Shortage of Long-Term Finance Blunts Progress in Developing Countries, says World Bank Report
Wednesday, September 16, 2015
A shortage of long-term financing since the 2008 crisis is choking the investment-backed growth of companies in developing countries and hampering the ability of credit-worthy families to borrow for education and housing needs and escape poverty, a new World Bank report warned today.
At the global level, this shortage of long-term financing also means that despite appeals by the Group of Twenty (G-20) and other key international groups, developing countries are struggling to mobilize the billions of dollars in financing they need to build badly-needed infrastructure in order to grow their national and regional economies.
According to the new report: ‘Global Financial Development Report 2015-2016: Long-term Financing,’ extending the maturity structure of finance is considered to be at the core of sustainable financial development.
Securing long-term financing, defined as investment funding that matures in a year or more, depends on the same fundamentals essential to tackling the current volatility in global capital markets: Policy makers need to focus on institutional reforms, such as promoting macroeconomic stability, establishing a regulated and legally enforceable banking and investment system that protects creditors and borrowers, and setting a framework for capital markets and institutional investors.
World Bank Group President Jim Yong Kim says, “It would be a challenge to achieve high and sustainable rates of economic growth if countries fail to invest in schools, roads, power generation, electricity distribution, railways and other modes of transport, and communications. Private sector construction of plants and investment in machinery and equipment are also important. Without long-term financing, households face great hurdles to raising income over their lives —for example by investing in housing or education—and may not benefit from higher long-term returns on their savings.”
While commercial banks remain the primary source of financing for firms and households around the world, capital markets have grown rapidly, especially in emerging market economies like China and India. Firms in developing countries saw a 15-fold increase in the amounts raised in equity, bond, and syndicated loan markets between 1991 and 2013. Although the majority of this finance originated in high-income countries, there are notable exceptions: more than 70 percent of India’s total syndicated loan market originates domestically.