Building Financial Institutions in Developing Countries

The paper recognizes financial development and financial institution building as important prerequisites for economic growth. In this light, it discusses the potential and the problems of institution building.

The paper discusses three key issues:

• Importance of financial sector development and financial institution building;
• Recent experiences and the potential approaches to financial institution building;
• Reasons of success of a few microfinance institutions (MFIs) worldwide.

The paper also:

• Underlines the importance of financial development for economic growth;
• Describes the main elements of financial institution building:
  • Lending technology,
  • Methodological approaches,
  • Internal structure and corporate governance of partner institutions.

Finally, the paper highlights the key problems that negatively affect financial institution building:

• Inappropriate expectations on part of donor and partner institutions regarding the problems and effects of institution building efforts;
• Neglect of corporate governance and ownership issues;
• Lack of a conducive regulatory framework for MFIs.