Financial sector development - Sida

structural adjustment, including macro-economic stabilisation and abolition of the grave
distortions previously existing in the markets of goods, capital, labour as well as foreign
exchange, is a necessary condition for developing a sustainable financial structure”
From the early 1990s it became increasingly common to find indicators pertaining
specifically to the banking and financial sectors among the targets and the conditions
posed in connection with structural adjustment lending. This was also the time when
Swedish aid policy started adhering more closely to the IMF’s judgement of when a
programme was ”on track” or not. It might therefore be argued that in terms of supporting
the introduction of financial sector reforms, Sweden’s balance of payment support during
most of the 1990s - amounting to about MSEK 1000 per year - has been a relevant
instrument.
Box 5. Financial System Reform and Structural Adjustment in Nicaragua
Reform of the financial system played a central role in the programs aimed to stabilize the economy at the
beginning of the Camorro administration. The modernization and reform of the financial sector was a key
element in the program agreed with the International Financial Institutions in 1993, which led to the first ESAF.
Today, Nicaragua is quite advanced in this reform and modernization effort. This effort had three main
orientations. First, the program focused on modernization and reform of the Central Bank. A new law was
introduced enhancing its role in monetary policy, eliminating its commercial operations, and increasing its
degree of independence. Simultaneously, an effort was made to increase the technical capability of the Bank.
Second, the banking sector was opened to private initiative. Several private banks opened, both with foreign
and domestic capital, but also with repatriated Nicaraguan capital. By 1996 there were about a dozen private
financial institutions in the market. These private banks captured rapidly a large share of deposits. The
expansion has been slower in the loans market, but already private banks have a majority share of the market.
Finally, the state has had a process of divestment in the banking sector, closing some state-owned banks and
strongly reducing and reforming others. This process is still going on in spite of facing serious political
problems. The introduction of some important institutions also contributed much to this process. One of them
is the “Superintendencia de Bancos” controlling prudential regulations and publishing an important flow of
data, which contributes much to the transparancy of the system. Another institution is Managua’s Stocks and
Values Exchange, the first such institution in the Central American region. Sweden cooperated from the
beginning to this development, indirectly through its financial support to the Structural Adjustment Program,
and directly, through its support to the FNI, a second tier investment bank, and by supporting training and
education programs within the Central Bank.
6. GLOBAL FINANCIAL SECTOR TRENDS
6.1 Structural reforms and the overall need to increase savings
The urgency for achieving a broad based sustainable economic development (with
increased real per capita incomes) in developing countries point to a need to mobilise
savings to productive investments in these countries. Most developing countries are in a
process of reforming their economies by introducing basic market mechanisms,
improving fiscal and monetary control, liberalising regulatory regimes and restructuring
the bank sector to allow commercial lending criteria and market interest rates to prevail.
Following the restructuring of central banks there is a need for these countries to develop
their financial markets. The "first generation" structural adjustment measures have paved
the way for the introduction of reforms in the financial sector.
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