Independent Evaluation

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Evaluation on ADB Assistance for Domestic Capital Markets
Completed: 2008

Financial and infrastructure development are core areas under ADB's Strategy 2020. The development of domestic capital markets will significantly influence DMCs' ability to finance infrastructure. This is the first evaluation study on ADB assistance for domestic capital market development. The study evaluates the performance of ADB's public and private sector assistance related to the development of policy, legal and regulatory frameworks, and institutions for stock and bond markets. It covers two decades (1986-2006) of sector operations with greater attention given to assistance provided in recent years to help identify lessons for future operations. Projects with capital market components accounted for 10% of ADB's lending during the review period. The study was prepared on the basis of findings from 6 country studies for Indonesia, Mongolia, Pakistan, Philippines, Sri Lanka, and Viet Nam, which have accounted for two thirds of ADB's lending operations in the sector.

Summary of Findings

• The overall rating for sector assistance is borderline successful indicating that there is scope for improvement.



• ADB's assistance was on average relevant and effective in achieving envisaged outputs and, in many cases, outcomes, particularly with regard to the establishment of regulatory frameworks and infrastructure for securities markets.



• Efforts to help develop domestic bond markets and the institutional investor base have been less successful so far and will also depend on progress made with regard to strengthening government debt management frameworks, reforming the role of the state in financial markets and institutions, enforcement of creditor rights, and the introduction of private pension funds.



• Generally, capital markets now have greater depth and liquidity than at the start of ADB's assistance, although in many cases only modestly so.



• The limited impact of ADB support has been due to deficiencies in the implementation of agreed reform agendas, and, more importantly, unaddressed impediments in the overall economic, business, institutional, and legal environment governing capital market activities, as well as the limited potential for capital market development in very small economies. To improve strategic positioning, a number of related issues should be addressed by governments and ADB over time as part of comprehensive capital market development strategies that will need to go beyond narrow sector concerns to be effective.



• ADB's performance has generally been satisfactory, but needs to be raised further in line with emerging sector challenges and Strategy 2020.

Recommendations

• At the corporate level, develop a financial sector strategy that provides a consistent analytical and operational framework for sector assistance to improve the responsiveness of ADB support to rapidly changing and diverse client demands and needs including viable approaches for small or low-income DMCs; strengthen the coordination of various ADB entities that work on sector issues; and facilitate the availability of adequate staff and consultant resources to support sector operations.



• At the country level, improve the selectivity and strategic planning of capital market assistance through careful assessments of market development potential, support for the preparation of long-term strategies that address all binding constraints to capital market development, and the involvement of relevant stakeholders within ADB and government in the preparation of sector assistance strategies and programs.



• Strengthen the delivery of ADB sector assistance by using adherence to international standards and principles as indicators in design and monitoring frameworks pertaining to assistance for securities market; considering costs and benefits associated with capital market development measures by developing and promoting cost-effective approaches; and involving relevant private and public sector stakeholders in the formulation of reform programs and ensure that any capital market reforms are sufficiently discussed with market participants.