Economic Paper

2310-1385 (online)
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This series examines current economic issues from a Commonwealth perspective. The titles in the series are technical papers of topical interest to specialists concerned with trade, micro and macroeconomics, development economics and related subjects.
Financial Intermediation in Small Island Developing Economies

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Maxwell J. Fry
01 Sep 1981
9781848593299 (PDF)
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  • Preface

    Development of a well integrated financial system to effectively mobilise and efficiently allocate resources is essential to promote economic growth. In recent years considerable attention has been focused on the process of financial intermediation, providing a link between savings and investment activities, and its impact on economic development. However, much of the work has been in the context of larger developing countries and the working of the financial system in small economies has hardly received any attention.

  • Introduction

    The purpose of this paper is to provide a background survey of financial intermediation in small island developing economies. An attempt to achieve this aim is made here by examining the roles of financial intermediaries, measuring the efficiency with which they perform these roles, describing briefly the financial intermediaries operating in a sample of 11 small island developing economies, discussing the part played by foreign financial institutions, analysing advantages and disadvantages of alternative financial systems for these economies, and, finally, outlining the elements of a monetary policy strategy designed to promote effective and efficient domestic resource mobilisation and allocation in small island developing economies.

  • Role of Financial Intermediaries

    Financial intermediaries perform two major economic functions in almost all economies. First, they create money and administer the payments mechanism. In most economies today, a central bank or monetary authority issues currency and depository institutions supply deposit money.

  • Efficiency of Resource Mobilisation by Financial Intermediaries

    In practice, the benefit/cost ratio of a country's financial intermediaries cannot be measured. There is no direct indicator of total benefits. Therefore, various indirect methods of evaluating efficiency must be used.

  • Efficiency of Resource Allocation by Financial Intermediaries

    Financial intermediaries can be evaluated not only in terms of their efficiency in mobilising resources but also on the basis of their efficiency in allocating resources. The majority of governments in the sample countries evidently believe that the financial intermediaries cannot and/or do not allocate resources efficiently. In the majority of the sample countries - the exceptions include Bahamas, Hong Kong, Maldives and Singapore - governments intervene by means of selective credit policies aimed at influencing deliberately the allocation of resources by the financial intermediaries.

  • Foreign Financial Intermediaries in Small Island Developing Economies

    A bird's eye view of the financial sectors in all the sample countries is presented in Table 3. Of particular note is the fact that only Hong Kong and Singapore have any private joint stock domestic commercial banks. Barbados, Fiji and Papua New Guinea each have one government-owned domestic commercial bank and the governments of the Solomon Islands and Western Samoa have both participated with a foreign commercial bank in the establishment of one domestic commercial bank.

  • Policies for Effective and Efficient Domestic Resource Mobilisation and Allocation in Small Island Developing Economies

    The objective of any financial development programme is to raise both the quantity and quality of investment and, hence, to accelerate the rate of economic growth. The majority of such programmes have, in practice, stressed institution building plans - development banks, stock exchanges, etc. They incur substantial resource costs.

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