- Elgar Financial Law series
Edited by Frederique Dahan and John Simpson
Chapter 2: Policy Choices for an Efficient and Inclusive Financial System
2. Policy choices for an eﬃcient and inclusive ﬁnancial system Thorsten Beck* 2.1 FINANCE: PRO-GROWTH AND PRO-POOR Market frictions such as transaction costs, uncertainty and asymmetric information prevent the smooth ﬂow of society’s savings into investment projects. Financial institutions and markets arise to overcome these market frictions. Speciﬁcally, they arise to help ease the exchange of goods and services by providing payment services; mobilize and pool savings from a large number of investors; acquire and process information about enterprises and possible investment projects, thus allocating society’s savings to its most productive use; monitor investments and exert corporate governance; and diversify and reduce liquidity and intertemporal risk (Levine 1997, 2005). However, there is large variation across countries in the eﬃciency with which ﬁnancial institutions and markets reduce transaction costs and information asymmetries and reach out to households of diﬀerent income levels and enterprises of diﬀerent sizes. Private credit to GDP was 228 per cent in the United States in 2005, but only 2 per cent in Congo.1 While in most Western European countries more than 90 per cent of the population has access to a ﬁnancial account, less than 20 per cent of the population has in most of Sub-Saharan Africa (Honohan 2007). While interest rate spreads (the diﬀerence between lending and deposit rates) vary typically between 2 and 4 per cent in developed ﬁnancial systems, they are over 30 per cent in Brazil (Laeven and Majnoni 2005). * I am grateful to Edward Al-Hussainy for...
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