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Thrift deposit institutions in Europe and the United States

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  • Vittas, Dimitri

Abstract

The financial systems in most developing countries today have many features in common with the financial systems of the developing countries of the eighteenth and nineteenth centuries. Whether they had unlimited liability (as in Scotland in the eighteenth century), or limited liability and special charters, commercial banks dominated European and U.S. financial systems. Moreover, they were typically established by wealthy people and oriented toward busineses and other wealthy people - they effectively represented"banking for the rich by the rich."Insurance companies were underdeveloped and pension and mutual funds did not yet exist. As a result, middle- and low-income people had limited access to formal financial services and relied on informal arrangements for borrowing. Meanwhile, financial savings were unproductively hoarded under the mattress. In developing countries today this gap in the provision of financial services can be explained by the low level and unequal distribution of income and wealth, high information and transaction costs, and weak enforcement mechanisms. In Europe and the United States, over time, different types of institutions - including savings banks, credit cooperatives, building societies, and credit unions - emerged to fill this market gap. Many developing countries have created institutions that specialize in lending to the poor, but more must be done to help these institutions reach the poor in rural areas and assist small farmers, artisans, and traders. An integrated program to build solid institutions requires 5 elements for success: 1) strong leadership. (Support should be given to groups, such as the Church or local officials, likely to attract people with integrity, high ideals, and committment to the institution's success.); 2) a three tier structure; 3) strong emphasis on education and dissemination of information about the workings and benefits of the institution. (Culture can be an obstacle to a thrift institution's success, as the Irish experience shows); 4) an official policy that encourages self-help and avoids total reliance on external funding. External support could be made dependent on local resource mobilization and record of monitoring and repayment; and 5) most importantly, the encouragement of active peer monitoring and the enforcement of contractual obligations. The principal of unlimited liability may not be viable in most developing countries, but government could support only regional units and local institutions that have a good record of loan repayment.

Suggested Citation

  • Vittas, Dimitri, 1995. "Thrift deposit institutions in Europe and the United States," Policy Research Working Paper Series 1540, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1540
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    References listed on IDEAS

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    1. Olmstead, Alan L., 1974. "New York City Mutual Savings Bank Portfolio Management and Trustee Objectives," The Journal of Economic History, Cambridge University Press, vol. 34(4), pages 815-834, December.
    2. Davis, Lance E., 1961. "Mrs. Vatter on Industrial Borrowing, A Reply," The Journal of Economic History, Cambridge University Press, vol. 21(2), pages 222-226, June.
    3. Olmstead, Alan L., 1972. "Investment Constraints and New York City Mutual Savings Bank Financing of Antebellum Development," The Journal of Economic History, Cambridge University Press, vol. 32(4), pages 811-840, December.
    4. Davis, Lance Edwin & Payne, Peter Lester, 1958. "From Benevolence to Business: The Story of Two Savings Banks," Business History Review, Cambridge University Press, vol. 32(4), pages 386-406, January.
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    Cited by:

    1. Polterovich, Victor, 2001. "Трансплантация Экономических Институтов [Transplantation of Economic Institutions]," MPRA Paper 22034, University Library of Munich, Germany.
    2. Polterovich, Victor & Starkov, Oleg, 2006. "Проблема Трансплантации Ипотечных Институтов В Переходных Экономиках: Роль Стройсберкасс [The Problem of Transplantation of Housing Finance Institutions in Transition Economies: the Role of Contrac," MPRA Paper 21996, University Library of Munich, Germany.

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