Taking Stock of the First Generation of Financial Sector Legal Reform

Abstract

The World Bank Group has promoted access instruments in the financial sector (e.g., microfinance and small- and medium-enterprise projects) for many years. More recently, it has conducted major studies on financial system access and implemented projects involving rural financing, cooperative financial institutions, the down-scaling of commercial banking institutions, and home financing for the poor. Germane to this paper, the Group has been closely involved through its structural adjustment and technical assistance programs (and more recently its Financial Sector Assessment program) with financial sector legal reform initiatives respecting developing, emerging and transitioning economies This paper contends that the first generation of financial sector legal reform (particularly that related to policies and infrastructure) is really of relatively recent vintage. Historically, such reform has not been a core function of the World Bank or other international financial institutions (IFIs). The reform process has been mainly crisis-oriented and reactive by necessity, driven largely by the systemic objectives of industrialized countries to prevent financial crises and related contagion, foster global financial stability, and, more recently, maintain financial sector integrity. The first generation of reform did not benefit from a conducive reform environment nor, until the recent past, a clearly thought-through approach to incorporating such developmental factors as access and equality into reform processes. This paper suggests that the World Bank Group should step back and take stock of what the preceding stage of financial sector reform has and has not achieved in order to discern appropriate lessons for the next generation of reform. The Bank's fundamental mandate as a development bank, its current primary mission of poverty alleviation, and its evolving institutional profile as a knowledge-based bank should provide the overarching context for this new generation of reform.