Financial system development
An increasing interdependency of developing countries in the international financial market and rising involvement of private capital in development financing have been observed over the past few years. From a development policy perspective, these are generally welcome trends. However, increasing exchange rate risks and rising interest charges also result from this. Moreover, the lack of transparency and heterogeneity of debt is increasing.
The current issue of Development in Brief explains the changes in debt structure of low- and middle-income countries as well as the reasons for these developments. It also goes into detail about increasing capital market interdependency and its consequences.
Budget support is viewed as the most consistent development policy instrument for implementing the principles of the "Paris Declaration". However, it was unable to meet many expectations regarding increasing the speed or comprehensiveness of development steps and is also subjected to the allegation of (implicitly) promoting corruption and mismanagement. Many donors have thus more or less withdrawn from providing budget support. At the same time, policy-based financing ("reform financing") is gaining significance due to good experiences with policy loans in international development cooperation.
The current issue of Development in Brief summarises the differences between reform financing and budget support and, in the process, discusses the success factors for reform financing.
In recent years, the debate surrounding international development finance has tended to shift its focus from increasing ODA and foreign direct investments to increasing domestic resource mobilisation (DRM). Increasing locally available public and private resources not only frees up significant potential for meeting the enormous financing requirements of the SDGs. There is also hope that this will decrease dependency on development aid and international financial flows in the long term.
The current edition of Development in Brief provides an overview of the most important approaches to increasing mobilisation of local resources in developing countries.
The relatively positive economic situation of the past few years has also improved access to the international finance markets for many developing countries and companies based there. However, the financing offered through those markets is mostly denominated in hard currencies like the US dollar or the euro, so when borrowers accept hard currency loans they have to take on exchange-rate risks as well. If their local currency unexpectedly depreciates in real terms due to global financial crises or speculative financial transactions, they may be forced to raise significantly more domestic purchasing power than expected to service their debts.In the worst-case scenario, this can lead to insolvency for important utility companies (e.g. energy, drinking water) or even entire states.
In this issue of Development in Brief we explain the options available to countries and companies to reduce these types of foreign exchange risk, or to avoid them completely through local currency financing.
Originally, the blockchain technology has become known among experts primarily as an elegant technical device to ensure counterfeit protection of the cryptocurrency Bitcoin. Since, the enormous transformative potential of this technology has become more and more evident for many further processes dealing with reliability and transparency.
The current edition of Development in Brief explains how blockchain technology works, what relevance it holds for developing countries, and how international development cooperation can help to promote useful applications in developing countries.
According to UN estimates, an annual USD 2.5 trillion funding gab needs to be filled in order to finance the implementation of the Sustainable Development Goals (SDG). Besides domestic sources of finance including taxation and traditional ODA, the mobilisation of private funds to finance the SDGs is crucial. In this respect, “green bonds” seem to be an important instrument offering significant prospects.
The current issue of Development in Brief briefly presents this instrument and discusses if and to what extent it appears an appropriate means to close the funding gaps encountered by developing countries in financing sustainable development projects.
In many developing countries, a bank account is still a luxury: it is hardly worthwhile for financial institutions to maintain expensive branches in regions with potentially low revenue. The resulting de facto exclusion of low-income and underprivileged population groups from financial services such as saving, borrowing or risk protection (insurance) makes it even more difficult for them to overcome poverty.
The current issue of "Development in Brief" explains how and under what conditions the introduction of digital payment systems can help overcome this obstacle to development.
As a result of climate change, extreme weather events and natural disasters are globally on the rise, and their impacts are increasingly devastating. Due to their geographic location, developing countries are hit especially hard while at the same time they are the least prepared.
The current issue of Development in Brief presents ways to considerably reducing the extent of human suffering and material damage in the event of natural disasters by pro-active risk management systems. Furthermore, it explains the significance of new insurance products providing governments and aid organisations sufficient financial means to allow for quick and efficient support in case of disasters.
The experts worked to obtain and convey a better understanding of operational efficiency issues within the microfinance industry by both explaining why many institutions frequently do not view efficiency concerns as a top priority and by using multiple case studies to illuminate a wide range of efficiency challenges and potential solutions. The analysis detailed in this paper builds off earlier studies by examining the issue from the practitioner’s perspective and combines case studies from six commercial banks which have a strong focus on microfinance with third-party publications and the experts’ own knowledge gained from working with over a hundred microfinance providers worldwide.
When the virtual currency bitcoin was invented eight years ago, hardly anyone expected that it could establish itself as an alternative to legal tenders. Although the role played by bitcoins in industrialised countries is still fairly minor in quantitative terms, the number of bitcoins in circulation is steadily growing. Meanwhile, an increasing number of people see bitcoins as an opportunity to enhance financial inclusion in developing countries.
This edition of Development in Brief discusses what bitcoins are, how they work, and what potential and risks they carry for use in poorer countries.
A major reason for the reluctance of banks to extend credit to farmers is the broad range of risks that affect agricultural production and that reduce farmers' ability to repay loans. Against this backdrop, agricultural insurance presents one promising option to lower the financial impact from risks that the farmers face and hence to increase their creditworthiness. The aim of this feasibility study is to assess the potential of such meso-level agri-insurance schemes and to derive conclusions on whether and how different types of intermediaries would be suited to apply and benefit from them.
The relative stability marking the West and South of the Democratic Republic of the Congo has allowed for a stable net economic growth for more than 10 years with recent economic growth rates exceeding 7 percent (2010-2012). An extension of the financial sector to segments of the population that were previously excluded has further strengthened these positive economic developments.
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