Capital Market Development In A Small Country

Project and Seminar Topics with material for Banking and Finance

Abstract

Financial intermediation in Slovenia relies mostly on the banking system with established lending relationships, while the development of the non-bank financial sector is far behind EU peers. The dominance of bank lending has resulted in a lack of equity financing, in particular to start-ups and small and medium-sized enterprises (SME) as bank lending is biased towards existing corporations and securities markets are shallow.

Therefore, developing more complete and deeper capital markets would enhance the growth potential and innovation in Slovenia. This paper applies a framework for analyzing the state of development of Slovene capital markets, identifying the main shortcomings, and suggests a strategy for capital market development including policy measures. The key issues to be tackled in Slovenia consist of (i) directing the trading liquidity into more transparent trade venues; (ii) expanding the supply of investible instruments; and (iii) advancing financial market integration with the EU.

A large number of studies have reached the conclusion that deep capital markets improve the capital allocation, as reflected by higher returns and lower cost of capital from higher valuations.2 Bekaert, Harvey and Lundblad (2001, 2005) and Levine and Zervos (1996) illustrate that the cumulative effect of deeper capital markets has a positive impact on innovation and growth. This is important for Slovenia that has to compete by increasing productivity and must foster technological upgrading of its production.