FINANCIAL STRUCTURE

Personal Referral Work

Dr. I. Bayai
 Dfn: Financial System

• financial system are arrangements for executing

payment, managing risk, resource transformation
and transfer, enabling the pooling of financial
resources, price discovery and limit the negativity of
information asymmetry (adverse selection and
moral hazard) (Stulz, 2000).
• How a financial system works is influenced by the
financial structure, which naturally differs with
countries.
 Financial Structure

• financial structure encompasses the institutions, financial

interface (technology) and ‘rules of the game’ which gives
guidelines of refereeing financial activities (Stulz, 2000).
• “...refers to the set of rules and regulations and the
aggregation of financial arrangements, institutions,
agents that interact with each other to foster economic
growth and development of a nation” (Maduka &
Onwuka, (2013).
• nature of financial institutions, the products and services
as well as the regulation of the various financial players in
an economy are guided by the financial structure.
 Empirics on Fin Structure
• Empirical evidence point to there being no tangible
and defined relationship between economic growth
and the financial structure (Stulz, 2000).
• “…the structure of the financial system has no
independent effect on investment, in the sense that it
does not enhance the response of investment to
changes in output, while financial development
makes investment more responsive to output
growth” (Ndikumana, 2003).
• Stulz, (2000) show that different financial structures
have seen different countries enjoy prolific economic
growth.
 …continued
• Levine, (1997) concluded that, bank based and stock market
based economies tend to grow faster.
• Thus there is no equi-finality on whether bank-based or stock
market-based economies out-pace each other in fostering
growth.
• However, Allen & Gale, (1999; 2000) developed a model which
showed that, bank based financial structures work well where
the business and industries are already known by financiers.
• Where new technology is availed and need to be tested,
different views from the market of financiers crop up, thus the
market based structure would work well.
• In such instances, IPOs, private equity and venture capital type
of financing take centre stage.
 Gvts & Fin Structure

• financial structure can be a function of competitive

forces especially in market economies (Crockett,
2011).
• However, governments have expressed interest in
influencing the financial structure (Independent
Commission on Banking, 2011).
• The motivation to control the financial structure has
been more inclined to the need to arrest financial
instability and to align social values to the financial
activities of the financial sector (Turner, 2009).
• The intervention has been bent also on addressing
the size and scope of financial institutions as well
their geographic reach.
• Despite efforts to control financial structure, there
is no pronounced relationship between financial
structure and financial development, though
financial structure can subdue or promote financial
development.
• This is because, legislation affects financial structure
directly thus indirectly influencing financial
development (Allen, 2001).
 Fin Structure & Economic Growth
• Still, the direct link between financial structure and
economic growth is not well defined as shown earlier,
but, the role of financial development in economic
growth has been well captured in literature (Maduka
& Onwuka, 2013).
• “demand-following” and “supply-leading” hypotheses
define the contribution of financial development in
economic growth at different levels of economic
growth (Patrick, 1966)
• The level and pace of economic growth can be
inferred from the level of financial development of
institutions in a country.
• “financial superstructure” in the name of primary and
secondary markets according to Goldsmith (1969)
spur growth and enables the movement of capital
within and across borders.
• To foster economic growth, what matters is a financial
structure which defines the financial instruments, the
form and type of financial institutions and the
regulations which shape the financial deepening and
development of a given country (Levine, et al., 2000).
• Effectively, any form of financial structure assumed is
meant in some sense to spur economic growth.
Question [50 Marks]
With specific reference to a chosen economy you are
very familiar with:
(a) Attempt a classification of the major types of
financial arrangements in this economy paying
particular attention to their number, size and
functional characteristics.
(b) What are the major gaps in the financial structure of
the chosen economy?
(c) Based on your discussion, what would you consider
an optimal financial structure for this economy?
 Group A
Provide empirical evidence on the relationship
between Financial Structure and Economic growth
in a country of you own choice. [50 Marks]