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Full File Research Area Public Finance Publication Type Working Paper Series Author(s) - Sherif H. Elkholy, PhD Publisher The Egyptian Cabinet - IDSC Publish Date July 2010 Abstract This paper considers the impact of modern financial mechanisms on the transformation of financial systems from a political economy of finance standpoint in light of the global crisis. Over the last three decades, many financing practices were imported under financial liberalization, strengthening arms length market banking in Egypt, and transforming the processes, institutions, and relationships of financial intermediation to become more market-based. Taking into account the particularities of every country, the study analyzes whether such a transformation is (a) feasible and (b) desirable for Egypt. The first section of the paper analyzes the impacts of modern financing mechanisms on the financial system, the shift towards a market-based direction, and the repercussions on market economies pertinent to information gathering and risk assessment by new kinds of institutions- not necessarily suited to the institutional framework in developing countries like Egypt. The second section reviews the role of financial intermediaries and the theoretical challenges facing the modern lender-borrower relationships. The focus is on financialization of contemporary capitalism and the transformation of banks. The paper concludes that the spread of modern techniques has fostered changes in banking relationships to be more arms length and market-based. This transformation is not necessarily desirable for Egypt where access to finance by small and medium enterprises is an impediment to economic development. This raises questions on the optimal design of the financial system to enable prudently regulated access to finance as a key point for consideration.