Finance for All : The Success of the Market-Led Approach to Financial Development in the Developing World

Economists have long argued that inclusive and well-developed financial systems play a critical role in fostering economic growth and development. However, the question of what is the best means of achieving financial development has long remained a puzzle in the development finance literature. In this paper, I show that some of the greatest examples of financial development in modern times have not come from countries that have pursued a more top-down or state-led approach to financial development, which has been the dominant mode of promoting financial inclusion and development in the postwar era. Instead, they've come from countries that have taken a bottom-up or market-oriented approach. This hands-off approach has succeeded because it gives entrepreneurs the ability to utilize their knowledge of their local economy to discover innovative ways to access financially excluded segments of the population. Perhaps the greatest modern day example of market-led financial development is the mobile money revolution that has swept across Sub-Saharan Africa (SSA) over the past decade. In this paper, I argue that the key predictor of whether a country will reap the benefits of these transformative innovations is whether its government embraces a hands off, or “enabling,” regulatory environment that promotes entrepreneurship and experimentation