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	Table of Contents
p. 16 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 : I. Preconditions for Financial Sector Development

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B. Institutional Underpinnings of Finance

Once the foundations of a governance structure supporting property rights, the enforcement of contracts, and human capital formation are in place, basic financial transactions and markets can develop even in a problematic macroeconomic environment. In order to develop functioning financial markets, an economy must provide a number of fundamental institutional tools to underpin financial sector development, including support for the creation and enforcement of security, including secured transactions law, company law, and an appropriate system of taxation.

First, adequate lending infrastructure, including secured transactions law, is necessary to the development of banks and banking. A proper legal framework for lending encourages extended loan duration, improved currency matches, and enhances the development of domestic financial markets.

Second, adequate company law is essential for the development of a decentralized financial system. The development of company law was not really considered in detail until the requirements of privatization and transition of the late 1980s and 1990s. Arguably, company law is fundamental to aggregation of capital necessary for exploitation of capital intensive industries and projects.

Third, fair and reasonably predictable tax laws are (i) essential to supplement other legal infrastructure and to clarify the role of the government in any economy, and (ii) an absolute necessity both for the adequate functioning of domestic governments and for the encouragement of investment and growth.

Finally, in order to support broader and sophisticated financial development, the rule of law is important. The rule of law is a broader issue than merely enforcing contracts. It also includes the process by which governance and the legal system operate in a given economy. The issues addressed in the transparency codes discussed in Section C, as well as the rules of the World Trade Organization (WTO), reflect many of these ideas. For more information on WTO, please refer to ADB's toolkit on WTO.

With these elements in place, one can expect the development of functional financial markets, with financial markets receiving significant support from the existence of appropriate macroeconomic policies. Developed and sophisticated financial markets require greater attention to the issues discussed in Part Three as well as to an appropriate macroeconomic policy environment.

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