In this section, we provide an overview of the various chapters. We have deliberately not distinguished different parts in the book, because the chapters can be combined in various ways to deal with subparts of the extant development finance literature. For instance, Chapters 1,2,3,10, and 15 deal with domestic finance issues. Chapters 4, 5, and 6 discuss external finance, and Chapter 7 discusses the global financial architecture. Chapters 8 and 9 address issues on sovereign debt and wealth management, and Chapters 11, 12,13,14, and 15 discuss the financing of specific sectors of the economy.

In Chapter 2, Lordina Amoah, Charles Komla Delali Adjasi, Issouf Soumare, Kofi Achampong Osei, Joshua Yindenaba Abor, Ebenezer Bugri Anarfo, Charles Amo-Yartey, and Isaac Otchere discuss the theoretical and empirical literature regarding the role of the financial sector in inducing a process of economic growth. They also discuss financial repression, liberalization, and growth and the finance-growth nexus, highlighting the various hypotheses underpinning this relationship. Their chapter ends with a discussion of the importance of deposit-taking financial institutions and capital markets in the economic growth process.

In Chapter 3, Niels Hermes and Robert Lensink provide an up-to-date review of the role of microfinance in the process of development. The aim of this chapter is to discuss, in the face of the recent criticism, whether, and if so how, there is still a role to play for microfinance in promoting inclusive growth. They distinguish between the supply side of microfinance, focusing on analyses at the MFI level, and the demand side of microfinance, focusing on end users.

The next four chapters deal with external finance. These chapters discuss how various types of external capital flows (private capital flows, remittances, and foreign aid) affect growth and development. Moreover, it discusses the international financial architecture.

In Chapter 4, Elikplimi Komla Agbloyor, Alfred Yawson, and Pieter Opperman discuss the role of international private capital flows in promoting economic growth. The chapter explains the difference between various types of private capital flows, such as foreign direct investments (FDI) and foreign portfolio investment (FPI). It examines how these components of private capital flows drive growth and assesses the interactions between private capital flows and domestic investment.

In Chapter 5, Hanna Fromell, Tobias Grohmann, and Robert Lensink discuss the relationship between international remittances and development. They explain in detail the results and methodology of research that addresses international remittances from developed and developing countries. The chapter pays attention to, for example, the motivation for remittances, the impact of international remittances on economic growth, financial development, and inequality and poverty. The chapter ends with a discussion on policy tools to enhance the marginal impact of international remittance payments.

In Chapter 6, Matthew Kofi Ocran, Bernadin Senadza, and Eric Osei- Assibey deal with foreign aid and development. They describe the historical origins of foreign aid and summarise trends in the volume of aid. The chapter also summarises the voluminous literature on aid effectiveness. The chapter concludes by discussing some alternatives for foreign aid.

After three chapters on the relationship between external capital flows and development, Joshua Yindenaba Abor, Angela Azumah Alu, David Mathuva, and Joe Nellis, in Chapter 7, discuss the system of global economic and financial governance - the so-called global financial architecture - that facilitates the flow of external capital. The chapter pays attention to the role of the institutions that make up the global financial architecture, such as the Bretton Woods institutions, including the International Monetary Fund (IMF), the World Bank Group, the World Trade Organization, the Bank for International Settlements (BIS), and the regional development finance institutions in developing and emerging countries. They chapter also addresses financial globalisation, global crises, and reform issues regarding the global financial architecture.

The next two chapters deal with sovereign management in developing countries. A distinction is made between sovereign wealth management and sovereign debt management.

In Chapter 8, Mbako Mbo and Charles Komla Delali Adjasi discuss sovereign wealth management in emerging economies. Sovereign wealth management deals with questions related to prudent public finance management. The chapter pays attention to the evolution and changing role of sovereign wealth management and asset-liability management in emerging economies. It also looks at asset allocation and risk management for sovereign wealth funds.

In Chapter 9, Amin Karimu, Vera Fiador, and Imhotep Paul Alagid- ede pay attention to what is known as sovereign debt management. The chapter discusses how governments in developing countries have managed their international debt, and how external debt affects economic growth. It also deals with questions related to renegotiating debt contracts, debt-relief policies, sovereign debt restructuring, and risk management frameworks. The chapter ends by analysing debt sustainability and a medium-term debt strategy.

In Chapter 10, Joshua Yindenaba Abor, Haruna Issahaku, Mohammed Amidu, and Victor Murinde discuss the relationship between financial inclusion and economic growth. Whereas Chapter 2 pays attention to the more general discussion of financial development and economic growth, this chapter deals with the more recent discussion on financial inclusion and economic growth. Financial inclusion, in theory, differs from financial development: financial development focuses on the development of the financial sector in general, whereas financial inclusion deals with the question who actually has access to the financial system and to what extent access to the financial sector has improved for certain groups, especially the poor, in a society. Flowever, in terms of measurement, the difference between financial development and financial inclusion is often not clear. This chapter defines financial inclusion, provides a guide to its measurement, describes the trends in financial inclusion, discusses the determinants of and barriers to financial inclusion, and assesses the link between inclusive finance and financial development. It also examines the effect of inclusive finance on economic growth, including the importance of recent innovations like mobile phone-based money transfers. The chapter ends by discussing the roles of institutional architecture in the nexus between financial inclusion and economic growth.

The next five chapters deal with financing particular sectors in the economy and its relevance for economic development. Distinctions are made between financing the agricultural sector, financing infrastructure, financing sustainable development, financing the external sector, and financing the private sector, especially SMEs.

