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Sound financial sector vital for growth
2005-12-28 08:58:28
By Mireny John
Financial markets in any economy stimulate economic growth by allowing efficient inter-temporal allocation of resources.
Evidence abounds about the interconnectedness of the financial superstructure of a country and its economic infrastructure.
In mature capitalist economies, stable, responsive and well managed financial systems fuel the economic machinery of a nation’s development and poverty reduction strategies.
Financial development generates infrastructure growth by mobilising savings, allocating capital funds, monitoring the use of funds and managing risk.
The financial system thus acts as the ’brain” of the economy by marshalling scarce resources across time and space by synthesising asymmetrical or irregular market information.
The financial system consists of banks, discount houses, the stock market, insurance firms, pension funds, building societies and, in the case of Tanzania, microfinance institutions and a myriad of other informal financial institutions.
Financial firms play a pivotal role in gathering information on risk-return attributes of investment opportunities under different environmental scenarios.
Financial liberalisation is the best positive financial development that impacts directly on economic development and poverty reduction. It is, therefore, prudent and imperative that there be, in any economy, financial service providers for both the first economy and the second economy.
The first economy represents the formal, institutionalised sector, and the second economy, a predominant feature in the developing world, represents the informal sector where the majority of self-employed people engage in economic activity.
When Tanzania deregulated its financial system in 1991, the aim was to enable easy pricing and allocation of funds into the various sectors of the economy.
A well-developed financial superstructure is rooted in friendly financial sector policies which permit private capital to put in place competitive infrastructure.
Today, we have about 30 commercial banks and a number of micro-finance institutions, all competing for various financial products and services on the marketplace.
It was Standard Chartered Tanzania Ltd which first introduced world-class financial product —the Automated Teller Machines—ATMs in the mid 1990s. For the first time, depositors in Tanzania could access their cash at any time of the day or night.
The StanChart move raised its public confidence on the market, and looked well ahead as the attractive, and most innovative bank in an emerging market.
Sooner or later, other commercial banks followed suit, even those banks that have pan territorial networks.
As a great plus indeed, some banks have boosted market capitalisation through bond innovation, with resolve to raise finances for micro-credit lending products.
We are looking forward to a more shrewdly organised financial superstructure that would see leasing companies financing asset acquisition by firms, building societies transforming the real estate market, and, micro-finance institutions supporting small, informal sector borrowers.
With the liberalization of the insurance sub-sector, insurers are providing cover to businesses and assets, and pension funds are investing in property development .
Some financial institutions are operating in partnership by infusing appropriate products into the economy, thus fostering growth prospects.
Financial institutions obviously stimulate enterprise growth. Strategies for enterprise growth should have revolved around establishing effective bank regulation and supervision, reducing unnecessary intervention from government, guidance and direction, issues related to credit rationing, with a view to avoiding excessive lending.
Economic growth is expected to reach 8 percent come next year, hence, we need more financial companies to finance this growth.
There are three sources of growth finance that a firm can consider and these are: use of retained earnings, borrowing through debt instruments, floating an Initial Public Offer (IPO) or issuing new share capital.
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