Delivering Inclusive Financial Development and Growth

Lead Research Organisation: University of Birmingham
Department Name: Accounting and Finance

Abstract

According to Stiglitz (2006), the financial system acts as the 'brain' of an economy. Financial institutions and markets promote the dissemination and co-ordination of information about resource availability at every level throughout the economy, and so they enable an efficient allocation of these resources for supporting economic growth. However, it is not altogether clear how finance can deliver inclusive financial development and growth. Recent empirical research shows that in LICs there are financial development gaps as well as financial inclusion gaps (Allen et al., 2014). In addition, the links between the financial system and economic development have come under increasing scrutiny in recent years, especially following the 2007-09 global financial crisis (Caballero, 2015). The current consensus is that there is urgent need for research on the role of the finance in fostering inclusive financial development and sustainable economic growth.

Led by the University of Birmingham, a consortium of UK and international partners will collaborate on this four-year programme of research. Partner institutions include the Institute of Development Studies at the University of Sussex, Loughborough University, the Overseas Development Institute, SOAS at the University of London, and the University of Nottingham in the UK, and the Universities of Groningen in the Netherlands, Laval in Canada, and Columbia in the US. Crucially, the project consortium also includes researchers from institutions in sub-Saharan Africa (SSA), namely the University of Ghana-Legon and the African Economic Research Consortium (AERC) in Kenya, who stand to benefit from the organisational and institutional capacity-building opportunities which underpin the research programme.

The aim of this research is to identify workable policies to help make the financial sector an effective instrument in promoting financial inclusion and sustained growth in LICs, and consequently create an enabling environment for transitioning these countries to middle income status. We will provide a set of answers to ALL THREE critical questions posed in the Call for Proposals concerning i) the role of international capital flows in growth and development, ii) the design and provision of institutional frameworks to support financial development, and iii) the ways in which financial systems can help generate and transmit technical change in the economy as a whole.

To achieve this ambitious goal, the project will be structured into four clusters on 1) institutional framework for inclusive growth, 2) capital flows, 3) technological diffusion, and 4) a cluster which will run in parallel to the other three to synthesise findings in order to derive meaningful policy recommendations and drive tangible global impact. Component II of the programme is planned to focus on additional policy-oriented issues, and will be developed in tangent with DFID policymakers, the ESRC and other national and international academics and end-user stakeholders, and will be run in partnership with the Africa Growth Initiative at the Brookings Institute, US.

The research will cover a wide range of topics within the overall remit of financial sector development, so multiple innovative research methodologies will be employed across eight integrated work-streams. Methods include institutional analysis, i.e. the assessment of how institutional features of financial systems contribute to, or impede, financial sector objectives; field experiments; comparative analysis of the experience of countries with different policies and institutions; rapid appraisal and participatory appraisal methods; quantitative analysis of company and bank balance sheets, and quantitative and qualitative analysis of survey data. The major part of the research programme will entail empirical research based on fieldwork in selected LICs in SSA (Ethiopia, Ghana, Kenya, Rwanda, Uganda, Zambia), with wider application to other LICs globally.

Planned Impact

The direct beneficiaries of this research will be individuals and companies in low income countries (LICs) whose wellbeing will be improved by both enhanced access to financial services (inclusion) and improved financing of development projects (effectiveness). There are three principal groups of beneficiaries:

1) Users of finance in low-income countries (LICs)

The research has been designed to maximise opportunities to engage with individuals in LICs through, for example, interviews, focus groups and surveys, seminars and research findings dissemination workshops. Outputs, influenced by their input to the project, will be geared towards influencing policy decisions which can maximise access to finance for those living in LICs in sub-Saharan Africa.

2) Organisations involved in financial development

The research will engage with organisations such as finance NGOs, banks and financial services organisations, and government departments by contributing to knowledge on financial inclusion, financial development, and on the types of policies most appropriate to the needs of financially excluded people. Furthermore, there will be scope for engagement with associations of entrepreneurs, e.g. micro, small and medium companies, to better understand their needs and major obstacles they face in accessing finance, to collect primary data at their level and to gain insight into their perceived view of proposed new financial innovations.

3) The broader policy community

The final group of beneficiaries is the broader community concerned with financial development and financing for development, including international organisations (e.g. the World Bank, African Development Bank), NGOs and donors such as DfID. The research will ensure that these institutions' actions can be better informed by contributions to knowledge on how to enhance the wellbeing of individuals through inclusive access to finance.

The research will result in short, medium and long-term outputs for these groups:

Short-term benefits: During research delivery, key end-users will be engaged as project stakeholders to steer the project. This will ensure that impact is meaningful, and is influenced directly by their needs in order to respond to challenges which they face. Stakeholders will include those in senior positions of large organisations such as the African Development Bank, IMF and Higher Education Institutions in the research regions (through mechanisms such as the Advisory Board), through to users of finance in sub-Saharan Africa who will be invited to participate in workshops and focus groups to be delivered throughout the fieldwork phase of the project.

Medium-term: Upon wider dissemination of findings, it is anticipated that a set of key policy recommendations will be produced which will steer government officials, policy/decision makers, civil actors, donor groups, NGOs, and central banks in LICs in sub-Saharan Africa (SSA). The policies implemented as a result of these findings should seek to enable greater access to finance for those in SSA LICs, as well as greater integration of financial products and new technologies in financial organisations in these regions.

Long-term: In the long-term, it is hoped that the findings and outputs from this research, and associated policy changes in LICs, will be influential in the ongoing efforts to relieve poverty in LICs and offer substantiated evidence upon which to base strategies for the transitioning of counties in SSA from low- to middle-income status. Furthermore, it is hoped that, analyses of 'what works' in these regions will engender future research in other LICs globally.

A week-long Initial Stakeholder Workshop will be held in Ghana in the first year of the project for representatives from key research regions in SSA. It will include talks from notable guest speakers, knowledge exchange events, and interactive end-user seminars (full details are in the Pathways to Impact).

Publications


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