Journal of Financial Economics

REF 156 Financial Innovation in Developing Countries

This article aims to describe and, above all, to explain the particular effects of new financial technologies in emerging and developing countries. Regarding payment services, the introduction of « mobile money » has led to a huge increase in the number of bank accounts and, therefore, in financial inclusion. Revolutions in methods of communication as well as in the collection and processing of information have made access to credit easier and its distribution more efficient. For other services, notably insurance, progress has been less obvious and more heterogeneous depending on the country. Making further progress will require investments from the public sector in several areas (infrastructure, training, etc.). Financial regulatory systems will also have to be overhauled. They no longer make it able to meet all their objectives, which have become difficult to reconcile (stability, fair competition, protection of information).

In Kenya, the introduction of M-Pesa represented a revolution: originally intended to facilitate the sending of money, its success and the possibility of extending its use to all manner of usages opened a new chapter in the inclusion of populations that had previously been financially excluded. The experience was copied internationally. Large popular masses are gaining access to an ever broader range of financial services, resulting in a positive, albeit reduced, impact. This financial inclusion via mobile phones has transformed microfinance institutions into agents of telephone companies.

One of the benefits of this financial inclusion has been the possibility of taking out loans simply and rapidly, using software contained in the phone. The consequence of this facility has been that very poor people have taken on excessive debt, creating a drawback to the benefits of this inclusion.

So, while financial inclusion via mobile phones has succeeded in reducing poverty, it has also led to the opposite result in many cases.

Worldwide, account ownership increased by 50% in the 10 years spanning 2011 to 2021, reaching 76% of the global adult population. The goal of financial inclusion is not just for more adults to have accounts but for account owners to benefit from using them, for example, for digital payments, which provide a range of positive benefits that extend far beyond convenience. This paper reviews the evidence demonstrating how digital payments can expand financial inclusion among recipients and encourage the use of additional formal financial services, such as savings, credit and insurance. It explores how digital transactions offer greater security and privacy, especially for women, as well as opportunities to build a digital credit history for credit risk assessments. The introduction of digital payments to low-income adults brings some risks, however, such as fraud and phishing scams targeting accounts, over-indebtedness in digital credit, and customers receiving incomplete or incorrect information on the fees and costs of financial products.

In financial innovation, Latin America and the Caribbean punch above their weight. Digital innovations have helped to reduce costs and enhance access to financial services. Pragmatic policies, such as public infrastructures and regulation, have helped to address economic distortions that can arise in markets. This article gives insights into both the theory and practice of financial innovation in the region. Drawing on examples like Brazil's Pix, Costa Rica's SINPE Móvil, central bank digital currencies in the Caribbean and digital wallets, lending, insurance and big tech services in other countries, it shows that innovation is proceeding rapidly. These experiences are ripe for further research to inform policy.

Blended finance is a form of mixed financing in which public funds are used to raise private capital in pursuit of impacts linked to the pursuit of the Sustainable Development Goals (SDGs). Innovative blended finance structures have proliferated in recent years. The challenge for public authorities with these structures is to anchor a private finance investment strategy in overall public planning. Furthermore, by co-investing with the private sector, the public sector develops a good understanding and appropriate pricing of the risks that the private sector is prepared to bear, and can thus better calibrate the need for concessional funds and subsidies. This article highlights how our approach to blended finance can help remove certain barriers to scaling up sustainable finance, not only in terms of bankability, but also in terms of coordinating public policies and private investments and standardizing impact measurements, in order to ultimately bring about the emergence of a new asset class and new sustainable economic models.

This article explores the promising relationship between impact investing and financial development in Africa. Impact investing is a financial innovation that seeks to balance financial profitability with impacts (economic, social and environmental). Although this industry is beginning to take root in Africa, its growth remains limited. The article points out that in order to develop, impact investing needs to be supported by a sound financial system, which is lacking in many African economies. In turn, this new asset class could strengthen the financial sector by providing greater access to bank loans and financial innovation. In this way, impact investing and the rest of the financial system are closely linked, and the development of the former cannot be achieved in isolation.

This article explores the major challenges associated with sovereign debt management in sub-Saharan Africa and the financial innovations that may provide solutions. After a reduction in indebtedness in the 2000s, the region is facing a new dynamic of excessive debt, exacerbated by substantial financing needs and heavy dependence on raw materials. Innovative financial instruments, such as State-Contingent Debt Instruments (SCDIs) and sustainable bonds, are seen as potential means of stabilizing debt. However, their complexity, low level of liquidity, and the reluctance of some creditors limit their effectiveness. The article also underscores the risks of excessive financialization of public debt management, which could compromise ecological transition efforts, while calling for a more coordinated and sustainable approach to sovereign debt management in the region.

This article examines the effectiveness, limitations and governance challenges of debt-for-nature swaps (DFNs) as financial instruments for reducing external debt of emerging and developing economies (EDEs) while channeling resources toward biodiversity conservation and climate adaptation. In a context in which EDEs must cope with a rapid increase in the amount of government debt, increasing refinancing restrictions, and the growing impact of climate change, DFNs are attracting fresh interest. Although, theoretically, they are able to obtain funding for biodiversity protection and climate adaptation, DFNs only marginally reduce debt. High transaction costs and a lack of transparency significantly limit their concrete advantages. Moreover, their ecological impact remains questionable: environmental additionality is rarely demonstrated, and the commitments made on environmental policy often suffer from little independent evaluation. In light of these findings, the article emphasizes the importance of overhauling DFNs, including the adoption of more rigorous monitoring, evaluation and governance standards, better coordination with national priorities, and more relevant targeting of priority ecosystems. While DFNs are not a miracle solution to the systemic debt-climate-nature vulnerabilities, improving them could contribute to strengthening both the environmental and fiscal resilience of EDEs.

In recent years, African economies have faced growing debt and liquidity challenges due to diverse a series of external shocks on international markets, compounded by regional- and/or country-specific vulnerabilities. This paper proposes a framework for an African Liquidity and Stability Mechanism (ALSM) to ease these pressures, which would offer tools aimed at liquidity support and crisis prevention. This mechanism includes instruments to stabilize borrowing costs, to hedge against commodity fluctuations, and enable sustainable debt restructuring. The ALSM would aim to improve access to affordable financing, to bolster resilience to external shocks, and to promote the development of robust financial markets across Africa.

According to the principles of modern central bank governance, accountability is the necessary complement of independence. The empirical literature on central bank governance has produced some indices of central bank accountability, but on a much smaller scale than those for central bank independence. Empirical research on the accountability of central banks in the Eurosystem is particularly lacking in a post global financial crisis world that witnessed an extension of central banks' sphere of activity. Recent empirical research has focused on European Central Bank practices. National central banks have not received much attention, although they continue to play an important role. In order to shed light on the blind spots of the accountability of Eurosystem central banks, this paper offers an updated index of accountability and compares the accountability settings of national central banks. Despite homogeneity in the overall level of accountability, national central banks have very heterogeneous procedures when it comes to reporting to political authorities. Different relationships between independence and accountability are discussed, as well as the potential impact of recent evolutions of central banking on trust in central banks, particularly through the lens of the French institutionalist theories of money.

Cryptocurrencies are developing rapidly. Based on an examination of the traditional functions of money, however, not all specialists accord them the same status. To get beyond this debate, the purpose of this contribution, which inverts the direction of the analysis, is to show that cryptocurrencies have five characteristics making them phony currencies: they have no legal basis, the economic basis of their value is not based on production, they can be imitated fairly easily, they are most often used locally, and they are difficult to convert. Crypto asset is therefore the appropriate term.