Working Group on Financial Intermediation

1. Working Group on Financial Intermediation Finance Forum FY05: The Future of Financial Sector Operations The World Bank September 23, 2004 P.S. Srinivas Senior Financial Economist & Sector Coordinator Finance & Private Sector Development The World Bank, Jakarta, Indonesia

2. Overview • Main question • How can the Bank assist in best mobilizing financial resources for long-term funding needs of clients? • Approaches • Traditional Bank approach • Financial intermediary lending through banks or DFIs • Foreign currency resources • Emerging long-term funding needs of clients • Infrastructure finance, housing, sub-national finance • Financial intermediaries that could meet emerging needs – capital markets, pension funds, insurance firms • Domestic resources

3. Work of the Group • Financial intermediary lending (FIL) • Examine OED’s review of Bank experience with FILs • All FILs • Municipal FILs • Microfinance FILs • Draw lessons from OED’s findings • How to do FILs better? • Improving the environment for financial intermediation • Legal and regulatory issues • Emerging long-term financing needs of clients • Infrastructure finance • Housing finance • Financial intermediaries that can meet long-term needs • Capital markets • Pension funds • Insurance firms • Draft policy note prepared for discussion at Forum • Comments welcome

4. Key Messages (1) • Past experience with FILs has not been very good • But it is possible to do FILs “right” • Better outcomes in FILs associated with • Emphasis on proper design and implementation • Macro stability and favorable investment climate • Sound legal and regulatory regimes • There have been success stories in FILs (eg: Zambia case) • Shortcomings in laws and legal institutions a major constraint to sound financial intermediation • Focusing work on fixing “environmental” issues can have pay off • There are clearly emerging needs of clients for long-term domestic resources • Infrastructure finance, housing, sub-national finance are examples • Bank needs to focus work going forward on financial intermediaries that can meet these needs • Examples of intermediaries - capital markets, pension funds, insurance firms • Bank needs to take a broader view of financial intermediation Presentations will deal with these issues

5. Key Messages (2) • Group also asked to address the issue of getting financial sector work back on the Bank’s overall agenda • Special challenge in many middle income countries • Lessons from Indonesia case • FSD work needs to be tied in to work with other country and sectoral priorities • FSD work should be seen as a relevant partner across sectors and not just on a stand-alone basis Presentations will not get into this, refer page 41-43 in policy note

6. Structure of the Session • Lessons learned from Bank’s past financial intermediary operations • Brief summary of OED’s review - Laurie Effron • Case study of a successful financial intermediation operation • The Zambia Multi-purpose Credit Facility - Ahmet Soylemezoglu • Legal and regulatory issues for improved financial intermediation • Heywood Fleisig, CEAL, Washington • Emerging financial intermediation needs • Infrastructure finance - Michel Noel • Financial intermediaries that can meet emerging needs • Insurance and contractual savings - Rodney Lester