HONG KONG, CHINA – Financial systems in developing Asia have improved in the past decade but further deepening of banks and capital markets and greater access to finance is essential to enhance growth and equity in the region, says a new Asian Development Bank (ADB) report released today.

“Improving the efficiency of the banking sector and capital market can boost investment, productivity, and innovation,” said ADB Chief Economist Shang-Jin Wei. “Reducing the dominance of state-owned financial institutions and developing local currency bond markets are some of the important steps needed in promoting Asia’s financial development.”

Despite a lot of progress, developing Asia’s financial systems still lag advanced countries by a wide margin. Bank deposits, for example, equal 60% of regional gross domestic product (GDP), compared with an average of 110% among members of the Organisation for Economic Cooperation and Development. Developing Asia bond markets equal less than half of GDP, or about a third of the 140% average in advanced economies.

Financing Asia’s Future Growth, the special theme chapter in ADB’s Asian Development Outlook 2015 (ADO), notes that boosting developing Asia’s average ratio to GDP of liquid liabilities—currency plus checking and interest-bearing accounts in financial institutions—from about 65% to 75% would add almost 0.4 percentage points to average annual GDP growth per capita.

“Data shows that financial development does not necessarily lead to a reduction in income inequality,” said Mr. Wei. “It is therefore important to also pursue financial inclusion policies—measures that can boost access to financial services by low-income households and small and medium-sized enterprises.”

The empirical evidence in the ADB report suggests that, while financial development tends to alleviate inequality in its early stages, inclusive growth becomes more likely with concerted government efforts to improve financial inclusion.

Because a financial crisis can both lead to a recession and generate a disproportionate amount of misery for economically disadvantaged groups, as seen during the Asian financial crisis and the more recent global financial crisis, safeguarding financial stability is important for growth and economic inclusion.

The ADB report finds that countries with better regulation of financial institutions, more foreign direct investment relative to foreign bank loans and foreign portfolio flows, and a more diversified source of international funds, are likely to be more resilient to financial shocks.

The most effective approach to developing the financial sector needs to take into account a country’s circumstances. For low income countries in Asia, further improving their banking sector’s ability to mobilize domestic savings, lower the cost of credit, and improve access for households and firms may be the most important elements of financial development. For middle income countries, further developing their local currency bond market and stock market is also required in order to stimulate innovation.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. 

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