Finance in Lower-Income Countries: An Empirical Exploration

49 Pages Posted: 3 Mar 2006

See all articles by Enrica Detragiache

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Poonam Gupta

Delhi School of Economics

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Date Written: August 2005

Abstract

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.

Keywords: Financial development, low income countries

JEL Classification: G21, O16

Suggested Citation

Detragiache, Enrica and Gupta, Poonam and Tressel, Thierry, Finance in Lower-Income Countries: An Empirical Exploration (August 2005). IMF Working Paper, Vol. , pp. 1-49, 2005. Available at SSRN: https://ssrn.com/abstract=888036

Enrica Detragiache (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Poonam Gupta

Delhi School of Economics ( email )

Department of Economics
Delhi University
Delhi, Delhi 110007
India

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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