CIPE Worldwide Update: Central and Eastern Europe

Financial Research Seeks
More Banks, More Access

Financial Research, Ltd. (FR) (1993-1996)
Legal and Regulatory Reform in Hungary

As Hungarian entrepreneurs grapple with the myriad obstacles to success, most place the difficulties of obtaining capital at the top of their lists. The banking sector, oriented towards large state-owned enterprises, has been slow to recognize the financing needs of the burgeoning number of small- and medium-sized businesses. This impediment was identified as a central concern in CIPE's Legal and Regulatory Reform in Hungary project and has been a feature of CIPE's portfolio in Hungary ever since.

With three years of CIPE support, Financial Research, Ltd. (FR), a public policy institute located in Budapest, has been advocating policy reform to reshape the banking system into an effective contributor to business growth. FR's initial recommendations were based on the challenges that the emerging private business sector posed for the banking sector and identified steps needed to enhance business access to bank loans. However, because of debt and bank consolidation pressures, government policies were being driven by crisis management concerns rather than banking services considerations.

New Institutions, New Opportunities. By 1995, the consolidation processes were coming to a close and a few of the policy reforms advocated by FR and incorporated in CIPE's publication Crossed Paths: Straightening the Road to Private Sector Growth took effect. For example, FR's call for the creation of new institutions to improve financing opportunities for enterprises was a prime factor in the creation of four new credit unions serving small business. Similarly, FR's urging the government to lessen the business tax to help entrepreneurs accumulate capital resulted in the rate being lowered from 36 to an exceptionally low 18 percent.

Solid Status, Excellent Positioning. Perhaps more importantly, however, in the course of this project FR solidified its status as a formidable authority on financial policy. Its leaders sit on several policy committees and regularly comment on banking and financial issues. In 1995, recognizing the impact of the recent banking crisis, FR updated its recommendations on reforms necessary in the areas of economic policy, taxation, money markets and bank privatization. As these new positions are promulgated FR is in an excellent position to advance sound financial policy over the next few years.

Assist Business, Bolster Confidence. In early 1996, as the banking securities draft legislation was under debate, FR delivered a paper on the issue at an important CIPE-sponsored Economic Policy Roundtable. The event attracted the heads of the major Hungarian banks, parliamentarians, government officials and the press, drawing much needed attention to this matter. With the legislation still pending, FR continues to push for opportunities for banks to assist business while initiating a strong regulatory framework to protect investors and bolster both public confidence in and access to banking.

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