Financial liberalisation, institutional transformation and credit allocation in developing countries: the World Bank and the internationalisation of banking

The paper documents and analyses the World Bank's promotion of foreign ownership of banking in developing countries. In the wake of two decades of financial crises following exercises of orthodox financial reform, the World Bank has not only continued to push privatisation, but now sees foreign banks as the missing component that will deal with the downside risks of financial liberalisation. Concerns that foreign banks might reduce small and medium enterprise (SME) loan access because of information problems are largely dismissed by the Bank. In fact the World Bank argues for the very opposite, the existence of foreign banks is likely to have the effect of pushing local banks into SME markets where they have a greater comparative advantage. The question of access to credit for the private sector, particularly the locally owned small and medium size enterprises, is central to the issue of employment generation and poverty reduction in developing countries where the bulk of new jobs are typically created by these companies. This article traces the development of the World Bank's agenda on foreign ownership. It critically assesses the arguments and empirical work underlying the World Bank analysis and draws on alternative empirical testing and case studies to raise serious questions about the downside risks associated with the internationalisation of banking.