1
I
H
G
F
E
D
C
B
A
12
11
10
9
8
7
6
5
4
3
2
The indications are that sustained effectiveness of MFIs will require that they should
operate on a relatively large scale. If so, policies that encourage larger-scale operation over
a proliferation of small entities is to be preferred. Subsidized interest rates offered by MFIs
are not compatible with graduation to self-sustaining operation and are generally not to
be encouraged, though the limited spillovers into mainstream finance mean that a subsidy
need not be considered crucial.
Subsidized lending by larger government-sponsored development banks causes dis-
tortions (see box 4.4). Those banks can seriously distort the incentive for a balanced
provision of lending products by commercial banks, as well as creating the conditions for
corruption. Moving government-sponsored development banks as far as possible either
(downstream) toward a commercial operation or (upstream) to become explicitly the
lending arm of the fiscal authority (with loans at unsubsidized rates) will, in most cases,
seem the optimal direction of policy.
4.4.3
Insurance and Collective Investment Arrangements
As with the banking sector, insurance and collective savings generate financial services
on both the asset and the liability side. On the liability side, they provide investment
outlets and risk-reduction instruments; on the asset side, they typically represent the most
important block of professionally managed long-term funds. Both aspects need to be kept
in mind in the assessment. Insurance and fund management industries often overlap, in
that insurance firms often sell pensions or manage pension funds, other mutual funds and
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