Finance in Lower Income Countries : An Empirical Exploration

Author/Editor:

Poonam Gupta ; Thierry Tressel ; Enrica Detragiache

Publication Date:

August 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper considers how a comprehensive set of factors relates to financial sector performance in low-income countries (LICs). It finds that corruption and inflation are associated with a shallower and less efficient financial system, while legal origin and characteristics of the supervisory and regulatory framework have no significant relationship with performance. Moreover, better contract enforcement and information about borrowers are associated with more private sector credit. Some results are surprising. Countries with more foreign bank penetration seem to have shallower and not necessarily more efficient financial sectors, while a larger presence of state-owned banks is correlated with more bank deposits and lower overhead costs, even after controlling for market size and concentration. Although these relationships are robust, more research is needed to ascertain the direction of causality and identify channels of transmission before deriving policy implications.

Series:

Working Paper No. 05/167

Subject:

English

Publication Date:

August 1, 2005

ISBN/ISSN:

9781451861860/1018-5941

Stock No:

WPIEA2005167

Format:

Paper

Pages:

49

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