FEATURE STORY

Leveraging Long-Term Finance for Growth, Poverty Reduction

September 29, 2015

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From left to right: Kaushik Basu, Asli Demirguc-Kunt, Bertrand Badre, Peer Stein


STORY HIGHLIGHTS
  • A scarcity of long-term finance in developing countries exacerbated by the financial crisis has limited the growth of firms and may have hampered the ability of households to lift themselves out of poverty.
  • An expert panel discussed the challenges of increasing the use of long-term finance at a launch event this month for the Global Financial Development Report 2015 | 2016: Long-Term Finance.
  • Institutional reforms—from instituting credit bureaus to fixing sclerotic court systems—have delivered results for developing countries and helped extend the maturity structure of finance.

A scarcity of long-term finance for firms and households was foremost in the minds of a panel of distinguished financial sector experts earlier this month as they discussed the findings of the recently launched Global Financial Development Report 2015 | 2016: Long-Term Finance.

Kaushik Basu, Senior Vice President and Chief Economist of the World Bank Group and chair of the event, described the lack of financing for small and medium-sized enterprises (SMEs) as palpable, and called the amount of money available to businesses and households inadequate, pointing to a slowdown in rates of investment since the 2007-2008 global financial crisis.

Long-term finance—defined as any financing (debt or equity) with a maturity of more than one year—is as essential to an economy as proper plumbing is to a house. Without it, households struggle to invest in their futures through education or housing and firms are constrained from investing in their growth.

Asli Demirgüç-Kunt, Director of the Research Department, laid out the challenge faced by policy makers who want to tackle the problem: “Systematic limited use of long-term finance is a symptom of underlying problems: market failure and policy weaknesses,” she said. “As countries develop, their financial depth increases. A large part of this comes from increasing the maturity structure.”


" Systematic limited use of long-term finance is a symptom of underlying problems: market failure and policy weaknesses. "

Asli Demirgüç-Kunt

Director of Research, World Bank Group

A joint product of the World Bank’s Research Department and the Finance and Markets Global Practice, the Global Financial Development Report presents new research on key areas where policy makers can support the availability of long-term finance. Demirgüç-Kunt advised governments to consider four areas in particular:

  • Firstly, the value of information sharing through private credit bureaus. The report found that such bureaus increase the average maturity of loans to firms.
  • Secondly, a strong legal environment is crucial, particularly in the areas of contract and bankruptcy law.
  • Thirdly, innovative interventions can improve financial literacy and strengthen the ability of families to access and manage financial products.
  • Lastly, governments can attract a critical mass of investors by putting in place a solid framework for domestic capital markets and opening their markets to foreign institutional investors.

Bertrand Badré, Managing Director and Chief Financial Officer of the World Bank Group, focused on the critical role that development banks can play in mobilizing the private sector to supply financing for needed infrastructure projects in developing countries. According to Badré, the Global Financial Development Report “provides solid and evidence-based justification for the role of development institutions—particularly the World Bank Group—in financing development.” Infrastructure in particular “is a place where the World Bank is uniquely positioned. We can identify areas of market failure and underdevelopment, and provide the necessary incentives to bring in the private sector.”

The World Bank Group is stepping up its engagement in this area via the recently launched Global Infrastructure Facility, a platform to coordinate and integrate the efforts of Multilateral Development Banks (MDBs), governments, and private sector investors and financiers. Badré added, “I think it’s a key game changer long term. Sixteen of the world’s largest asset management, pension, and insurance funds, along with several commercial banks, representing close to $15 trillion in assets under management, have signed onto the Global Infrastructure Facility.”    

Peer Stein, Director of the Finance and Markets Global Practice, emphasized the importance of long-term finance for housing, SMEs, and infrastructure in developing countries. “Cities that are built on a dollar a day look very different from places where long-term financing structures are available,” he said. He pointed to the concrete benefits to both SMEs and larger firms of reforms that put in place movable asset collateral registries.

Stein also encouraged policy makers to use the Global Financial Development Report, saying “this report translates the evidence that we have and sets out guiding principles for robust and well-designed policies.”

For information about previous and upcoming reports, visit the Global Financial Development Report’s main website.