World Economic Forum Report 2012 - Emerging Markets Oppo

1. Insight Report
Redefining the Emerging
Market Opportunity
Driving Growth through
Financial Services Innovation
Prepared in collaboration with The Boston Consulting Group

3. Insight Report
Redefining the Emerging
Market Opportunity
Driving Growth through
Financial Services Innovation
Prepared in collaboration with The Boston Consulting Group

4. The information in this report, or upon which this report World Economic Forum USA Inc.
is based, has been obtained from sources the authors 3 East 54th Street
believe to be reliable and accurate. However, it has 18th Floor
not been independently verified and no representation New York, NY 10022
or warranty, expressed or implied, is made as to the Tel.: +1 212 703 2300
accuracy or completeness of any information contained Fax: +1 212 703 2399
in this report obtained from third parties. Readers E-mail: forumusa@weforum.org
are cautioned not to place undue reliance on these www.weforum.org/usa
statements. The World Economic Forum, the World
Economic Forum USA, and its project advisers, The World Economic Forum
Boston Consulting Group, undertake no obligation to 91-93 route de la Capite
publicly revise or update any statements, whether as a CH-1223 Cologny/Geneva
result of new information, future events or otherwise, and Tel.: +41 (0)22 869 1212
they shall in no event be liable for any loss or damage Fax: +41 (0)22 786 2744
arising in connection with the use of the information in this E-mail: contact@weforum.org
report. www.weforum.org
The views expressed in this publication have been based Copyright © 2012
on workshops, interviews and research, and do not by the World Economic Forum USA Inc.
necessarily reflect those of the World Economic Forum. All rights reserved
No part of this publication may be reproduced or
transmitted in any form or by any means, including
photocopying and recording, or by any information
storage and retrieval system.
ISBN-10: 92-95044-58-4
ISBN-13: 978-92-95044-58-6
A catalogue record for this book is available
from the British Library.
A catalogue record for this book is available
from the Library of Congress.

5. Contents
Case Study 4: Rationalizing the Branch-Banking.........................75
Contributors v Model to Deliver ‘No Frill’ Services
Case Study 5: Savings-Linked Conditional Cash.........................79
Preface vii Transfer Programs
Case Study 6: Using Legacy Payment Data................................83
Executive Summary ix and Infrastructure to Expand into
Consumer Loans
Case Study 7: Developing the Broader Ecosystem......................87
Part 1: Financial Services Opportunities 1 for Technology-Enabled Channels
in Emerging Markets
Case Study 8: Instant Disbursement of........................................91
Vehicle-Based Financing
Chapter 1: Unleashing Growth Opportunities 3
Case Study 9: Adopting a Franchise Model to.............................95
in Emerging Markets Expand Low-Income Financial Services
Appendix A: Supporting Figures....................................................13
Case Study 10: Using Equity to Finance SMEs in..........................99
Credit-Constrained Markets
Chapter 2: The Opportunity in Consumer 17 Case Study 11: Federalizing Product Development.....................103
Financial Services to Tailor Loan Products to SMEs
Stage 1: Exploiting Existing Infrastructure and Capabilities............22
Case Study 12: Adapting POS Networks..................................... 107
Stage 2: Enhancing Mass-Market Distribution Channels...............27
to Deliver SME Loans
Stage 3: Delivering a Balanced Portfolio of Services.....................29
Case Study 13: Using a Pawnshop-Bank Partnership................. 111
to Improve Propositions for Customers
Chapter 3: The Opportunity in SME Financing 31 and Providers
Stage 1: Developing Key Institutional Competencies.....................34
Case Study 14: Using an Electronic Platform to Provide............. 115
Stage 2: Transforming Economics through Partnerships...............40
Supply-Chain Financing for SMEs
Stage 3: Setting the Stage for Future Growth................................43
Case Study 15: Finance SME Suppliers through......................... 119
National Reverse Factoring Infrastructure
Chapter 4: The Opportunity in Corporate Bonds 47
Case Study 16: Developing the Venture Capital........................... 123
Stage 1: Laying the Foundation......................................................52
Industry through Co-Investment
Stage 2: Building Scale for Corporate Bond Markets.....................54
with Foreign Investors
Stage 3: Enhancing Liquidity and Deepening Markets...................55
Case Study 17: Forging Central Bank Partnerships to................. 127
Build the Market for a Region’s Bonds
Part 2: Case Studies 59 Case Study 18: Building a Bond Investor Base through.............. 131
Pension Fund and Insurance Reform
List of Case Studies 61 Case Study 19: Building Liquidity in Government........................135
Bonds to Pave the Way for Corporate
Case Study 1: Community Partnership Models...........................63
Issuances
for Efficient Product Delivery
Case Study 20: Overcoming Institutional Voids to.......................139
Case Study 2: Bundling Products to Encourage..........................67
Issue Corporate Debt
Experienced-Based Learning
Case Study 3: Delivering Consumer Loans to..............................71
Low-Income Consumers through Acknowledgments 143
Utility Company Infrastructure
Redefining the Emerging Market Opportunity | iii

7. Contributors
PROJECT TEAM EXPERT COMMITTEE
Ernest Saudjana Thorsten Beck
Project Manager, Redefining the Emerging Market Professor, Tilburg University
Opportunity project, World Economic Forum USA Erik Berglof
(on secondment from The Boston Consulting Group) Chief Economist, European Bank for Reconstruction
James Bilodeau and Development
Special Advisor, Financial Services Mario Blejer
World Economic Forum USA Vice-Chairman, Banco Hipotecario
Ranu Dayal Walid Chammah
Senior Partner and Managing Director, Chairman and Chief Executive Officer, Morgan Stanley International
The Boston Consulting Group
Janamitra Devan
Todd Glass Vice-President, Financial and Private Sector Development,
Project Associate, Emerging Markets Finance, International Finance Corporation
World Economic Forum USA
Ismail Douiri
Co-Chief Executive Officer, Attijariwafa Bank
Chris Furness
Managing Director, Standard Chartered
Kamesh Goyal
Head of Group Planning and Controlling, Allianz SE
Frank Hatheway
Chief Economist, The NASDAQ Stock Market, USA
Fawzi Kyriakos-Saad
Chief Executive Officer, Europe, Middle East and Africa
(EMEA) and Member of the Executive Board, Credit Suisse
Nkosana Moyo
Founder and Executive Chair, Mandela Institute for
Development Studies
Rajat M. Nag
Managing Director General, Asian Development Bank
Mthuli Ncube
Chief Economist and Vice-President, African Development Bank
Steven Puig
Vice-President, Private Sector and Non-Sovereign Guaranteed
Operations, Inter-American Development Bank
Mark Richards
Partner, Actis
Sergio Schmukler
Lead Economist, World Bank
Barry Stowe
Chief Executive, Prudential Corporation Asia, Prudential
Fernando Alvarez Toca
Chief Executive Officer, Banco Compartamos
Levent Veziroglu
Executive Vice President, Dogus Holding
Redefining the Emerging Market Opportunity | v

