Global Crisis of Egypt

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Modern Finance and the Transformation of Financial Systems: Key Considerations for Egypt In Light of the Global Crisis

ABSTRACT

This paper considers the impact of ‘modern’ financial mechanisms on the transformation of financial systems from the viewpoint of political economy of finance in light of the global crisis. Over the last three decades, many financing practices were imported under the banner of financial liberalization, strengthening arms length ‘market’ banking in Egypt. This is transforming the processes, institutions, and relationships of financial intermediation to become more market-based. However, the crisis is a testament that this transformation should only be undertaken in harmony with the particularities of every country. This paper analyzes whether such a transformation is a) feasible and b) desirable for financial development in Egypt. The analysis is split into two sections. The first section analyzes the impacts of ‘modern’ financing mechanisms on the financial system, considering how they shift the financial system to a market-based direction. This has repercussions in the context of market economies with regards to information gathering and risk assessment by new kinds of institutions which are not necessarily suited to the institutional framework in developing countries like Egypt. The second section reviews the role of financial intermediaries, considering the theoretical challenges associated with changes in the lender-borrower relationships. The focus is on the financialization of contemporary capitalism and the transformation of banks. The paper concludes that the spread of ‘modern’ techniques has fostered changes in banking relationships to be more arms length, resulting in systemic transformations that provide impetus to market-based finance. This transformation is not necessarily desirable for Egypt where an access to finance by small and medium enterprises is an impediment to economic development is access to finance by small and medium enterprises. This raises questions regarding the optimal design of the financial system to enable prudently regulated access to finance as a key point for consideration.

1. Introduction

“ "A financial sector which intermediates between savers and investors as well as providing financial services to traders and others is a crucial part of any capitalist economy.”" (Pomfret, 2009, p.5). Over the last three decades, a multitude of financing practices have been imported from developed to developing countries under the banner of modernity and have become deeply entrenched in the transmission of loanable capital. The result has been a transformation of financial systems across key financial centers from being bank-based to being market-based. Contemporary literature and the Washington Consensus position this transformation as a positive development towards a modern financial system. Indeed, it is very difficult to depict what comprises a modern financial system without being implicated in subjectivity or bias. Instead, there are characteristics that delineate a well-functioning financial system; namely access to credit, relationships that result in the provision of long-term finance, adequate legal settings, and the activity of the capital market. The process of creating financial mechanisms conducive to development must take into account the economic, political, and social particularities of each country which are directly related to historic and institutional specificity.

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