Monetary and Financial

Development in Developing
Countries
WEEK 7
Role of Monetary Policy
• Monetary policy is concerned with the changes in the supply of
money and credit.
• Refers to the policy measures undertaken by the government / the
central bank to influence the availability, cost and use of money and
credit with the help of monetary techniques to achieve specific
economic objectives.
• Monetary policy in developing country is different with the policy in
developed country due to its economic conditions and challenges.
Monetary Policy in Developing Country
Monetary policy in developing
country support the
developmental goals, including:
• Effective central bank policy to
manage price and economic
stability
• Financial development
• Financial inclusion
Types of monetary policy:
• Expansionary monetary
policy
• Contractionary monetary
policy
• Countercyclical monetary
policy
• Rule based monetary policy
• Discretionary monetary
policy
Global Monetary Policy Dependency
Global Monetary Policy Dependency
The Fed increase the interest rate:
Global Monetary Policy Dependency
The consequences:
Global Monetary Policy Dependency
What happen to the developing countries?
Global Monetary Policy Dependency
Is too much foreign aid a curse or blessing to developing countries?

Take a look on:

• Abate, C. A. (2022). Is too much foreign aid a curse or blessing to developing
countries?. Heliyon, 8(9).

• Financial Times - Developing countries have hit the financial rocks

(https://www.ft.com/content/3bd28362-c006-44c3-9f7f-a89a78452600)
Financial Development
What is financial development?
Financial Development
What is financial development?

Fundamentally, financial sector development is about overcoming

“costs” incurred in the financial system. This process of reducing the
costs of acquiring information, enforcing contracts, and making
transactions resulted in the emergence of financial contracts,
markets, and intermediaries – World Bank

Financial sector: set of institutions, instruments, markets, as well as

the legal and regulatory framework that permit transactions to be
made by extending credit
Importance of Financial Development
Financial sector development plays a huge role in economic development. It promotes
economic growth through capital accumulation and technological progress by:
• Increasing the savings rate
• Mobilizing and pooling savings
• Producing information about investment
• Facilitating and encouraging the inflows of foreign capital
• Optimizing the allocation of capital
• Help small and medium sized enterprises (SMEs) grow by providing them with access
to finance
• Reduces poverty and inequality by:
• Broadening access to finance to the poor and vulnerable groups
• Facilitating risk management by reducing their vulnerability to shocks
• Increasing investment and productivity that result in higher income generation
 Measurement of Financial Development
Financial Institutions
Depth • Private Sector Credit to GDP
• Financial Institutions’ asset to GDP
• M2 to GDP
• Deposits to GDP
• Gross value added of the financial sector to GDP
Access • Accounts per thousand adults(commercial banks)
• Branches per 100,000 adults (commercial banks)
• % of people with a bank account (from user survey)
• % of firms with line of credit (all firms)
• % of firms with line of credit (small firms)
Financial Market
• Stock market capitalization and outstanding
domestic private debt securities to GDP
• Private Debt securities to GDP
• Public Debt Securities to GDP
• International Debt Securities to GDP
• Stock Market Capitalization to GDP
• Stocks traded to GDP
• Percent of market capitalization outside of top 10
largest companies
• Percent of value traded outside of top 10 traded
companies
• Government bond yields (3 month and 10 years)
• Ratio of domestic to total debt securities
• Ratio of private to total debt securities (domestic)
• Ratio of new corporate bond issues to GDP
 Measurement of Financial Development
Financial Institutions Financial Market

Efficiency • Net interest margin • Turnover ratio for stock market

• Lending-deposits spread • Price synchronicity (co-movement)
• Non-interest income to total income • Private information trading
• Overhead costs (% of total assets) • Price impact
• Profitability (return on assets, return on equity) • Liquidity/transaction costs
• Boone indicator (or Herfindahl or H-statistics) • Quoted bid-ask spread for government bonds
• Turnover of bonds (private, public) on securities
exchange
• Settlement efficiency
Stability • Z-score • Volatility (standard deviation / average) of stock
• Capital adequacy ratios price index, sovereign bond index
• Asset quality ratios • Skewness of the index (stock price, sovereign
• Liquidity ratios bond)
• Others (net foreign exchange position to capital, etc) • Vulnerability to earnings manipulation
• Price/earnings ratio
• Duration
• Ratio of short-term to total bonds (domestic, int’l)
• Correlation with major bond returns (German, US)
Financial Development in Developing
Country
Go check:
Global Financial Development Report by World Bank
Financial Development Index Database by IMF
Financial Inclusion
Financial inclusion emerged as a trending topic after the 2008 crisis.

Definition:
The process of ensuring access to appropriate financial products and
services needed by all sections of the society in general and vulnerable
groups such as weaker sections and low-income groups in particular, at
an affordable cost in a fair and transparent manner by regulated,
mainstream institutional players.
Financial Inclusion
Why do financial inclusion important?
• Increasing economic efficiency
• Supporting financial system stability
• Reducing shadow banking and irresponsible finance
• Supporting financial market deepening
• Unlocking potential new markets for the banking industry
• Raising the Human Development Index (HDI)
• Contributing to sustainable local and national economic growth
• Reducing inequality and low-income trap rigidity, thus ameliorating public
prosperity and ultimately alleviating poverty​
Financial Inclusion
Who does involve in developing financial inclusion?

The case of Indonesia:

The Usage of Bank Account in Developing
Countries
Financial Inclusion and Financial Resilience
Financial resilience: the ability of people and firms to recover from adverse
economic shocks, such as job loss or unanticipated expenses, without
suffering a decline in living standards.

“Financial inclusion also helps governments deliver services cheaper and faster.
As the COVID-19 crisis erupted in 2019, countries with higher rates of financial
inclusion were able to leverage that infrastructure to rapidly roll out
government support, as evidenced by the experiences of China, Colombia, and
India.”

Worth to read:
World Bank. 2022. World Development Report 2022: Finance for an Equitable Recovery.
Washington: World Bank Publication
How 'financial inclusion' can help lift millions
of people out of poverty?
• 1.4 billion adults have no access to banking, World Bank's Findex
survey finds.
• Mobile technology has reduced the number of 'unbanked' in the
developing world, but there is more to do.
• 'Financial inclusion' has been shown to reduce poverty and improve
lives, especially those of poorer women.

Listen to know more:

Radio Davos - https://www.weforum.org/agenda/2022/09/financial-inclusion-findex-radio-
davos-world-bank-economist/