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The role of banking and financial policies in promoting micro, small, and medium enterprises

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The results of empirical research confirm that a well-functioning and developed financial sector fosters economic growth. Additionally, financial deepening has a significantly larger impact on the poorest parts of societies, thus playing a critical role in reducing income inequality and poverty. In many countries, however, the level of financial development is very low due to severe consequences arising from asymmetric information between lenders and borrowers. This, in turn, restricts the amount of capital available to companies, especially small and medium ones. In this paper we have attempted to give some answers to the question of what the government’s role should be in overcoming barriers to capital and financing. The empirical research, as well as case studies of successful reforms, indicate that the main role to be played by the government in supporting financial sector development is to ensure macroeconomic stability and provide an appropriate legal and infrastructural framework for its functioning. Finally, we also argue that in the 21st century global-knowledge economy there is a need for a deeper discussion about the efficacy of public support for SMEs and its redirection to narrowly defined innovative sectors,which may create the potential for long-term development and an increase of social welfare.

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Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 24 (2008)
Issue (Month): ()
Pages: 183-191

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Handle: RePEc:ris:jofitr:0021
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