A search for Theory of Financial Market Failure in Lower Income Countries (LICs) and implication for Financial Exclusion.

Agyekum, Francis and Locke, Stuart and Hewa-Wellalage, Nirosha (2016): A search for Theory of Financial Market Failure in Lower Income Countries (LICs) and implication for Financial Exclusion.

Abstract

We demonstrate in this paper using transdisciplinary approach that the same theory of information asymmetry that explains the raison d’être of financial intermediaries also explains why financial exclusion exists. This paper synthesises some elements of theories of finance and economics in developing a theoretical framework towards the understanding of why financial exclusion exists, and appears to be widespread in lower-income countries (LICs). The paradigm emphasises that financial market frictions that generate information asymmetry, risk and transaction cost associated with lending, contribute significantly to why exclusion occurs. The role fiscal deficit financing that crowds-out the private sector completely plays towards exclusion is also emphasised. The model predicts that excessive fiscal borrowing, market imperfection that allows ‘arbitrage value’ to be exploited, and excessive taxation, tend to widen the financial exclusion gap for the private agent. In contrast, growth in income and private investments tend to reduce the exclusion gap, hence, inclusion stimulating. The policy direction is curved towards choices that will minimise the tendencies and prevalence of financial exclusion in economies, especially the developing world.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Exclusion, LICs, Information Asymmetry, arbitrage value, crowding-out effect, QAT
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

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