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Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.
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Chapter 5: Financial Regulation in Developing Countries: Policy and Recent Experience

Martin Brownbridge, Colin H. Kirkpatrick and Samuel Munzele Maimbo


Martin Brownbridge, Colin H. Kirkpatrick and Samuel Munzele Maimbo1 1. INTRODUCTION The role of an effective regulatory regime in promoting economic growth and development has generated considerable interest among researchers and practitioners in recent years. Regulation by government is associated with mitigating market failures. From the 1960s to the 1980s, market failure was used to legitimize direct government involvement in productive activities in developing countries by, for example, extending public ownership of enterprises. However, following the apparent success of market liberalization programmes in developed countries, and growing evidence of the failure of state-led economic planning in developing countries, the role of the state was redefined and narrowed in the 1980s to one of ensuring an ‘undistorted’ policy environment in which markets could operate as an efficient mechanism for the mobilization and allocation of resources. Consequently markets were liberalized, often as part of structural adjustment programmes, with the aim of reducing the burden of regulation on the market economy. But, by the beginning of the 1990s, there was a recognition that the state had a key role to play in providing the regulatory framework for the operation of what are often imperfect or missing markets. Effective regulation is now recognized as essential for supporting market-led economic growth and development, and empirical analysis has confirmed that the quality of the regulatory regime has a significant impact on the functioning of markets and economic performance (World Bank, 2002; Jalilian et al., 2003). Since the 1980s, significant changes have...

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