9. Preface
KEVIN STEINBERG, Chief Operating Officer, World Economic Forum USA, and
GIANCARLO BRUNO, Senior Director and Head, Financial Services Industries, World Economic Forum USA
The World Economic Forum is proud to release this tap into the aforementioned opportunities in advance
Report, Redefining the Emerging Market Opportunity: of capacity building. Many of these models have the
Driving Growth Through Financial Services Innovation. potential to be transferrable across borders. The Report
The project was initiated to explore innovative models is accompanied by nearly three dozen real-world case
from financial institutions that accelerate development of studies and cases-in-point. These illustrate strategies
opportunities in emerging markets. and initiatives that have transformed unmet emerging-
Over the past few years, emerging markets have market need and demand into opportunity and progress,
played a major role in driving global economic growth. as well as challenges encountered along the way. Case
Even faster growth can be observed in the financial studies include new models in distribution models,
services space, contributing to high shareholder return product development, and risk assessment, as well as
by emerging market institutions. approaches to overcoming institutional barriers.
Despite this strong growth, penetration of financial The Report itself is the result of a year-long
services remains low in many developing countries. The collaboration between the World Economic Forum,
World Economic Forum’s Financial Development Report The Boston Consulting Group, and leading industry
2011 highlighted the fact that many emerging economies practitioners, policymakers, and academics participating
have undeveloped areas within their financial systems. in interviews and workshops around the globe.
Developing these opportunities will be critical to realizing Throughout this process, intellectual stewardship and
economic growth and prosperity for people in these guidance was provided by an actively engaged Expert
regions. Committee.
This Report highlights two broad conclusions: We trust that this publication can help overcome
asymmetries in knowledge and experience across
• The most powerful and compelling opportunities
for financial services firms to promote growth and different regions and organizations, and help realize
stability in emerging markets lie in three specific the untapped opportunities within the financial services
areas: consumer financial services, small and space in emerging markets. Moreover, we hope that this
medium enterprise (SME) financing, and corporate Report can provide relevant input and catalyze dialogue
bond markets. among the private sector, governments, investors, and
other stakeholders in implementing innovative models in
• ”Leapfrog” innovation in these three areas, rather
various emerging economies.
than simple capacity building, will be the key to
success in driving broad economic growth. At the On behalf of the World Economic Forum, we wish to
same time, capitalizing on these opportunities will thank all who have contributed their time and expertise
provide institutions and their investors an avenue for to this Report, particularly the Expert Committee, the
long-term growth and shareholder return. interview and workshop participants, Project Manager
Ernest Saudjana, Senior Advisor James Bilodeau,
The Report showcases a shortlist of proven,
Project Associate Todd Glass, and our project advisor
innovative approaches that financial institutions from
from The Boston Consulting Group, Ranu Dayal.
around the world have successfully implemented to
Redefining the Emerging Market Opportunity | vii

11. Executive Summary
The rising importance of developing economies has led emerging-market economic expansion contributed
to an increased role for financial institutions in emerging US$8 trillion, or roughly 60 percent of global GDP
countries. The result is a historic opening for financial growth, during that half-decade. Many emerging markets
services firms to provide new financial services to have also achieved unprecedented financial stability
upwardly mobile low-income populations as well as to and economic resilience. The growth of developing
regional companies evolving to world-class competitors. economies has been accompanied by an even faster
For financial providers committed to understanding evolution of financial services.
and unlocking the potential, there is unparalleled
opportunity to build long-term growth and superior SUPERIOR SHAREHOLDER VALUE
shareholder value. At the same time, providers can Financial institutions active in emerging markets
help empower small and medium sized enterprises and have benefited from tremendous growth in market
low-income people by providing financial access and a capitalization
potential path out of poverty. Financial institutions in different parts of the world
have seen very different outcomes for their market value
Three key opportunities: consumer financial in recent years. In high-income countries belonging
services, SME financing, and corporate bonds to the Organization for Economic Co-operation and
The purpose of this Report is to provide a guide to those Development (OECD), the market value of financial
opportunities as well as a framework for action. Among institutions sustained a US$1.5 trillion decline from 2006
the Report’s key conclusions: to 2011. At the same time, in non-OECD high-income
countries, it grew by US$243 billion, and in emerging
• First, the most significant opportunities for financial markets, values soared by US$572 billion. A five-year
services firms in emerging markets lie in three
total shareholder return (TSR) analysis of financial
business activities: consumer financial services,
institutions globally shows that the majority of top
small- and medium-sized enterprise (SME) financing,
and corporate bonds. institutions in emerging markets performed above the
median level, while most of the large financial institutions
• Second, innovation of financial products and in developed markets ranked in the bottom half. Of
services—through lower barriers to entry, increased the 30 leading emerging-market banks, 75 percent
productivity, and transformed economics of service performed in the TSR ranking’s first quartile—but none of
delivery—is the main driver of success in emerging
top 30 developed-market banks did.
markets. Capacity-building of traditional services is
not sufficient.
The rise of financial institutions in emerging markets
This Report is accompanied by nearly three dozen has reshaped international competition
case studies and short “cases-in-point” highlighting Emerging-market banks in the top 200 tripled in number
successful, real-world innovations. These profiles from 22 to 66 between 2005 and 2011 and now account
document strategies and initiatives that have transformed for one-third of leading global institutions. The rise of
unmet emerging-market needs and demands into emerging-market competitors is even more striking
opportunity and economic progress, as well as the within the top 100 institutions, where the number grew
challenges encountered along the way. (Case studies are from nine to 33 in the same period. In the middle of the
gathered in Part 2; cases-in-point appear in boxes within 2000s, the emerging-market financial institutions rising
the report.) to the top ranks came mostly from China. More recently,
institutions from Brazil, Chile, Indonesia, Thailand,
Strong economic growth in emerging markets Malaysia, Turkey, India, and South Africa have made their
underpins the new opportunity for providers way up the rankings, as well.
The GDP growth of emerging nations strongly
outpaced that of high-income countries from 2006 to
2010. Developing economies grew at an annual rate of
roughly 15 percent, compared with growth averaging just
3 percent for the developed world. In absolute terms,
Redefining the Emerging Market Opportunity | ix

