Reviews of Cross-Cutting Issues
The development assessment draws both on infrastructural assessments (for each of which one or more sets of standards have been developed by the relevant international bodies) and on sectoral assessments. As explained, development dimensions must be added to, or built on, aspects of the sectoral prudential standards. Among the development dimensions that have been highlighted in this regard are the competition issues such as entry and exit policies, the taxation issues, and the distorting or chilling side effects of poorly designed prudential regulation. Some of the issues also arise on a cross-sectoral basis or in respect to undeveloped sectors and segments, which will now be discussed.
4.6.1 Missing Markets and Missing Products
Experience shows that a number of potentially useful products or markets, though readily observed in some low - and middle-income environments, are not present in others. The sectoral and demand analyses of sections 4.4 and 4.5 should detect the absence of key markets or services, and those analyses should be assiduous in discovering the reasons for missing products and markets. Many such products—leasing, factoring, reverse factoring, venture capital and other forms of private equity, and various types of long-term finance— can be provided by commercial banks. Otherwise, they may be provided through finance companies or other specialized banks or nearbanks, which are often nondeposit taking. Insurance and collective savings funds are also important potential providers of those and other products (especially for longer terms and for higher-risk profiles).
It is useful to distinguish between the following underlying causes of underdeveloped or missing markets: macroeconomic or legal. Macroeconomic causes may include an inflation history that impedes long-term contracting at reasonable interest rates. Regulatory impediments may include restrictions on contractual savings institutions to hold private sector assets. Those factors effectively restrict the supply of long-term resources or prohibit financial institutions from entering certain markets. Taxation rules or the lack of clear rules can result in higher costs for certain financing products, such as leasing. While deficiencies in the legal system can impede effective financial intermediation overall, the negative marginal effect may be especially strong for certain products that depend more on its effective functioning, such as leasing. It is important to analyze whether there is a lack of appropriate legislation, a consistent lack of application of the legislation by the court system, or a lack of appropriate registration systems at reasonable costs. But there may also be demand factors; the demand for certain services may not be sufficient to justify the set-up costs.
