A Strategic Vision for the Financial Sector

Abstract

A large body of evidence now exists which shows that financial sector development can make an important contribution to economic growth and poverty reduction. This is especially true in the Democratic Republic of the Congo, whose financial sector is particularly underdeveloped, and without it economic development would certainly be constrained even if other necessary conditions are met. Insufficient financial development may leave the Democratic Republic of the Congo in a ‘poverty trap’. Because of increasing returns to scale in the financial sector, a vicious circle can be created, where low levels of financial intermediation result in only a few market players. The lack of competition results in high costs, leading to low real deposit rates and hence low savings, which in turn limits the amount of financial intermediation. Financial sector underdevelopment can therefore be a serious obstacle to growth in the Democratic Republic of the Congo, even when the country has established other conditions necessary for sustained economic development such as the rule of law, solid democratic institutions, economic and social infrastructure, lasting peace, and human capital.