Breaking the Logjam of Capital Allocation

The role of financial institutions in modern society is to provide financing and capital to meet the needs of individuals, companies and society, and ultimately provide the support for an efficient functioning economy and to facilitate sustainable growth and prosperity.

Financial institutions face a series of impediments that inhibit capital from flowing to where it is most needed. Indeed, the world is awash in financial capital: corporate balance sheets are at an all-time high, consumers are deleveraging and money is clustered in large institutional pools. And yet, it is not finding its way to SMEs, upstart entrepreneurs and underbanked individuals, where the opportunities for sustainable economic growth are perhaps the greatest. There is an acute mismatch between the suppliers of capital (who are mostly very large) and the demanders of capital (who are mostly very small). Profound diseconomies of scale in transaction costs make it difficult for large capital providers to access these small stakeholders. In part, the capital takes the wrong form: the mismatch in size is often coupled with a mismatch in investment time horizon.

Of course, competitive markets have a way of evolving to capture profit opportunities. Thus, this situation cannot persist. Over time the forces of competition will drive innovations that connect capital to its best use. But it may take wholesale structural failure before the bottlenecks that impede the flow of capital are addressed.

The real question, therefore, is: what can be done to catalyse this change?
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