12. Executive Summary
Competition will grow, requiring financial providers Successful providers focus first on filling a specific
to create new business models in order to adapt mass-market need
Many emerging-market institutions have advanced by Financial institutions usually find it difficult to create
adopting highly innovative approaches in their own profitable services for low-income consumers when
markets. They have overcome infrastructure limitations they use legacy business models created to serve more
and addressed local needs through creative distribution affluent clients. Simply adjusting traditional business
models, risk practices, and partnerships. Some models—that is, relying on capacity-building initiatives—
institutions, for example, can disburse financing to small is not enough. Innovating new channels, products, and
business customers within 10 minutes through electronic processes is necessary. Successful providers usually
channels and without documentation or guarantor started by meeting an express and specific mass-market
requirements. need and only then introduced additional products.
Countries and financial institutions must steer clear A three-stage framework for developing consumer
of potential macro- and micro-level risks financial services
Countries need to ensure that they can respond to Our research suggests that consumer markets in
global shocks, as macroeconomic conditions are closely emerging countries can best be developed in three
linked to the health of financial systems. Countries that stages of activity:
have little fiscal and monetary flexibility must manage the
Stage 1: Exploiting existing infrastructure and
risk of future macroeconomic challenges.
capabilities. Institutions explore partnership models
On a micro level, for financial providers, there is a
to expand their reach to mass-market customers with
risk of reduced returns, as the high interest margins in
minimal capital expenditure.
emerging markets are expected to go down as markets
mature and competition intensifies. Financial providers Stage 2: Enhancing mass-market distribution
can overcome top-line compression by improving channels. Providers develop cost-effective models to
efficiency, lowering costs, and diversifying income build and expand channels.
streams. Institutions need to expand beyond credit
Stage 3: Delivering a balanced portfolio of
revenues.
services. Governments establish an environment and
CONSUMER FINANCIAL SERVICES: ENABLING infrastructure enabling providers to deliver a full set of
GROWTH AND REDUCING POVERTY services more efficiently in the long term.
While emerging countries are growing faster than
mature ones, consumer financial services have not Case study highlights: Consumer financial services
caught up Case studies accompanying this Report document
Savings accounts, insurance, loans, payments, and successful innovations in developing consumer financial
similar offerings—where they do exist—penetrate services, including:
unevenly and often reach only higher-income • Sales and distribution partnerships between
populations. As a result, the enormous potential of financial providers and non-financial organizations
mass-market consumers to drive economic growth including utility providers, retailers, supermarket
in emerging countries has barely been tapped. In the chains, and community organizations.
portfolio of the poor, three key services are greatly in
• New models for low-cost, paperless retail branches,
demand but often inadequately provided: managing technology-enabled delivery channels, and
money on a daily basis, building long-term savings, franchised distribution of mass-market services.
and borrowing for various needs. Providing insurance
products will also be a significant opportunity. • Use of legacy consumer payment records in risk
assessment and credit benchmarking.
Providers will benefit by embracing financial SME FINANCING: BATTLING THE CREDIT PARADOX
inclusion for lower-income populations Emerging markets face a credit paradox that hinders
For providers of consumer financial services, the most small- and medium-size businesses (SMEs), as well
significant “white space” opportunities for emerging- as their banks. Only one-third of SMEs, on average,
market growth lie in mass-market services and products. have access to credit and loans, even though three-
Financial inclusion of the poor will also benefit quarters of them maintain bank savings and checking
emerging countries. Consumer financial services can accounts. Banks, for their part, lack sufficient access
reduce poverty, improve health care, and increase the to shared data—such as tax records, credit history,
consumer’s ability to afford needed goods on a more and legal status—to risk lending to many SMEs. As a
equitable basis. The infrastructure for these services also result, many businesses lack much-needed cash to
supports and improves the society’s broader efficiency grow, while financial institutions miss the opportunity
in raising capital, making payment transactions, and to tap into the huge pool of potential SME borrowers.
distributing wealth. Emerging economies suffer because they depend
x | Redefining the Emerging Market Opportunity

13. Executive Summary
heavily on smaller companies for economic growth and respect to products, services, risk management, and
job creation. SME client segmentation.
Stage 2: Transform business models and
SMEs play a major role in economic development
offerings through national-scale partnerships and
SMEs account for a significant share of employment
collaborations with formal and informal organizations.
and GDP around the world, especially when taking into
Create shared infrastructure—such as repositories of
account the informal sector. SMEs provide an average
SME data—and employ financial channels to deliver
of 67 percent of the formal employment in developed
government loans and subsidies.
countries and around 45 percent in developing
countries. They also contribute a sizable share to formal Stage 3: Set the stage for future growth by
GDP, 49 percent on average in high-income countries improving the business and financial management
and 29 percent on average in low-income countries, capabilities of SMEs themselves and thus their
respectively. While that share may seem modest, the creditworthiness and attractiveness for investors outside
informal sector—most of which comprises SMEs— the banking system.
accounts for up to 48 percent of the total labor force
and 37 percent of GDP. The corresponding proportions Case study highlights: SME financing
for developed countries are just 25 percent of the labor Case studies accompanying this Report document
force and 16 percent of GDP. successful innovations in SME finance development,
including:
Innovation can overcome SME financing challenges
• Client micro-segmentation and customization
A number of innovative institutions are working actively strategies based on SMEs’ detailed financial needs,
and creatively to topple the barriers to SME financing along with new models for rationalizing SME
in emerging markets. We have conducted a global services, such as “remote” relationship managers.
review of these efforts and present in this Report a
summary of those that have been the most successful • Using transaction information and psychometric
testing to develop credit risk-assessment tools and
and scalable. These models can be adopted or adapted
benchmarks.
by financial providers seeking to broaden their range
of SME financing opportunities. There is little doubt • Adapting POS electronic networks to approve and
among global financial institutions that SMEs are a key deliver SME loans.
source of profits now and that they will continue to be • Developing specialized financing sources, including
so in the future. In a 2008 survey of 91 banks in 45 venture capital and equity financing.
countries, more than 80 percent of the banks described
the SME market as a large and attractive one. More than CORPORATE BONDS: PROVIDING STABILITY AND
70 percent said profitability was the top driver of their REDUCING RELIANCE ON TRADITIONAL CREDIT
involvement. Corporate bond markets provide many advantages,
in the nations where they thrive
The private sector needs alternative mechanisms to Economies, companies, and investors all receive clear
help new SMEs develop their capabilities and measurable benefits when corporations compete
Traditional banks are often not the right institutions for transparently to raise funds by selling debt. Domestic
serving start-up companies. Financial institutions, due corporate bond markets help diversify economies,
to their risk-management approach, typically prefer to reduce systemic risk, and mitigate exposure to currency
finance companies with clear cash flow that are already swings. As economies evolve, local companies grow
operational. Additionally, formal financial providers larger, too, and develop more complex funding needs,
often have scant knowledge of quickly evolving high- such as handling larger investments and managing
technology industries and their SME business models, liquidity, interest-rate, and foreign currency risks. Bank
and are inclined to reject loans for those entrepreneurs. credit alone cannot meet these requirements.
As a result, emerging economies are deprived of
the innovation, energy, and competitive capabilities Corporate bonds provide a valuable alternative to
that start-ups and other SMEs bring to developed bank financing
economies. Venture capital, private equity, and similar The macroeconomic and financial dislocations that
start-up financing operations are crucial to support followed the crises in emerging markets in the late
new SMEs trying to expand into the next stage of 1990s highlighted the importance of developing local
development. bond markets as an alternative source of debt financing.
Bond markets can strengthen corporate and bank
The three stages of action to improve SME financing restructuring and thus accelerate the resolution of a
Our research suggests that financing for SMEs in crisis. Well-functioning local corporate bond markets
emerging countries can best be developed in three also provide institutional investors with an instrument that
distinct stages of activity: satisfies their demand for fixed-income assets, especially
of long maturities that match their long-term liabilities,
Stage 1: Develop and improve primary
while providing higher yields than government bonds. For
institutional competencies and business models with
Redefining the Emerging Market Opportunity | xi

