corruption and Finance: Are Innovative Firms Victims or Perpetrators?

Asli Demirgüç-Kunt's picture

Designing policies that promote innovation and growth is key to development. In many countries there is also considerable corruption, with government officials seeking bribes and many firms underreporting their revenues to the state to evade taxes. Might there be a set of reforms that allow policymakers to kill two birds with one stone, both reducing corruption and boosting innovation? New research suggests financial sector reform may be able to play this role.

In a recent paper with co-authors Meghana Ayyagari and Vojislav Maksimovic, we look at corruption—defined as both bribery of government officials and tax evasion—and how this is associated with firm innovation and financial development. Using firm-level data for over 25,000 firms in 57 countries, we investigate whether firms are victims, who pay more in bribes than they gain by underreporting revenues to tax authorities, or perpetrators, who gain more by avoiding taxes than they lose in paying bribes.

Of particular interest is the effect of corruption and tax evasion on innovative firms. Specifically, we explore the following questions:

What Do We Know About the Impact of Remittances on Financial Development?

Maria Soledad Martinez Peria's picture

Remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S. $3.3 billion in 1975 to close to U.S. $338 billion in 2008. They have become the second largest source of external finance for developing countries after foreign direct investment (FDI) and represent about twice the amount of official aid received (see Figure 1). Relative to private capital flows, remittances tend to be stable and increase during periods of economic downturns and natural disasters. Furthermore, while a surge in inflows, including aid flows, can erode a country’s competitiveness, remittances do not seem to have this adverse effect.

Figure 1: Inflows to developing countries (billions of USD), 1975-2008

As researchers and policymakers have come to notice the increasing volume and stable nature of remittances to developing countries, a growing number of studies have analyzed their development impact along various dimensions, including: poverty, inequality, growth, education, infant mortality, and entrepreneurship. However, surprisingly little attention has been paid to the question of whether remittances promote financial development across remittance-recipient countries. Yet, this issue is important because financial systems perform a number of key economic functions and their development has been shown to foster growth and reduce poverty. Furthermore, this question is relevant since some argue that banking remittance recipients will help multiply the development impact of remittance flows.

The Inexorable March of Branchless Banking

Ignacio Mas's picture

There are two ‘coming of age’ tests for bold new ideas. The first, still in the realm of the market for ideas, occurs when the concepts become entrenched as conventional wisdoms, when you no longer need to justify them as ideas. The second is when they gain traction in the marketplace, when you no longer need to justify them as a business proposition.

The ground has shifted massively on both counts since I wrote about the opportunities from branchless banking in this blog more than two years ago. Few now would dispute that a key step to achieve much broader financial inclusion is to take banking transactions outside of banking halls and into everyday retail establishments that exist in every village and every neighborhood, and that financial service providers need to put technology in the hands of customers (in the form of cards or, better still, mobile phones) to increase the convenience and security of those transactions.

From Bubble to Bubble: Government Policy Blunders

Raj Nallari's picture

Greedy speculators in housing and private bankers, financial innovation and failure of risk models, regulators and credit rating agencies were all deservedly blamed for the recent financial crisis. Behind this all is public policy that worsened the problems.


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