Banking for growth: Tiering the banking sector as a strategy for improving access to credit for small enterprises in developing countries

The absence of a robust small and medium-sized formal business sector (SMEs)---or the "missing middle"---has long been identified as both a contributing factor and a distinguishing characteristic of many developing countries. Many reasons have been advanced to explain the missing middle including the inability of SMEs to access bank-based credit. This thesis compares the relative merits of the legal reforms associated with two strategies that have emerged to address the lack of bank-based credit. The first strategy can be considered as the second generation of reforms following the financial liberalization policies of the 1990s. It focuses on improving the financial intermediation process performed by first tier, or "commercial", banks and is commonly referred to as "downscaling". The second strategy is a second generation reform of the NGO "microcredit" movement and a sub group of the effort to make microcredit "sustainable" or "commercialized" that began in the 1990s. This strategy is commonly referred to as "scaling-up" and emphasizes the enactment of narrow, second tiers or segments within the banking sector of developing countries as a necessary step in the process of expanding bank-based financial intermediation.; The emergence of these two, potentially competing, strategies reflects the convergence of the two tracks of development efforts that have run parallel to each other: one track for the informal sector and the other for the existing, but negligible, SME sector. However, the recognition that the SME sector in developing countries will emerge from very small, growing, informal sector enterprises and the commercialization of microfinance have led to the convergence of the two tracks of efforts.; The thesis assesses and compares the merits of each strategy by considering the way in which the laws that each strategy advances support the independent and interactive roles of the stakeholders to the financial intermediation process, mindful of the historical, cultural and socio-political similarities and differences that each developing country would present. It challenges the ability of lawmakers to draft laws that can make a meaningful distinction between first tier and narrow second-tier bank institutions, and suggests that the focus of legal reform should be on supporting the roles of stakeholder to the financial intermediation process and removing the constraints that hampered its development.