Civil war and financial underdevelopment : the case of Georgia with special reference to Sri Lanka

Abstract

This paper explains the causes of financial underdevelopment in Georgia shedding light on country’s prolonged ethnic and civil conflict. It is argued that newly privatized commercial banks are excessively cautious in expanding their loan assets to private nonfinancial corporations due mainly to the lack of banks’ skill and capacity of monitoring credit and political risk. Lending activity is associated with uncertainty stemming from recurrent civil war which has prevented banks from precisely assessing borrower’s credit risk. Further support to this proposition is provided drawing upon Sri Lankan experience that shows that bank responds positively to loan demand during the time of ceasefire and the vice-versa.