Financial structures to promote private sector development in south-eastern Europe

This paper investigates the extent to which the financial sector in south-eastern Europe (SEE) responds to the needs of the local private sector. It does so through an analysis of the sources of finance used by enterprises when making fixed investments, and by looking at the level of banking intermediation and the (lack of) development of the non-banking financial sector. Enterprises in SEE are found to rely mainly on internal funds to finance expansion. The degree of financial intermediation of which the local banking system is capable is far lower than in Western economies. The paper examines various characteristics of the financial sector to gain an understanding of this poor performance.