COMCEC Financial Outlook 2018
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1. FINANCIAL OUTLOOK OF THE OIC MEMBER COUNTRIES
Financial markets have crucial roles for the economies. In the 1950s and 1960s, financial
institutions, especially state-owned institutions, were used for promoting economic sectors
through subsidized credit programs by governments. Three main factors led to the government
to follow financial liberalization: poor results, high costs, and pressures from globalization2.
Hence, financial markets have been started to liberalize in 1980s and 1990s, and the role of the
market for development increased.
The liberalization of financial markets during the 1990s and 2000s has played an essential role
in shaping today’s financial structure all over the world. The financial sector can provide
payment and transaction services, channeling households’ savings to its best investment areas
to the different sectors of the economy, such as households, enterprises, and governments.
However, it can also cause fragility and crisis, as seen during the recent global financial crises in
2007-2008, as well as during numerous banking crises in emerging market and developing
economies.
The financial sector accomplishes several functions that enable the efficient functioning of the
economy and promote economic growth. Some of the main functions of a financial system are
identified as “the trading of risk, allocating capital, monitoring managers, mobilizing savings,
and easing the trading of goods.” For the financial sector to contribute to the growth, the
industry itself has to be resilient and be able to reduce its vulnerabilities. Given the complexity
and dynamism of modern financial products and markets, appropriate institutions are needed
to reduce the risks and vulnerabilities that can potentially lead to severe and costly economic
downturns.3
It has been generally accepted that modern financial institutions and financial markets have a
powerful influence on economic development, poverty alleviation, and economic stability. For
example, when banks screen borrowers and identify firms with the most promising prospects,
this is a crucial step that helps allocate resources efficiently, expand economic opportunities,
and foster growth. When banks and securities markets mobilize savings from households to
invest in promising projects, this is another crucial step in fostering economic development.
When financial institutions monitor the use of investments and scrutinize managerial
performance, this is an additional ingredient in boosting the efficiency of corporations.
Additionally, equity, bond, and derivative markets enable the diversification of risk; this
encourages investment in higher-return projects that might otherwise be shunned. 4
The financial sector is significantly connected to the overall institutional framework in a country.
Given that the intertemporal of financial transactions makes it one of the most institution
sensitive sector, a financial system can only thrive in an environment with active institutions
that reduce agency conflicts between contract parties. There might also be reverse influences
from a thriving financial sector to the institutional strengthening of a country.5
2 Hanson, J., & Ramachandran, S. (1990). Financial Liberalization: What Went Right, What Went Wrong?. World Bank,
Economic Growth in the.
3 National and Global Islamic Financial Architecture, COMCEC Financial Working Group Report, 2016
4 Cihak, M., Demirgüç-Kunt, A., Feyen E., Levine, R., “Benchmarking Financial Systems around the World”, World Bank Policy
Research Working Paper 6175. Washington, D.C.: World Bank, 2012
5 Beck, Thorsten, “Finance, Institutions and Development: Literature Survey and Research Agenda”, Cass Business School, City
University and CEPR, August 2016