At the global level, this shortage of long-term financing also means that despite appeals by the Group of Twenty (G-20) and other key international groups, developing countries are struggling to mobilize the billions of dollars in financing they need to build badly-needed infrastructure in order to grow their national and regional economies.
According to the new report, ‘Global Financial Development Report 2015-2016: Long-term Financing’, extending the maturity structure of finance is considered to be at the core of sustainable financial development.
Securing long-term financing, defined as investment funding that matures in a year or more, depends on the same fundamentals essential to tackling the current volatility in global capital markets: Policy makers need to focus on institutional reforms, such as promoting macroeconomic stability, establishing a regulated and legally enforceable banking and investment system that protects creditors and borrowers, and setting a framework for capital markets and institutional investors.
“It would be a challenge to achieve high and sustainable rates of economic growth if countries fail to invest in schools, roads, power generation, electricity distribution, railways and other modes of transport, and communications. Private sector construction of plants and investment in machinery and equipment are also important. Without long-term financing, households face great hurdles to raising income over their lives —for example by investing in housing or education—and may not benefit from higher long-term returns on their savings,” World Bank Group President Jim Yong Kim said.
While commercial banks remain the primary source of financing for firms and households around the world, capital markets have grown rapidly, especially in emerging market economies like China and India.
Firms in developing countries saw a 15-fold increase in the amounts raised in equity, bond, and syndicated loan markets between 1991 and 2013.
“Long-term finance facilitates investment in infrastructure, durable goods, and people’s education and skills, and, as such, is the bedrock of sustained growth. Finance, however, needs good institutions and effective contract enforcement,” noted Kaushik Basu, World Bank Senior Vice President and Chief Economist.
Long-term housing finance is arguably the most important ingredient towards home ownership, yet the disparity across countries is stark: an average of 21 percent of individuals in high-income countries have an outstanding home loan, compared to a mere 2.4 percent in lower-middle and low-income countries.
Firms in developing countries also face substantial disparities. Loan durations to firms in low-income countries average 23.3 months, less than half of the average for firms in high-income countries at 58.7 months.
The report cautions, though, that long-term finance is not optimal or even necessary in all circumstances.
It said firms match the maturity structure of their assets with liabilities, and typically seek shorter-maturity debt to finance payroll and inventory, while seeking longer-maturity debt for fixed.