Access to Finance in the Pacific Region: Issues and Options

Access to Finance in the

Pacific Region:

 Issues and Options

Paul Holden

The Enterprise Research Institute

Introduction

There is extensive evidence that well functioning financial markets areessential for promoting economic growth. The difference betweenrepressed financial markets and those that work effectively can make adifference to growth rates of as much as two percentage points a year. Improving and deepening financial markets is therefore an urgent policypriority.

The benefits of well functioning financial markets are widely spread. Theynot only provide investment finance to large businesses, but assistance tohome buyers, financing for automobile purchases, working capital forsmall businesses, loans for education to improve human capital, andloans to farmers and others in the rural sector to improve crops andaccess new markets.

However, broad access to finance is not in the interests of some groups.For example, state owned banks can be used to channel funds topoliticians and government officials. Competition, which is promoted bywidespread access to finance, weakens the grip on power and resourcesof small concentrated elites. They therefore try to slow it progress.The financial systems of high income countries have a complex structureof legal and regulatory institutions which provide the foundation for theoperation of financial markets. It took hundreds of years for theseinstitutions to evolve. The question, therefore, is how to promoteinstitutional development in Pacific Region countries and to what extent isit possible to imitate those of the advanced economies.

This paper analyzes issues and policy options related to extending anddeepening access to finance in the Pacific Region. Its purpose is tooutline as concisely as possible the factors that lead to “thin” financialmarkets in the region. It suggests policy measures that will allow financialmarkets to better fund investment, entrepreneurship and growth. Thepaper does not attempt to break new ground but focusses on what needsto be done to improve financial intermediation within the Pacific context.It first summarizes the evidence showing that financial markets are thinand poorly performing. It outlines briefly the types of financial institutionsthat exist, suggesting that for the foreseeable future, commercial bankswill continue to be the dominant lenders. It looks at barriers to greaterlending and suggests policy reforms to improve banks’ ability to lend. Italso examines the institutional underpinnings of financial markets in theRegion and concludes that they are weak. The paper makes policy reformsuggestions to improve the lending environment.

The paper is laid out to highlight the mainpoints influencing financial markets in theregion. It is designedto be easy to read.Readers should find that the arguments andsections flow together, but that many pagesare self contained and can read in standalone fashion, so that they can bereproduced for single issue discussions.Although some detail is sacrificed as aresult of this approach, there are substantial gains. in terms of brevity andease of dissemination.

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