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p. 14 of 58 BACK | NEXT Purpose and Structure of the Toolkit Part One: Introduction and Overview Part Two: Preconditions and Infrastructure for Financial Sector Development I. Preconditions for Financial Sector Development A. Foundations of Financial Development and Economic Growth B. Institutional Underpinnings of Finance C. Macroeconomic Policy and Data Transparency II. Institutional and Market Infrastructure Part Three: Financial Regulation and Supervision Part Four: Regional Financial Integration Part Five: ADB's Intervention in the Financial Sector Bibliography Glossary and List of Abbreviations Acknowledgements

Financial Sector Legal and Regulatory Toolkit : Part Two: Preconditions and Infrastructure for Financial Sector Development

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I. Preconditions for Financial Sector Development

In order for a financial system to develop, a number of preconditions must exist.

First, a system of governance which establishes property rights and enforcement of contracts should be in place. It is also important to provide for the development of human capital.

Second, a number of legal underpinnings must be available, including laws governing collateral over moveable assets ("secured transaction law") and collateral over immovable assets, law supporting companies or corporations ("company law"), and a supportive system of government finance (e.g., taxation). To support effectiveness, in addition to enforcement of contracts, the governance system should also provide an efficient system for rule of law.

Third, a financial sector functions best in the context of appropriate macroeconomic policies. These policies, while largely outside legal and institutional concern, operate best in the context of an appropriately designed and transparent institutional framework.

Prudential regulation and market transparency are central to a viable financial system. However, supervision and regulation are only important if participants actually engage in financial transactions. Accordingly, laws promoting prudential regulation and market transparency must be supported by the development of an effective legal and institutional infrastructure that foster, in practical terms, financial and other transactions. In addition to a sound public law regulatory framework, private law must provide a means for participating in financial transactions and for enforcing rights with respect to transactions.

Without these, a sophisticated market economy cannot exist; likewise, a market-based financial system will not exist. Macroeconomic policy, data transparency, and the supporting institutional framework would be largely meaningless, at least if the goal is to have a functioning market-based financial system.

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