Financial Sector Policy in Fragile States - A Primer (English)

Financial development can enhance economic well-being and foster resilience in fragile settings, potentially contributing to escaping from fragility once “pivotal conditions” are in place. However, fragile states face numerous challenges, such as weak institutional frameworks, lack of infrastructure, and a volatile environment, which complicate financial sector policy design and implementation. Drawing from original empirical work and extensive World Bank experience in supporting financial development in fragile states, this paper attempts to distill lessons that can help financial sector policymaking in fragile settings. This paper advocates for a nuanced, country-specific approach to policy formulation, emphasizing the need for flexible, risk-based, and sustained engagements that adapt to changing conditions, leveraging collaboration with international partners. Key policy strategies include establishing legal and institutional foundations for market-based finance, stopping bank losses, establishing monetary control, and strengthening financial supervision, supported by long-term technical assistance and capacity building. Improving financial integrity by combating money laundering and illicit financial flows is vital. This requires implementing risk-based international standards, leveraging anti-money laundering/countering the financing of terrorism agendas to address foundational issues, and enhancing partnership engagements with relevant regional bodies. Restoring payment systems is crucial for enabling transactions, receiving remittances, facilitating aid flow, and maintaining cross-border payments. Policymakers should use agile project management, simplified procurement, and quick-to-deploy technologies to navigate challenges in fragile contexts. Facilitating financial inclusion for small businesses is also a priority. This involves developing financial and digital infrastructure, addressing capacity constraints, and unlocking bank financing.