In Chapter 11, Haruna Issahaku, Edward Asiedu, Paul Kwame Nkegbe, and Robert Osei discuss financing agriculture for inclusive development. The chapter examines how financing agriculture can promote inclusive development and reduce poverty and inequality. The specific topics covered include stylised facts on agriculture development, challenges of agriculture financing, financing opportunities, innovative financing models for agriculture and agriculture development, and inclusive development.

In Chapter 12, Gordon Abekah-Nkrumah, Patrick O. Assuming, Patience Aseweh Abor, and Jabir Ibrahim Mohammed pay attention to financing sustainable development. The main issues covered here are global actions for sustainable development, challenges and opportunities of sustainable development, conventional and innovative funding modes for sustainable development, and benefits derived from financing sustainable development. The chapter offers innovative ideas for financing sustainable development.

In Chapter 13, Steven Brakman and Charles van Marrewijk discuss international trade, finance, and development. This chapter covers topics such as models of trade, the political economy of trade policy, various trade agreements, and the effects of trade policy on economic growth and development. The chapter also pays attention to the main aspects of exchange rates and the related importance of forward-looking markets for understanding the power of financial forces. Finally, the chapter discusses issues on trade finance and concludes with a discussion of finance, investment, and development.

In Chapter 14, Saint Kuttu, Ashenafi Fanta, Michael Graham, and Joshua Yindenaba Abor discuss infrastructure financing and economic development. The chapter covers challenges and opportunities for infrastructure development, economic growth and development nexus, infrastructure financing models, a framework for enhancing private participation in infrastructure development, and risk management in infrastructure projects.

In the final chapter of the book, Chapter 15, Joshua Yindenaba Abor, Haruna Issahaku, Charles Komla Delali Adjasi, and Elikplimi Komla Agbloyor return to the finance and growth discussion that started in Chapter 2. Chapter 15, however, focuses on the role of the private sector in the financial development and economic growth discussion. The chapter argues that addressing the financing constraints of the private sector, especially those for SMEs, is necessary to drive growth in developing and emerging economies. The chapter provides an overview of the discussion related to the private sector and economic development, discusses the financing and investment behaviour of firms, and examines how various forms of development finance contribute to private sector development and economic development.


In this chapter, we have discussed the basic tenets of financial markets and their role in economic growth and development and pointed out the role of development finance and DFIs in financing growth and development. The chapter shows that financial markets can be replete with bottlenecks and inherent challenges, rendering it imperfect and incomplete. If not reduced or controlled, these challenges could destabilize the economy and cause crises. Some of the key financial market problems that result in market imperfection are asymmetric information between borrowers and lenders of finance and the presence of transaction costs. The asymmetric information prevents capital from being allocated in the most productive manner at an affordable cost. This creates financing gaps, rationing of credit, and market segmentation, rendering the financial market imperfect. This, coupled with significant transaction cost, creates market failures in financial markets. In the presence of these financial market failures, the economic growth and development process is heavily hampered and results in further gaps and developmental challenges in a country. This reiterates the importance of understanding the nature of financial systems and structuring appropriate interventions to finance activities to sustain the economic development efforts of countries over time in order to produce positive economic and social outcomes. Well-functioning and well-structured financial systems minimise the informational gaps and transactions cost. When the financial sector functions efficiently, it provides the avenues for market players to take advantage of investment opportunities by channelling funds for production, thus driving economic growth and development. We have also shown that the evolvement of fintechs has implications for the structure and depth of the financial system. In particular, fintechs provide innovative solutions by designing products that can be accessible for low-income populations and small businesses at a relatively lower cost. We do, however, note that for developing countries with low communications infrastructure, digital (internet) fintech-based solutions will be more costly to access than simple analogue fintech solutions.

Development finance deals with structuring and reforming the financial system in ways that promote growth and development at the macro and micro levels in developing and emerging economies. It focuses on how domestic and global financial systems facilitate the economic growth and development process. DFIs (be they multilateral, regional, and bilateral or country specific in structure) carry out this role by minimising the imperfections in financial markets and institutions in order to improve the level of efficiency and establish alternative financial institutions to provide direct capital in the market. DFIs therefore provide long-term finance (including long-term loans, equity, and risk guarantee instruments) to promote private investment, economic growth, and sustainable development.

Discussion questions

  • 1 Discuss the issue of information asymmetry in financial markets. What measures can be used to reduce information asymmetry?
  • 2 What are the necessary measures to ensure efficiency and effectiveness in the operation and performance of financial markets?
  • 3 What is credit rationing? What are the consequences of credit rationing?
  • 4 Using examples from your country, discuss the issue of transaction cost in financial markets.
  • 5 Examine the place of development finance in addressing the issue of

market imperfections in financial markets.

  • 6 Discuss how development finance plays an important role in expanding capital availability to finance economic growth and development.
  • 7 Discuss the various types of DFIs and their specific roles. How do DFIs add value to the economic development process?
  • 8 How do fintechs address the issue of information asymmetry in financial markets?
  • 9 Discuss the conditions under which fintechs can enhance financial inclusion.


1 The market consequences of information asymmetry were popularized by George Akerlof in his article The Market for Lemons: Quality Uncertainty and the Market mechanism' in 1970. In 2001, the Nobel Memorial Prize in

Economic Sciences was awarded to George Akerlof, Michael Spence, and Joseph Stiglitz for their work on analysing markets with asymmetric information.

2 This section draws heavily on Hinson, Lensink, and Mueller (2019).


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