Banks That Don't Lend? Unlocking Credit to Spur Growth in Developing Countries

This article explores the level of liquidity within the banking systems of developing countries and the potential impact on rates of economic growth from prudently redirecting a portion of liquid assets into credit to the private sector. It finds that banks in developing countries are extremely liquid and growth rates per capita might increase substantially in response to heightened lending to the private sector. It then summarises the primary obstacles to this and presents several policy reforms that can augment the level of credit to the private sector in developing countries.     

Deposit Insurance,Institutions, and Bank Interest Rates

Many recent institutional reforms of the financial system have relied on the introduction of an explicit scheme of deposit insurance. This instrument aims at two main targets, contributing to systemic stability and protecting depositors. However, it may also affect the interest rate spread in the banking system, which can be viewed as an indicator of either inefficiency or market power in this financial segment. This paper provides an empirical investigation of the effect of deposit insurance and other institutional and economic variables on bank interest rates across countries. We find that deposit insurance increases the lending–deposit spread in banking. The main effect seems to arise not from the deposit side though, but from an increase in the lending rate. We interpret this result as evidence of the presence of moral hazard problems related to this instrument. We also find that higher quality of institutions is associated with lower spreads, thus contributing to eroding sources of market power in the banking sector.     

DEPOSIT INSURANCE AND EXTERNAL FINANCE

In this article we examine one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms, and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems. (JEL G21 , G22 , G32 )     

China's Way of Economic Transition

China started economic transition in 1978 to implement a Chinese type of socialist market economy system, i.e., a market-oriented economy consisting of collectively community-owned enterprises (CCOE) and state-owned enterprises (SOE) in a totalitarian political system with the Communist Party of China as the ruling power. The main contents of the economic transition can be briefly described as follows: (1) gradual decentralization of economic decision from central economic planning to market-oriented decision by delegating competence to managers of SOE and CCOE without privatization of public ownership, (2) liberalization of cross border economic activities (open-door policy), (3) allowance for Chinese to erect private enterprises (PE) on the one side and foreigners to set up foreign invested enterprises (FIE) on the other side, as well as (4) reorganization of SOE and CCOE. In comparison to the former Soviet Union and the Central and Eastern European countries, the following points of China's way of economic transition are of special interest. First, China's way of transition is a ``gradual trial and error' approach without a transition program set for long term but flexible and gradual way which is called a ``touch stones to cross river' approach. Field experiments have been carried out at first. A reform will be implemented after successful experiments. Second, the rural community becomes reorganized by breaking down communes, implementing a ``household responsibility system' in the agricultural sector and setting CCOE in the rural areas to carry out industrialization without movement out of rural labor (the slogan for this kind of transition is lee tuh puh lee shian [``move out from agriculture but not out of rural area']. Third, China's economic development is characterized by a huge expansion of CCOE in the eighties and newly founded PE consisting of FIE since the nineties, while only a very limited share of SOE has been privatized via the reorganization of the sector. China's way of economic transition has been a process of decentralization of the economic system from a central planning economy to one of decentralized market-oriented decision by delegating competence to management of SOE and CCOE without privatization of the ownership to increase efficiency. Fourth, China has been heavily loaded by a fragile banking system with a huge amount of nonperformance loan which implies a high risk of banking system crisis. Fifth, China's economic transition has been seen as a tool to keep the power of the Communist Party China with a periodically instable totalitarian political system and has permanently been confronted with risk of a political collapse. Human rights have not been protected in China. The FIE have crucially contributed to the growth of industrial production, export, and also the economic growth in China since 1979, especially since 1992. Economic special zones have significantly induced the rapid growth inflow of FDI which has financed the establishment of new enterprises instead of financing privatization of the SOE in China. Thus, it is not exaggerated to say that the FDI inflow has mainly contributed to the performance of the Chinese economic transition and the FIE have been the engine of the Chinese economic development.     

The banking industry in Jordan

This paper examines the structure and performance of the banking industry in Jordan during the period 2000–2006. The Jordanian banking industry is free of extensive state ownership and government direction of the economy. These positive features are reflected by the absence of dominant state-owned banks and by the limited use of directed credit programs, interest rate controls, and credit ceilings. The banking industry is well developed, with bank assets representing 239.80 percent of the GDP at the end of 2006, which is a high percentage compared with other developing countries in the region.     

Financial Intermediation Modernization in Countries with Transition Economy

During the modern phase of economic reforms directed at the establishment of market economy, many countries with transition economies face the challenge of solving the issue of formation and rational usage of internal sources of financing the real sector of the economy, as well as attracting considerable volume of direct foreign investment. In general, financial market imperfections hold back innovation and growth, and that public policy can complement financial markets. Therefore, the most relevant issue at the present time is the formation of attendant and complex supervision institutions, as well as an exigency of innovative economy governance as mainframe principles for further banking system elaboration and financial sector development in general. We have taken Armenia as a case study for transition economy as far as Armenia is currently in the stage of capital market development through integration into international financial markets.      