14. Executive Summary
the same reasons, corporate bonds can also strengthen • Creating central bank partnerships to promote
the balance sheets of pension funds and life insurance development of regional bond markets.
companies. • Building a bond investor base through pension fund
and insurance reform.
Two pillars support corporate bond markets:
economic size and level of development As this Report demonstrates, emerging economies
The ability of a country to develop a corporate bond cannot rely solely on capacity building to accelerate
market is largely determined by two factors: the size financial development. Traditional models often are
of its economy and its level of economic development. unsuitable for seizing new opportunities. In many
A sizable and strong economy is required to sustain a countries, the best path for accelerating financial gains
liquid sovereign bond market, a prerequisite to creating will be “leapfrog” innovation that crosses borders,
a corporate bond market. A government bond market platforms, and concepts at a single bound. This kind of
serves as a crucial stepping stone to corporate issuance bold change, and the policies that support it, are crucial
in several ways. For one, government bonds provide to ensure that emerging markets are able to realize their
valuable price and yield benchmarks for corporate economic potential and improve the lives of their citizens.
debt. Big economies also directly promote the viability
of corporate bond markets, as their scope allows more
companies to grow large and flourish.
There are considerable barriers to corporate bond
development in emerging economies
Developing a corporate debt market is a complex task
requiring a systematic approach. Initiatives to improve
liquidity are required in order to attract a wide range of
investors. Several key conditions need to be achieved,
including sustained investor demand and bond issuance
supply, strong business and legal environments, and a
fast and efficient issuance process.
The sequential path of development for corporate
bond markets
Developing a corporate bond market requires a
sequential approach. Based on our research for this
report, we have divided the development process into
three distinct phases.
Stage 1: Laying the foundation. The market
is very small and unsophisticated. Bond issues and
investors are few and the sovereign bond market is
underdeveloped. Transactions occur sporadically and
usually by private placement.
Stage 2: Building scale for corporate bond
markets. The primary market is sound, with a fairly
stable macro-political environment and several high-
quality issuers.
Stage 3: Enhancing liquidity and deepening
markets. An active secondary market is growing. During
this phase, primary issuance remains active.
Case study highlights: Corporate bond markets
Case studies accompanying this Report document
successful real-world innovations in corporate bond
market development, including:
• Developing multi-stakeholder engagement to
support issuance and private placement of bonds in
the least developed markets.
• Creating investor syndicates to lower issuance costs
for large, repeat issuers.
xii | Redefining the Emerging Market Opportunity

15. Part 1
Financial Services
Opportunities
in Emerging Markets

17. CHAPTER 1 As wealthier nations emerge from the financial turmoil
and economic retrenchment of recent years, they are
relying on the developing world to serve as the engine
Unleashing Growth of global growth. Emerging economies, despite the
turbulence, have managed stronger and more sustained
Opportunities in economic expansion than developed ones. These
economies have been bolstered by a record of improved
Emerging Markets financial and fiscal stability.
The growing importance of developing economies
has led to an increased role for financial institutions
in those regions of the world. Both trends are likely to
continue. The result is a historic opening to provide new
financial services to low-income populations rapidly
transitioning to middle-income status, as well as to
regional companies evolving to world-class competitors.
For financial providers equipped to understand and
unlock the potential, there is an unparalleled set of
opportunities to build long-term growth and superior
shareholder value.
The purpose of this Report is to provide a guide to
those opportunities as well as a framework for assessing
them and taking action. Research has been based
on expert interviews and discussions among Forum
stakeholders, including global and emerging-market
financial institutions, regulators, multilateral organizations,
and academics. On that basis, the Report highlights two
key themes:
• First, the most significant immediate opportunities
for financial services firms in emerging markets
lie in three specific realms of activity: consumer
financial services, financing for small- and medium-
size enterprises (SMEs), and corporate bonds. It is
there that new financial services will have the largest
impact in driving broad economic growth while
creating new sources of future value for their own
institutions and their shareholders.
• Second, the main driver of accelerated success
by financial organizations in emerging markets
is product and service innovation. Innovation is
critical to accelerate progress and expand the
market for financial services, through lower barriers
to entry, increased productivity, and transformed
economics of service delivery. In some cases, as
discussed below, innovation must be preceded or
accompanied by coordinated, multi-party capacity-
building initiatives to lay the groundwork for success.
There are many ways for institutions to innovate, and
each must find its own. This report highlights a shortlist
of proven, creative approaches, accompanied by nearly
three dozen real-world case studies and cases-in-point.
These are intended to illustrate strategies and initiatives
that have transformed unmet emerging-market needs
and demands into opportunity and economic progress,
as well as challenges encountered along the way.
STRONG AND PERSISTENT ECONOMIC GROWTH
CREATES A FINANCIAL SERVICES OPPORTUNITY
The economic expansion of developing economies
has been accompanied by an even faster evolution of
financial services in those regions of the world. The
key to maximizing that opportunity going forward lies
Redefining the Emerging Market Opportunity | 3

18. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 1: Growth of financial services assets
Figure 1a: Banking asset growth Figure 1b: Insurance premium real growth rate
120 20
+9%
100 15
Banking assets (US$ trillions)
Real growth rates (percent)
80 10
60 5
40 0
n Low and Lower middle income EMs
–5 Emerging markets
20 n Upper middle income EMs
Industrialised countries
n High income countries
0 –10
2006 2010 1990 1994 1998 2002 2006 2010
Sources: Economic Intelligence Unit, Financial Indicator database (consulted March 14, 2012); Swiss Re, 2011.
in understanding the complexities—and occasional The developing world’s economic expansion has
contradictions—of that remarkable expansion. precipitated an even faster growth of financial services.
The GDP growth of emerging nations has strongly Emerging countries contributed nearly 40 percent of the
outpaced that of high-income countries from 2006 to global growth of banking assets in absolute terms from
2010 (see Figure A1 in appendix). Developing economies 2006 to 2010 (see Figure 1a). This translates to an annual
grew at an annual rate of roughly 15 percent, compared growth rate of more than 20 percent for banking assets
with growth averaging just 3 percent for the developed in emerging markets themselves, compared with a rate
world. In absolute terms, emerging-market economic of just 6 percent in high-income countries. The growth of
expansion contributed US$8 trillion, or roughly 60 banking assets in emerging markets has outpaced GDP
percent of global GDP growth, during that half-decade. growth there, because of the low initial level of financial
In addition to their faster expansion, many emerging development and penetration in many of those markets.
markets also demonstrated unprecedented financial The insurance industry also has expanded robustly
stability and economic resilience during the two-year in emerging countries since the early 1990s. The growth
period of turmoil beginning in 2008. While developed of premium income was triple the rate in developed
nations’ aggregate GDP fell from US$44 trillion in 2008 countries (see Figure 1b), expanding by nearly 10
to US$41 trillion in 2009, emerging market output percent annually in real terms over the last two decades
remained constant at US$13 trillion. while growth in high-income markets averaged just
That economic performance and financial stability 2-3 percent. In 2010, the contrast was even more
have continued, prompting numerous sovereign credit pronounced: emerging market premiums grew 11
rating upgrades of emerging economies since mid- percent, while those in developed countries inched
2010. At the same time, recurring financial turmoil has forward an average 1.4 percent.
triggered downgrades in the Euro zone. Over the two-
year period ending in February 2012, five emerging High growth + high returns = superior
countries—Brazil, Bulgaria, Colombia, Indonesia, and the shareholder value
Philippines—received sovereign credit rating upgrades The high-growth, high-return nature of emerging
from Moody’s Investors Service. The January 2012 markets makes it a valuable area for financial institutions
upgrade for Indonesia returned Southeast Asia’s largest globally to target in order to generate shareholder
economy to investment grade for the first time since the return. Institutions need to place significant attention on
Asian financial crisis 14 years earlier. A sixth developing emerging markets to drive growth, improve profitability,
country, Turkey, had its local-currency debt rating raised and generate long-term value.
to investment grade by Standard & Poor’s in September The last five years have created tremendous value
2011. for financial institutions active and successful in emerging
4 | Redefining the Emerging Market Opportunity

19. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 2: Total shareholder return of global financial institutions, 5-year TSR (2006–2011)
1
Top 30 banks by market First
capitalization from emerging quartile
markets
150
Top 30 banks by market
capitalization from high Second
income countries quartile
TSR ranking
300
Third
quartile
450
Fourth
quartile
600
–80 –60 –40 –20 0 20 40 60
Average annual total shareholder return (percent)
Sources: Thomson Reuters Datastream (consulted April 2, 2012); BCG analysis.
Notes: TSR derived from calendar year data in local currency; Rank (n=582); Median average annual TSR: First quartile, 14.1%, second quartile, 1.6%, third quartile, –8.3%, fourth quartile, –22.7%.
markets, where those institutions’ growth in market spread—the difference between return on equity and
capitalization has been concentrated. In high-income cost of equity. Although emerging markets are known to
countries belonging to the Organisation for Economic have higher cost of equity, their significantly higher return
Co-operation and Development (OECD), the market on equity offsets this impact.
value of financial institutions sustained a US$1.5 trillion The spread generated by emerging market
decline from 2006 to 2011. At the same time, in non- institutions is significantly higher than that in developed
OECD high-income countries it grew by US$243 billion, markets. More than half of leading developed-market
and in emerging markets, values soared by US$572 institutions operate at a negative overall return spread.
billion. By contrast, the majority of such institutions in emerging
A five-year total shareholder return (TSR) analysis of markets are operating on positive territory, many
financial institutions globally shows a striking contrast in exceeding 5 percent. The higher return spread results
performance between institutions in emerging markets in much higher valuation multiples for institutions in
and those in developed markets. While the majority of emerging markets.
top institutions in emerging markets performed above
the median level, most of the large financial institutions in Developing markets will continue driving global
developed markets ranked in the bottom half (Figure 2). growth while remaining resilient
Of the 30 leading emerging-market banks, 75 percent Developing markets are expected to continue their role
performed in the TSR ranking’s first quartile—but none of as the engines of global economic growth. In the five
top 30 developed-market banks did. years through 2015, the International Monetary Fund
It is important to understand what drives (IMF) forecasts that emerging-market GDP will grow at
shareholder return over the long term. Growth is, by far, around 10 percent annually, compared to 5 percent in
the most important driver of long- term TSR for top- high-income countries (Figure A2). This is equivalent to
performing financial institutions (Figure 3). Changes in roughly 55 percent of global GDP growth in absolute
valuation multiples can also drive value creation in the terms.
short to medium term, but the impact is diminished over Financial institutions will need to build capacity and
the longer term. This means institutions must be able to expand their offerings to continue to realize this growth
drive continuous, sustained growth even under uncertain potential, especially since financial services penetration
macroeconomic conditions. and development remain low in many emerging markets
Examples from the banking sector highlight despite recent growth. There is still significant room for
the stark contrast in the valuation of institutions in healthy growth of banking assets, as penetration is still
developed versus emerging markets (Figure 4). This very low (Figure 5a). Seventy-six percent of emerging
valuation premium closely correlates to the overall return markets have a banking asset-to-GDP ratio of less than
Redefining the Emerging Market Opportunity | 5

20. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 3: Sources of value creation for top-quartile global FS performers, 2001-2011
40
n Change in free cash flow
n Change in multiple (P/E)
30 n Change in margin (EBITDA)
n Revenue growth
Value creation (TSR %)
20
10
0
–10
3 years TSR 5 years TSR 10 years TSR
Note: TSR derived from calendar year data in local currency. Sample size are financial institutions from S&P 1200 and top 200 financial institutions by market capitalization as of December 2011.
Figure 4: Profitability and valuation of banks
5
Emerging market banks
Developed market banks
4
Price-to-Book Value
3
2
1
–15 –12 –9 –6 –3 0 3 6 9 12 15
Return on Equity (ROE)–Cost of Equity (COE) (percent)
Sources: Bloomberg (consulted on March 14, 2012); BCG analysis.
Note: Data are as of December 2011.
6 | Redefining the Emerging Market Opportunity

21. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 5: Banking penetration and asset growth projection
Figure 5a: Banking asset penetration Figure 5b: Banking asset growth estimate
2010 banking penetration(banking assets / GDP) 8 150
Lower middle income 120
6 Upper middle income
Banking assets (US$ trillions)
High income
90
4
60
2 n Low and lower middle income EMs
30 n Upper middle income EMs
n High income countries
0 0
0 25,000 50,000 75,000 100,000 2010 2015
GDP per capita (US dollars)
Sources: Economic Intelligence Unit, Financial Indicator database (consulted March 14, 2012); IMF, World Economic Outlook Database, September 2011.
Notes: 76% of EMs have penetration under 1.0; 67% of DEs have penetration under 2.0.
1.0, while 67 percent of developed markets have a ratio While this slowdown was largely the result of policy
above 2.0. tightening to cool overheating economies and curb
The Economic Intelligence Unit projects that banking inflation, it also reflects weaker exports and reduced
assets in emerging markets will continue to grow more capital inflows. Emerging markets as a group still have
than 20 percent annually, compared to 3 percent in high- a high degree of monetary and fiscal firepower at their
income countries (Figure 5b). This implies that emerging disposal, compared to most high-income countries,
markets will contribute to 68 percent of global banking which have little or no room to cut interest rates or
asset growth from 2010 to 2015 in absolute terms. increase public borrowing. However, this aggregate
The insurance industry has similar potential for picture masks dramatic differences. Some governments
expansion. With the exception of South Africa, India, and have much more scope to loosen policy than others.
Malaysia, many emerging markets still have relatively The Economist used several key monetary and fiscal
undeveloped life insurance business (Figure 6a). indicators to assess 27 emerging economies’ ability to
Eighty-six percent of emerging markets have premium ease monetary and fiscal policy. The average of these
penetration less than 2 percent. Similarly, for non-life monetary and fiscal measures is the overall “wiggle-
insurance, there is still room to accelerate insurance room index.” China, Indonesia, and Saudi Arabia have
adoption in many emerging markets, as 82 percent of the greatest capacity to use monetary and fiscal policies
emerging markets still have premium penetration of less to support growth and respond to external shocks
than 2 percent (Figure 6b). (Figure 7). Chile, Peru, and Russia are also in a solid
position. On the other hand, Egypt, India, and Poland
Developing countries’ room to maneuver varies have the least room for stimulus. Argentina, Brazil,
widely Hungary, Turkey, Pakistan, and Vietnam are also in the
Despite some signs of slowing growth due to the recent “red zone.”
global economic turmoil, emerging economies will
continue to have a stronger macroeconomic outlook. The shift in global competition underscores the need
However, attractiveness will vary significantly across for financial innovation
countries. Over the last five years, there has been a significant shift
An assessment by The Economist magazine in in the competitive dynamics of global finance, influenced
January 2012 suggests that the downturn in the euro by the rise of global-scale institutions in the emerging
zone and the uneven recovery in the United States have markets. The number of emerging-market banks in
already taken their toll on the emerging world. Setting the top 200 tripled from 22 to 66 between 2005 and
China’s economy to one side, the average growth rate in 2011, and now accounts for one-third of leading global
other developing countries is estimated to have slumped institutions (Figure 8). The rise of emerging-market
to an annual rate of less than 3 percent in the fourth competitors is even more striking within the top 100
quarter of 2011, from 6.5 percent in the first quarter.
Redefining the Emerging Market Opportunity | 7

22. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 6: Monetary and fiscal policy wiggle room
Egypt
India
Poland
Brazil
Vietnam
Pakistan
Turkey
Argentina
Hungary
South Africa
Taian
Venezuela
Czech Republic
Mexico
Colombia
Malaysia
Thailand
Philippines
Hong Kong
Peru
Russia n Least flexible (“red zone”)
Singapore n Neutral
South Korea n Most flexible (“green zone”)
Chile
China
Indonesia
Saudi Arabia
0 20 40 60 80 100
Room to ease fiscal and monetary policy (minimum flexibility=100)
Sources: The Economist, 2012.
Figure 7: Number of emerging market banks in top 200 by market capitalization
80
Market Capitalization Rank
70 n 1–50
n 51–100
n 101–150
60
n 151–200
Number of banks
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011
Source: Thomson Reuters Datastream (consulted April 2, 2012).
Note: Emerging market banks in top 200 tripled their numbers in six years.
8 | Redefining the Emerging Market Opportunity

23. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 8: Appearance of financial development indicators
Increasing GDP per capita
Foreign Domestic
Public
debt
public public
debt debt
services
Banking
Bank Bank Bank Bank
deposits wholesale private claims
funding credit on FIs
Foreign Domestic
market
Capital
Stock
market private private
debt debt
Institutional
investor
Pension Non-life Life Mutual
funds insurance insurance funds
Source: World Bank, 2012.
institutions, where the number grew from nine to 33 To win and gain market share, institutions will
within the same period. need to innovate constantly and identify “white space”
In the middle of the 2000s, the emerging-market opportunities to exploit.
financial institutions rising into the top ranks of global-
market capitalization ranking came mostly from China. Financial institutions must steer clear of potential
More recently, institutions from Brazil, Chile, Indonesia, macro- and micro-level risks
Thailand, Malaysia, Turkey, India, and South Africa have Countries need to ensure that they can respond to
made their way up the rank. global shocks, as macroeconomic conditions link closely
Despite the attractive opportunities presented by to the health of the financial system. Countries that are
emerging markets, competition will get more intense. in the “red zone” in terms of fiscal and monetary wiggle
Institutions will need to continue looking for creative room must manage the risk of future macroeconomic
business models to tap a wider range of opportunities. challenges. While government institutions such as the
As later chapters of this report will show, many Reserve Bank of India have sensibly not yet reduced
emerging-market institutions have advanced by adopting interest rates in the face of a weakening economy, some
highly innovative approaches in their own markets. They others have ignored the red zone described earlier.
can get around infrastructure shortcomings and address Brazil’s central bank has reduced interest rates four
the local needs and practices of emerging-market times since last August, and it has signaled that more
customers. They have done this through innovative cuts lie ahead. Such easing will support growth this year,
distribution models, risk practices, and partnerships. but at the risk of reigniting inflation in 2013.
Some institutions, for example, can effectively disburse On a micro level, there is potential for reduced
financing to small business customers within 10 minutes returns as markets mature and competition intensifies.
through electronic channels and without documentation As mentioned previously, return spread is a key driver
or guarantor requirements. In developed markets, such of valuation for financial institutions. The high interest
transactions normally take days and require mailing in margins in emerging markets are expected to go down
documents. as the market matures and competition intensifies.
Redefining the Emerging Market Opportunity | 9

24. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
As market penetration increases, net interest margin A World Bank study suggests, on a macro level, that
(NIM) tends to go down (Figure A3). However, margin corporate bonds emerge late in the development path.
compression will not happen overnight. There is still In typical financial development, government borrowing
significant room for development before NIM reduction emerges before basic banking services, which emerge
will take place, as penetration in many emerging markets before capital markets, as the financial system develops
is still low. and income levels rise (Figure 9). Institutional investors
Financial providers can also overcome top-line appear at various stages of the process, reflecting policy
compression by improving their efficiency to lower costs factors as well as links with other components of the
and by diversifying income streams into fee revenues. development process. Pension funds typically emerge
In the early stages of financial development, interest early, before insurance and mutual funds.
income dominates a financial institution’s income stream.
However, as markets mature and financial activities Consumer financial services: Enabling growth by
become more diverse, the institution can tap into reducing poverty, unleashing consumption
opportunities from non-interest income, from transaction For emerging markets, increased consumption, including
business and investment banking activities. by lower-income consumers, will be critical in driving
Institutions, especially credit providers, will need to economic expansion. As previously discussed, there
secure sufficient capital to continue their growth. While will be significant shifts in global spending over the
many emerging markets generate high earnings that can next decade. There is a major opportunity to drive
recapitalize them for future growth, external influences, consumption, especially in the lower-income segment, to
such as pressure for high dividend payouts, can impact produce both economic and social benefits.
this ability. In some emerging markets, the banking Obtaining access to financial services and adopting
space is still dominated by state-owned institutions, disciplined savings habits are both prerequisites for
which often face government pressure to pay high lower-income consumers to afford more goods and
dividends to increase state revenue. Governments must services, including emergency expenses such as
balance fiscal revenue needs with the longer-term impact medicine and home repair. Expanding financial access is
on banks’ ability to provide capital to support enterprises also a path for low-income people to escape poverty.
and consumers. While there is significant demand for financial
Institutions need to be able to expand beyond services, poor communities continue to be underserved
credit revenues. Credit growth should be accompanied by formal institutions. In the portfolio of the poor,
by deposit growth in order to ensure sustainable and three key services are greatly in demand but often
profitable business. Institutions need to build capability inadequately provided: managing money on a daily
to gather deposits, including unlocking potential from basis, building long-term savings, and borrowing for
“under-the-mattress” savings. The compounded effect of various needs.
interest-margin reduction, as previously mentioned, will Providing insurance products will also be a
require financial institutions to diversify their sources of significant opportunity, as low-income consumers are
revenue to include fee income. the most susceptible to adverse events. Building a
Finally, business environments must be open savings culture is also a requirement for supporting other
to innovation in order for their efforts to succeed. parts of financial system. For example, a savings culture
Governments and agencies can do their part by is a prerequisite for establishing pension funds and
monitoring policies and adjusting or rejecting those that insurance, which, in turn are required for creating deep
create market distortions, hampering innovations and capital markets.
efficiencies. Policies driven by political decisions, such as Unlocking under-the-mattress savings can benefit
interest rate ceilings, dampen progress in unlocking new the larger financial system by helping governments and
opportunities. global organizations deliver benefits and assistance to
low-income people. Conversely, as the report will later
Providers should focus on three critical areas of highlight, government-to-person (G2P) payment also
opportunity: consumer financial services, SME plays an important role in driving financial inclusion.
financing, and corporate bonds Lowering the costs of such programs can make
There are many financial services opportunities in them more effective. In a pilot program in Mexico, a
emerging markets. Three of them are particularly critical new payment method for conditional cash transfers
to supporting economic growth: consumer financial decreased transaction costs and opportunity costs for
services, financing for SMEs, and corporate bonds. beneficiaries from 30.1 pesos to 0.5 pesos, and from
While the first two opportunities are relevant for 16.9 pesos to 2.2 pesos, respectively. This is equivalent
most emerging markets, developing a large and deep to a transaction cost reduction of more than 90 percent
corporate bond market should be the focus of emerging in delivering aid to low-income people.
economies at the middle income level and at a more
advanced stage of financial development. However, SME financing: Battling the credit paradox
as discussed in later chapters, there are opportunities Emerging markets face a credit paradox that hinders
to support select corporate bond issuance in less small- and medium-size businesses, as well as their
developed economies. banks: only one-third of SMEs, on average, have access
to credit and loans, even though three-quarters of them
10 | Redefining the Emerging Market Opportunity

25. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
Figure 9: Credit demand and constraints across African enterprises
100
n Received loan
n No credit demand
80
n Credit constrained
60
Percent
40
20
0
Small enterprise Medium enterprise Large enterprise
Sources: IFC, 2010; http://www.enterprisesurveys.org/Data/ExploreTopics/finance.
Note: Calculations are based on surveys from Kenya, Madagascar, Senegal and Uganda. Small enterprises have <=25 employees, medium have 26-100, and large have > 100.
maintain bank savings and checking accounts. Banks, of formal SMEs in emerging markets do not have access
for their part, lack sufficient access to shared data—such to formal institutional loans or overdrafts, despite a need
as tax records, credit history, and legal status—to risk for these services.
lending to many SMEs. As a result, many businesses The finance gap is far larger when considering micro
lack much-needed cash to grow, while financial and informal enterprises. By that measure, 65-72 percent
institutions miss the opportunity to tap the huge pool of of all SMEs in emerging markets lack access to credit.
potential SME borrowers. The proportional size of the finance gap varies widely
SMEs play a major role in economic development across regions and is particularly daunting in Asia and
in both emerging and developed economies. SMEs Africa, especially in low-income countries. A World Bank
account for a significant share of employment and GDP investment climate assessment survey indicates that
around the world, especially when taking into account small enterprises in Africa have much greater difficulty
the informal sector. SMEs employ an average of 67 in obtaining credit access than large enterprises. Only
percent of the formal employment in developed countries 20 percent of small enterprises in Africa get access to
and around 45 percent in developing countries (Figure credit, while 41 percent are credit constrained (Figure
A4a). They also contribute a sizable share to formal A5).
GDP, 49 percent on average in high-income countries
and 29 percent on average in low-income countries, Corporate bonds: A foundation for long-term growth
respectively. The macroeconomic and financial dislocations that
While the proportion in developing countries seems followed the crises in emerging markets in the late
modest, the informal sector—most of which comprises 1990s highlighted the importance of developing local
SMEs—accounts for up to 48 percent of the total labor bond markets as an alternative source of debt financing.
force and 37 percent of GDP in these countries. The Bond markets can strengthen corporate and bank
corresponding proportions for developed countries are restructuring and thus accelerate the resolution of a
much lower, at 25 percent of the total labor force and 16 crisis. At the same time, local bond issues facilitate the
percent of the GDP (Figure A4b). reduction of currency and maturity mismatches on their
In addition, SMEs typically contribute more to job balance sheets and thus reduce the vulnerability of the
creation than do large firms, especially in the case of corporate sector.
start-up companies. Moreover, a vibrant SME segment Well-functioning local corporate bond markets also
can help economic development through other provide institutional investors with an instrument that
channels, such as innovation and competition. Access satisfies their demand for fixed-income assets, especially
to finance remains a key constraint to SME development of long maturities that match their long-term liabilities,
in emerging economies. The International Finance while providing higher yields than government bonds. For
Corporation (IFC) recently estimated that 45-55 percent the same reasons, corporate bonds can also strengthen
Redefining the Emerging Market Opportunity | 11

