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In the early 1990s, a consensus emerged among the leading experts in the field of small and micro business finance. It is based on three elements: The focus of projects should be on improving the entire financial sector of a given developing country; a commercial approach should be adopted, which implies covering costs and keeping costs as low as possible; and institutions should be created which are both able and willing to provide good financial services to the target group on a lasting basis. The starting point for this paper, which wholeheartedly endorses these three elements, is the proposition that putting these general principles into practice is much more difficult than some of their proponents seem to believe - and also more difficult than some of them have led donors to believe. The paper discusses the central issues of small and micro business financing in three areas: credit in general and the cost-effectiveness of lending methodologies in particular (Section II); savings in general and the role of deposit-taking in the growth of a target group-oriented financial institution in particular (Section III); and the process of creating viable target group-oriented financial institutions in developing countries (Section IV). We argue that donor institutions must be willing, and prepared, to play a role here which differs in important respects from their conventional role if they really wish to support sustainable financial sector development.
Paper Presented at the Conference on Workable Corporate Governance: Cross-Border Perspectives held in Paris, March 17-19, 1997 To appear in: A. Pezard/J.-M. Thiveaud: Workable Corporate Governance: Cross-Border Perspectives, Montchrestien, Paris 1997. The paper discusses the role of various constituencies in the corporate governance of a corporation from the perspective of incomplete contracts. A strict shareholder value orientation in the sense of a rule that at any time firm decisions should be made strictly in the interest of the present shareholders would make it difficult for the firm to establish long-term relationships as the potential partners would have to fear that, at a later stage of the co-operation, the shareholders or a management acting only on their behalf could exploit them because of the inevitable incompleteness of long-term contracts. One way of mitigating these problems is to put in place a corporate governance system which gives some active role to the other stakeholders or constituencies, or which makes their interests a well-defined element of the objective function of the firm. A commitment not to follow a policy of strict shareholder value maximization ex post can be efficient ex ante. Such a system would clearly differ from what is advocated by proponents of a "stakeholder approach", as it would limit the rights of the other constituencies to those which would have been agreed upon in a constitutional contract concluded between them and the founder of the firm at the time when long-term contracts are first established.