DEPOSIT SUBSTITUTES AND THEIR MONETARY POLICY SIGNIFICANCE IN DEVELOPING COUNTRIES*
| Author | DEENA R. KHATKHATE,DELANO P. VILLANUEVA |
| Published date | 01 February 1979 |
| Date | 01 February 1979 |
| DOI | http://doi.org/10.1111/j.1468-0084.1979.mp41001003.x |
DEPOSIT SUBSTITUTES AND THEIR MONETARY POLICY
SIGNIFICANCE IN DEVELOPING COUNTRIES*
By DEENA R. KHATKHATE AND DELANO P. VILLANUEVA
In describing financial systems in underdeveloped countries, a very meaningful
distinction has been drawn by Hugh Patrick between a 'demand-following' and a
'supply-leading' pattern.' Financial markets in the developed countries can be
considered to be, by and large, of the 'demand-following' type, which is to say
that they grow more or less in automatic response to the felt needs of trade and
industry. On the other hand, financial structures that have evolved in the less
developed countries have been of the 'supply-leading' pattern in the sense that
they have come to be established by deliberate government policy. Once at a
functioning stage a demand for their services begins to be generated. Differences
in the mode of development of financial markets are reflected not so much in the
structural and other features of the financial system, as in the money market and
other trading instruments used in financial transactions. For instance, whereas
under the 'demand-following' type of financial development a variety of money
market instruments such as treasury bills, acceptance paper, short-term bills of
exchange came into existence and also were accepted on a wide scale, the 'supply-
leading' strategy of evolving financial markets was conspicuous by its failure to
create a market for these instruments or to devise new ones with similar charac-
teristics.2 But even under such a strategy occasions have arisen in some of the
less developed countries where new money market instruments have come on the
scene as an innovative response of the economic agents in these economies to their
institutional imperatives.3 In other words, the 'demand-following' pattern of
financial development is the more predominant one in the less developed countries
as far as the evolution of the money market instruments is concerned. Deposit
substitutes, so-called because of their close resemblance in basic characteristics to
bank deposits, are a case in point. In recent years, in a number of developing
countries, these substitutes for deposits as a source of funds to financial institutions
have emerged and grown in dimension.
* The authors would like to thank their colleagues, Warren Coats and Brock Short, and the
anonymous referees for their comments and suggestions. However, the authors remain
wholly responsible for the views expressed in this article. The authors are grateful to Amr
Moustapha for his help in gathering data on deposit substitutes.
1Hugh T. Patrick, 'Financial Development and Economic Growth in Underdeveloped
Countries', Economic Development and Cultural Change, January 1966, pp. 174-189.
2A. I. Bloomfield, 'Monetary Policy in Underdeveloped Countries', in C. J. Friedrich and
S. E. Harris (eds.) Public Policy (Cambridge, Mass.: Harvard University Press, 195G); P. G.
Fousek, Foreign Central Banking, the Instruments of Monetary Policy (Federal Reserve Bank
of New York, November 1957), and W. F. Crick, Commonwealth Banking Systems (Oxford,
1965).The phenomenon of the autonomous emergence of a money market instrument has been
dramatized by the Colombian experience during the 1960s. A tax certificate called a certificado
de abono tributario, or CAT, became very popular and played a useful role both as a tool of
stabilization assistance and allocative efficiency. See R. C. Porter, 'The Birth of a Bill Market'
The Journal of Development Studies, April 1973.37
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