26. Chapter 1: Unleashing Growth Opportunities in Emerging Markets
the balance sheets of pension funds and life insurance that emerging markets are able to accelerate their
companies. financial development, support their economic potential,
In many countries, assets under the management and improve the lives of their citizens.
of institutional investors have been growing faster than
the supply of local instruments in which to invest. When REFERENCES
bonds are not available, such funds may invest in assets Ayyagari, M., T. Beck, and A. Demirgüç-Kunt, 2007. “Small and Medium
Enterprises across the Globe.” Small Business Economics 29(4),
that are a poor match for their liability structure, leading 415–34.
to interest rate and other risks.
CGAP (Consultative Group to Assist the Poor), The World Bank Group.
To avoid such mismatches and the risks they entail, 2010. Financial Access 2010: The State of Financial Inclusion
governments should allow institutional investors to invest Through the Crisis. Washington DC: CGAP, The World Bank
internationally. Additionally, a deep and liquid corporate Group.
bond market may help prevent the development of CGFS (Committee on the Global Financial System). 2007. “Financial
asset price bubbles and the associated financial Stability and Local Currency Bond Markets.” CGFS Publications
28. Basel: Bank for International Settlements.
instability. Corporate bond markets also help reduce
the concentration of credit and maturity risks in the Collins, D., J. Morduch, S. Rutherford, and O. Ruthven. 2009. Portfolios
of the Poor: How the World’s Poor Live on $2 a Day. Princeton,
banking system and free capital for banks to provide NJ: Princeton University Press.
other segments, including SME financing and consumer
The Economist. 2012. “Shake It All About: Which Emerging Economies
lending. Have the Most Monetary and Fiscal Wiggle-Room?” The
Banks become the main source of long-term Economist. January 28, 2012.
local currency financing in the absence of corporate The Guardian. Credit ratings: How Fitch, Moody’s and S&P rate
bond markets. Today, with the exception of Chile, each country. Datablog. http://www.guardian.co.uk/news/
Malaysia, and Thailand, many emerging markets have datablog/2010/apr/30/credit-ratings-country-fitch-moodys-
standard.
a relatively low penetration of corporate bonds. In
India, for example, a significant portion of infrastructure IFC (International Finance Corporation). 2010. Scaling-Up SME Access
to Financial Services in the Developing World. Washington DC:
projects are financed by banks, because of the limited IFC.
development of the bond market.
IFC and World Bank, Investment Climate Survey. Available at http://
Concentrating maturity risk in the banking system www.enterprisesurveys.org/Data/ExploreTopics/finance.
is dangerous, as the lack of markets may lead to the
IMF (International Monetary Fund). World Economic Outlook Database,
mispricing of risk, which makes risk harder to monitor September 2011. Washington, DC: IMF.
and control. Additionally, lending to large corporations
— 2005. “Development of Corporate Bond Markets in Emerging
—.
consumes significant capital in the banking sector. With Market Countries.” Global Financial Stability Report. Washington
so much growth opportunity in the SME and consumer DC: IMF.
segments, freeing up this capital will ensure that banks Jackelen, H. and J. Zimmerman. 2011. A Third Way for Official
can tap into these opportunities. Development Assistance: Savings and Conditional Cash Transfers
to the Poor. New York and Washington DC: Growing Inclusive
THE PRIVATE SECTOR PLAYS A CRUCIAL ROLE BY Markets, United Nations Development Program, and The Global
Assets Project, New America Foundation.
DRIVING “LEAPFROG” INNOVATION
The financial development path of each country is Manurung, N. and B. Moestafa. “Indonesia Regains Investment Grade at
Moody’s After 14 Years.” Bloomberg. January 19, 2012.
unique. There is no universal template for capacity
building, which must be developed over time. Relying Mukherjee, S. 2011. The impact of interest rate controls on financial
inclusion: A comparative analysis. IMFR Trust blog. http://www.
solely on capacity building, therefore, will not address ifmr.co.in/blog/2011/02/25/the-impact-of-interest-rate-controls-on-
the urgent need to accelerate financial development in financial-inclusion-a-comparative-analysis/.
emerging markets. Parkinson, J. 2011. “S&P Upgrades Turkey’s Local-Currency Rating.”
This urgency is illustrated by the current near- The Wall Street Journal. September 20, 2011.
standstill in certain aspects of development among Sinha, J. and N. Aggarwal. 2011. Financial Inclusion: From Obligation to
emerging economies. In the areas of corporate Opportunity. Mumbai: The Boston Consulting Group.
governance, legal and regulatory competence, and Swiss Re. 2011. World Insurance in 2010. Zurich: Swiss Reinsurance
contract enforcement, emerging markets have registered Company Ltd.
virtually no progress over the past four years in the World The World Bank. 2012. Financial Development in Latin America and the
Economic Forum’s Financial Development Index (Figure Caribbean: The Road Ahead. Washington DC: The World Bank.
A6). Financial infrastructure has improved only modestly. World Economic Forum. 2011. The Financial Development Report 2011.
The lack of progress underscores the reality that New York: World Economic Forum USA Inc.
traditional models often are unsuitable for seizing new — 2010. The Financial Development Report 2010. New York: World
—.
opportunities. Transformation and innovation are needed. Economic Forum USA Inc.
While that involves risk, it also promises progress and — 2009. The Financial Development Report 2009. New York: World
—.
reward for those who get it right. Economic Forum USA Inc.
In many countries, “leapfrog” innovation will likely — 2008. The Financial Development Report 2008. New York: World
—.
be the best path for accelerating financial gains. It is a Economic Forum USA Inc.
form of innovation that crosses borders, platforms, and
concepts at a single bound. This kind of bold innovation,
along with the policies that support it, is crucial to ensure
12 | Redefining the Emerging Market Opportunity