Evaluation

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Evaluation Update on Support for Financial Intermediation in Developing Member Countries
Completed: 2008

This report updates the earlier evaluation studies on ADB's assistance to supporting financial intermediation for private sector development (PSD), small and medium-sized enterprises (SMEs) promotion in particular. It follows a meta-evaluation approach. The report is intended to inform future formulation and implementation of ADB strategies and operations in financial intermediation and PSD.

Background

ADB supported financial intermediation in its DMCs through various modalities, starting with a line of credit to a finance company in Thailand in 1968. The modalities have evolved since then and have diversified to meet the changing economic circumstances in the region, particularly the growing demand for financing for PSD. As of the end of 2007, ADB had provided credit lines, policy-based loans (to the industrial, financial, capital market, governance, pension, and trade sectors), housing sector loans, and financial leasing lines in support of financial intermediation. The support had come in the form of 476 projects worth about $16.8 billion in total—about 21% of the number of ADB’s projects and 14% of its public sector lending during that period.

Findings

ADB's financing modalities and practices relating to financial intermediation for PSD have changed emphasis from lending to more diversified operations and expanded nonlending services. This emphasis should be pursued further in the future. Many weak areas still constrain financial intermediation for private sector activity and retard economic growth. To overcome these weaknesses, a number of issues must be addressed:

• The investment climate must improve through rational policies, better access to finance, and stronger institutions.
  
• The financial sector needs to become more broad-based, competitive, and efficient to provide entrepreneurs with alternative sources of investment capital, a diversified selection of new and innovative products, competitive rates, and efficient services to make their investments viable.
  
• SME support services such as skills, trades, entrepreneurship, and other business development services would make success more likely and help strengthen financial intermediation for SMEs.
  

Thus, a three-pronged program where the above elements are mutually complementary needs to be adopted to build a strong foundation for an efficient and effective financial intermediation system.

ADB's program loan modality in support of financial intermediation for PSD has generally been successful and should therefore continue. That modality could be used to help stabilize macroeconomic conditions; strengthen policies, procedures, and incentive frameworks to improve the investment climate for PSD and foreign direct investment; and strengthen the financial sector in various areas such as legal frameworks, prudential regulations and rules, and their effective enforcement and oversight; financial sector deepening through activities in underserved regional and rural areas and small business financing; and institution building, capacity enhancement, and human resource development.

Issues to Consider Further

• Integrated programmatic approach. More integrated programmatic approach needs to be rigorously used to promote financial intermediation in DMCs.
  
• Private sector development. ADB needs to develop strategies to increase financial intermediation for PSD in DMCs and integrate them with its country partnership strategies.
  
• Flexible modalities and continuous policy dialogue. As the financial systems of DMCs become increasingly integrated with regional and global financial systems, the systems will be more susceptible to changes and turmoil in the external financial environments. ADB should stand ready to assist DMCs in coping with these challenges.
  

Team Leader: Cheolghee Kim, Senior Evaluation Specialist. Email: cmkim@adb.org.