Financial Sector Rapid Review: Moldova

The banking industry has recovered, in part due to intensive guidance and intervention from the International Monetary Fund (IMF). However, key vulnerabilities remain, particularly within institutions charged with overseeing and delivering financial services. Non-bank institutions, including microfinance institutions (MFIs), lack a coherent regulatory and oversight structure, despite their increasing popularity among smaller economic actors. The rate at which Moldovans entrust their money to formal financial institutions has increased significantly, from 14 percent in 2014 to 43 percent in 2017, according to the World Bank Global Findex databank. Key structural reforms in Moldova's banking sector since 2014 have contributed to somewhat increased confidence in the economy. The IMF has noted that growth has returned, inflation has been relatively contained, the banking sector has been stable, and Moldova's external position has strengthened. Despite these improvements, vulnerabilities remain, particularly with respect to bank governance, transparency, and commitment to rooting out corruption. The enabling environment for smaller players, in particular microenterprises and small and medium-sized enterprises (SMEs), is moving toward a potential tipping point that favors increased entrepreneurship and investments in domestic enterprise. To reach this tipping point, Moldova requires continued forward motion with respect to a number of priorities, including improving traditional and information and communications technology (ICT) infrastructure, building human capital, and addressing regulatory constraints that interfere with entrepreneurship and investment. Moldova's system of capital markets falls far short of its potential to raise capital for domestic enterprises, including larger companies and even SMEs. The report focuses on the institutions underlying capital markets as a foundation for potential action in this arena. Expansion of the non-bank credit sector, which partially offset reduced bank lending to the private sector in 2017, presents risks that, if not addressed, may harm the very community of smaller economic players that it has the potential to empower. This report identifies a number of these risks and presents a set of ideas for addressing them. The report provides an overview of key legal and institutional issues impacting Moldova's financial sector, with an emphasis on two areas where donor intervention may be warranted: (1) development of capital markets; and (2) regulation of non-bank financial institutions. The report follows a four-part structure, examining the legal framework, implementing institutions, supporting institutions, and political economy considerations of general relevance. Finally, the report offers recommendations for how the Moldova Structural Reform Program (MSRP or the Program) may join other donors in helping Moldova embrace key opportunities for both expanding sources of capital and managing risk, in a way that will indeed support long-term economic growth, stability, and resilience. Moldova's financial sector consists of a range of institutions—public, private, and not-for-profit—established to support the ability of individuals, businesses, and governments to save and transfer money, buy and sell assets, access credit, generate investment, reduce risk, and otherwise undertake "arms-length" transactions that build or protect their incomes and wealth. The report highlights the importance of addressing regulatory constraints that interfere with entrepreneurship and investment, as well as improving traditional and ICT infrastructure within and between centers of commerce. The report notes that the rate at which adults reported holding at least one account in a formal financial institution rose from 14 percent in 2014 to 43 percent in 2017, according to the World Bank Global Findex databank. This increase in financial inclusion is a positive trend, but it also highlights the need for continued efforts to improve the financial sector's ability to support economic growth, stability, and resilience. The report emphasizes the importance of addressing the risks associated with the expansion of the non-bank credit sector, which partially offset reduced bank lending to the private sector in 2017. If not addressed, these risks may harm the very community of smaller economic players that it has the potential to empower. The report presents a set of ideas for addressing these risks and promoting the development of capital markets in Moldova. Overall, the report provides a comprehensive overview of Moldova's financial sector, highlighting key challenges and opportunities for reform. The report's recommendations aim to support long-term economic growth, stability, and resilience in Moldova by promoting the development of capital markets and addressing the risks associated with the expansion of the non-bank credit sector.