20 small relative to the banks and do not represent much competition for them.<sup>45</sup> What explains the differences in the role of NBFIs in Malaysia, Thailand and India, where they were much more competitive with banks than the NBFIs in Latin America, Philippines, Turkey and Egypt? First, the financial systems in the East Asian countries are larger, relative to GDP, and the financial system in India is large relative to its GDP. These large financial sectors may have left more room for specialized institutions. Second, the composition of the institutions may explain the difference. In many of the countries the NBFI sector covered in the IFS consists of development banks and savings banks that are in decline. In contrast, in Malaysia and Thailand, and to some extent in India, finance companies were an important part of the sector.<sup>46</sup> These institutions grew rapidly up to 1997. Their growth in Malaysia and Thailand was reversed by the East Asian crisis and in India by a domestic crisis in the sector (World Bank, 2000b, Hanson, 2003). In all three countries, the finance companies appear to have grown by servicing new clientele with mortgages and consumer finance, but also under an easier regulatory and supervisory environment than the banks. For example, in India before 1997, the limits applied to bank deposit interest rates were not imposed on the non-bank financial corporations, and they faced easier capital requirements and supervision; after the 1997 crisis regulation and supervision was tightened substantially. Thus, the competition between the NBFIs and the banks in these three countries was partly regulatory competition, and the NBFIs’ competitiveness with banks declined as they shrank and became more heavily regulated after crises.

Markets for commercial paper and private sector bonds provide less competition for banks in most developing countries than they do in industrial countries. Generally speaking, these markets in developing countries are relatively much smaller than in the industrial countries that rely on credit markets, such as Canada, Japan, the U.K. and the U.S. The small size of these markets reflects the lack of the informational, infrastructural and legal frameworks in these countries and the lack of liquidity in small markets.<sup>47</sup> However, these markets have developed to some degree in the East Asian economies and India (See, for example, World Bank, 1995). Nonetheless the competition from these markets is only beginning to push down bank spreads (See Hanson, 2003).

# **B.   Competition from Off-shore:  The Growth of External Finance in the 1990s**

Banks in developing countries face off-shore as well on-shore competition. Public sector borrowers and, increasingly, private borrowers can raise funding off-shore as well as on-shore through increasingly open capital accounts. Depositors can place

> 45 In Latin America, average deposit mobilization by the non-banks fell from 4.9 percent of GDP in 1992 to 2 percent in 2000, according to the IMF data.  Moreover, nearly 50 percent of the Latin American deposit figures reflect Colombia’s housing bank system.  Non-banks’ deposit mobilization has been less than 10% of the banks’ in the other Latin American countries and fell over the decade in all of them countries, except Mexico.  Egypt and Turkey are similar in that the non-banks’ deposits are much less than 10% of bank deposits.  Over the decade, NBFI deposits rose relative to bank deposits in Egypt and but fell in Turkey.

> 46 Thai data also include the relatively slow growing development bank sector and the government savings bank.  The discussion of India is based on national sources, not the IFS.

> 47 See Shah and Thomas, 2003, and works cited there.