Economic growth cannot occur without savings and those savings must be processed and intermediated through banks, bond markets, stock markets, and so on. Countries without these institutions have smaller markets for loans, use their savings less effectively, and make fewer good investments.4 But why do some countries have poorly developed banking and financial systems?

The bridge between savers and borrowers can be broken in many ways, including insecure property rights, inflation and controls on interest rates, politicized lending, and massive bank failures and panics. These problems can break the bridge by (1) reducing the supply of savings, (2) raising the cost of intermediation, and (3) reducing the effectiveness of lending. Figure 9.11 illustrates the main ideas.

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