Contractual Savings in Countries With a Small Financial Sector

This paper discuses the effect of contractual savings on financial markets in countries having small financial sectors.

The paper begins with the characteristics of small financial systems include:

• Total size - less than US $5 billion;
• Found in - small open economies with small population;
• Financial markets - smaller and shallower.

The paper discusses the minimum pre-requisites for the successful development of contractual savings including:

• Existence of sound banks and insurance companies;
• Long-term commitment by government for:
  • Pursuing financial sector reforms;
  • Creation of a sound regulatory and supervisory framework.

The paper describes the likely benefits for the rest of the financial sector due to the development of contractual savings since it:

• Enhances the options to the population and enterprises to obtain sound coverage against contingencies;
• Boosts the supply of long term savings, thus:
  • Promoting financial deepening;
  • Encouraging innovation;
  • Improving financial risk management;
• Increases the national saving rate;
• Fosters economic growth.

The paper outlines the options available to policymakers in countries with small financial systems to provide private pensions.

It draws the conclusion that only countries with relatively high levels of per capita income are good candidates for a successful development of contractual savings.