David King Economics

Over the last three decades, financial sectors in developing countries have substantially widened and deepened. The ratio of private sector credit to GDP – the most comprehensive indicator of access to finance in any economy – has roughly doubled in middle-income countries, to about 60%, as well as in low-income countries, to about 30%. However, these ratios remain far below the average of about 140% for the high-income countries, according to World Bank data.

The financial sectors of developing economies are dominated by commercial banking. Very little finance comes from nonbank financial institutions – finance companies and capital markets. That is the main reason for the large difference in the PSC/GDP ratio versus the high-income economies, where about half of all finance is delivered by nonbanks.

Companies in developing countries will continue to suffer a severe competitive disadvantage versus those in higher-income economies as long as their ability to access finance – fundamental to their ability to take advantage of market opportunities and grow – is so much more constrained. Now that commercial banking is fairly well-advanced in developing countries, this comes down to the need to greatly expand the institutions of nonbank finance.

The attached report, prepared for USAID in Bosnia & Herzegovina, reviews this issue for that country. Its conclusions and recommendations apply to most developing economies.