Feed the Future
This project is part of the U.S. Government's global hunger and food security initiative.

2.5. Facilitators & Disrupters

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The fundamental role of the financial sector is financial intermediation: the pooling of funds available to be invested (typically, savings from households and net positive cashflows from businesses) and the matching of them with organizations and institutions seeking funding (typically, businesses and households that can put the funds to productive use).

The extent and sophistication of financial intermediation systems can be a key constraint in emerging economies’ financial sectors. Examples of financial intermediaries include:

  • Commercial Banks
  • Investment Banks
  • Stockbrokers
  • Pooled Investment Funds
  • Stock Exchanges

Developing economies are often highly reliant on the traditional banking sector as the primary financial intermediaries. Thus, the development of a broader range of capital and securities exchanges can provide an alternative to the banking sector as a source of financing. They can also serve as a market to trade (i.e., buy and sell) financial instruments, providing liquidity which is of great value to investors, and determining share prices for publicly-owned firms. Thereby, capital and securities exchanges impose ‘market discipline’ upon firm management.

Recently, new types of financial intermediators and facilitators have begun to appear, including crowdfunding websites, matchmaking platforms and a range of financial services providers making use of mobile and digital technology (termed “fintech”). These private and public entities are often not formal “financial intermediaries” but are in the business of encouraging or facilitating transactions which have development impact. They can be grouped into:

  • Matchmakers, Fintech, Funds and Facilities: A number of crowdfunding and matchmaking platforms have been launched to fill the gaps traditional intermediaries do not cover, several of which offer equity or debt financing for start-ups and/or SMEs directly. Some have a strong development focus while others are purely commercial. Fintech is also changing the landscape, including by introducing new ways to provide financial services, often competing with, or in partnership with, traditional intermediaries. There has also been a surge in launching specialized funds and facilities, established specifically to channel finance for areas not served by traditional financial intermediaries, such as in the space between pure debt and pure equity.
  • Advocacy, Convening and Investment Promotion: Many countries have some form of Investment Promotion Agency which have the potential to play a large role in identifying and promoting investment opportunities. USAID and other development agencies can have a strong impact in convening, creating forums and events in which those seeking finance can engage with finance providers. USAID has been successful in building interest in and generating financial commitments for development priorities, such as through the Feed the Future and Power Africa programs.

In USAID presence and other developing countries, the financial sector infrastructure and the range of intermediaries tends to be less modern and complete, with consequences for economic development. For example, digital financial services can only reach scale when there are inter-operative platforms which allow for funds to be transferred between multiple telecommunications providers and multiple banks. Without credit bureaus, finance providers must use staff time and other resources to assess the credit worthiness of each borrower. Without effective, transparent collateral registries, lenders are unable to check if collateral being offered as security for a loan has already been pledged to another lender.