Experts Lay Out Agenda for Next Generation of Financial Sector Reforms

Since the crisis of 2008, a shortage of finance has shut many eligible borrowers out of credit markets in developing countries, limiting job-creating investment in small enterprises and cutting off resources for housing and education. According to the latest Global Financial Development Report, small firms saw a sharp and lasting decline in access to long-term credit after the crisis. And according to the World Bank’s latest forecast, global economic prospects continue to be shaky with projected global growth of 2.4 percent in 2016.  

In the midst of these global headwinds, the World Bank convened a group of renowned financial sector policy makers, researchers, and practitioners earlier this month to lay out an agenda for the next generation of financial sector reforms. Experts from key institutions such as the Federal Reserve Board and the IMF discussed new research and data on policies that could make poverty-alleviating financial resources available to those in the bottom 40 percent. 

Some of the most promising research highlighted policies that could open financial and labor markets to women. According to data from the Global Findex, women significantly lag behind men in financial account ownership. But measures to expand access can pay dividends. For example, women-headed households in Nepal were able to significantly increase spending on education and food after receiving a savings account.

Greater competition in financial markets can also bring benefits. According to new research, banking deregulation in the U.S. helped reduce gender disparities in labor markets by speeding up business creation, with new labor demand disproportionately benefiting women.    

Exciting new research also highlighted paths to bringing finance to small-scale entrepreneurs. When Slovakia reformed its collateral laws in 2003, it saw a large uptick in the loans available to businesses with movable collateral. The World Bank Group has worked with clients such as China and Ghana to carry out similar reforms of secured transactions that have expanded the range of firms that can get loans.       

Fintech is also opening new possibilities for migrant workers. bKash, a mobile money provider in Bangladesh, helps urban migrants in Dhaka send remittances to family members in rural areas. Forthcoming research on an encouragement program to get workers bKash accounts found that households benefitted from better health, more investment in children’s education, and less borrowing.  

Other strands of research tackled policies related to firm start up, relationship lending for small firms, identifying promising entrepreneurs, and the determinants of firm growth.  

Developing countries can draw on a combination of these policies to counterbalance the current global economic environment. “Research suggests that services provided by the financial system exert a first-order impact on long-term economic growth,” said Asli Demirguc-Kunt, Director of Research at the World Bank. At the same time, she warned that credit growth is one of the best predictors of a financial crisis, so the goals of growth, inclusion, and stability must be carefully balanced.