Regional : Promoting Capacity Building in Financial Institutions in Emerging Countries in South Asia

Finance / Finance sector development

Access to finance remains a major obstacle to private sector development and poverty alleviation. In South Asia, only 33% (2011) of the population had access to the formal financial sector. As of the end of 2013, domestic credit to the private sector as a percentage of gross domestic product (GDP) equaled 48% in Bangladesh, 44% in Bhutan, 48% in the Maldives, and 31% in Sri Lanka. These domestic credit ratios are considered low when compared to other countries in Asia the ratio is 118% in Malaysia, and 148% in Thailand. In many countries, banking sector assets have grown more slowly than GDP. Moreover, access to credit for small and medium-sized enterprises (SMEs) and other nontraditional sector borrowers are particularly low versus larger, more established borrowers. SME loans make up just 25% of total bank lending across Asia and the Pacific and the use of credit guarantees has helped improve bankability in some countries. The non-bank sector represents an average 0.8% of financial sector assets to GDP in South Asia. There is a need to incorporate nonbank financing options and other schemes into national policies, such as increased use of asset-based finance and capital market instruments. Small businesses lack access to credit from banks and NBFIs, with just 45% accessing lines of credit. Furthermore, the low level of GDP to insurance premiums paid in emerging Asian economies represents the lack of penetration of the insurance market, with insurance premiums equal to just 3% of GDP.

Strengthening and diversifying the financial sectors in ADB DMCs via knowledge transfer and capacity building within banks and nonbanking QFIs is needed to develop more innovative strategies and products tailored to a broader spectrum of borrowers. In addition, corporate governance, AML, and anticorruption efforts need to be strengthened in many QFIs throughout this region. Related party transactions, for instance, are prevalent in Asia and need to be carefully monitored. Risk management practices still do not meet international standards. With the move to Basel III, and as financial systems in South Asia become larger, more complex, and more interconnected, many banks will be in need of capacity development to ensure that adequate risk management systems are in place. Good environmental and social management systems and polices are also needed, and the introduction of such systems will typically require external expertise.