The Impact of European Monetary Union on Finance-Growth Nexus

This study examines the relationship between financial development and economic growth in 15 developed European countries before and after the formation of the euro. The results of the panel data analysis show that financial development is significant in promoting economic growth for both periods. The impact of the banking sector development on growth, however, is greater in the post-euro period, whereas the impact of stock market development on growth is reducing in the period investigated. The study concludes that the formation of European Monetary Union does not weaken the relationship between financial development and economic growth in developed European countries.     

Measuring the Quality of Bank Regulation and Supervision with an Application to Transition Economies

This study develops a methodology to evaluate the quality of the legal aspect of bank regulation and supervision (RS). We use both the Basle guidelines and the letter of banking laws to form an extensive set of criteria to evaluate banking laws. As an application, we provide measures of RS for 23 transition economies. Our measurements indicate that legal banking reforms in Poland, Hungary, and Estonia have been more ambitious than the rest of the countries in transition. Controlling for various other relevant factors, empirical evidence reveals a significant positive relationship between RS and real GDP growth in transition economies.     

Safe credit to the poor: The role of anti‐usury policies

Usury regulations focus both on explicit recommendations, such as disclosure statements in lending acts or interest rate caps, and on incentives for the formal banking sector to reach the poor. Considerable attention is also devoted to adequate sanctions for the practice of usury. We propose a theoretical model to investigate where to direct reforms to curb usury. Our primary policy implication is the convenience of polarizing the allocation of public resources in either legal safeguards for formal lenders or sanction enforcement against usurers. Furthermore, we demonstrate that in developing countries such policy interventions may backfire when borrowers' higher wealth implies increasing inequality in its distribution. Therefore, countries undertaking reforms against predatory lending should be aware of their growth path during transition.     

From Boom to Bust: How Different Has Microfinance Been from Traditional Banking?

This article presents in‐depth analysis of developments in the microfinance sector before and after the collapse of Lehman Brothers in 2008, by comparing them with developments in the traditional banking sectors of emerging markets and developing countries. Its findings indicate that microfinance has been part of the same credit boom observed in the traditional banking sector, and that the boom was also fostered by substantial inflows of foreign capital. Further, that risks associated with credit booms in the traditional sector also evolved in the microfinance sector. The article comes to the conclusion that, by becoming part of the global financial system, microfinance has lost one of the characteristics distinguishing it from traditional banking, namely, its greater resilience to crises in domestic and global financial markets.     

Promoting women entrepreneurs in Lebanon: the experience of UNIFEM

The work of the United Nations Development Fund for Women (UNIFEM) in West Asia began in 1994 with a regional program to strengthen women-owned enterprises in Jordan, Syria, and Lebanon. In Lebanon, a survey of 100 women entrepreneurs, as well as nontraditional credit programs and banks, was conducted prior to program design. A second survey assessed micro-entrepreneurs' demands for financial and other services. Since gender analysis was a new concept in Lebanon, UNIFEM organized a gender awareness workshop for representatives of government, nongovernmental organizations, and the banking sector, followed by a strategic planning workshop. The surveys confirmed that women were concentrated mainly in the less profitable economic sectors, producing handicrafts and food products or running small service or trading companies. Women were less likely than men to get bank loans or to register their businesses. Women's problems accessing credit--the main obstacle limiting their ability to develop their businesses--were compounded by their lack of information, male-oriented collateral requirements, and discriminatory banking regulations. UNIFEM decided to channel counseling of women entrepreneurs on legal matters, marketing, and credit sources through the Ministry of Social Affairs. It is expected that knowledge of gender-related employment issues and the use of gender-specific analysis will become integral to the Ministry's program as a result.     

Determinants of Profitability of Banking Sector in India

India currently is one of the fastest growing economies in the world. One sector of Indian economy that has played a critical role in transforming the Indian economy has been its banking sector. But this sector of Indian economy has also gone through a major transition that is still in progress. Many events and policies have contributed in this transition. One pivotal variable has been the growing profitability of this sector in the recent years. But profitability in banking sector is affected by numerous factors. These factors can be internal or external. In this research we shall try to examine the most important factors that may stem from both internal and external factors, which affect profitability of Indian banking sector. For this study a balanced panel data set is used that is drawn from Indian banking industry. The data is compiled for the purpose of investigating the nature of the relationship between the profitability and the factors that determine profitability of banks in India. The results of the study clearly demonstrate a close correlation between both internal and external factors and the level of profitability of banks in India.     

Rating System as a Banking Performance Regulator in the Conditions of Transition Economy

Taking into consideration the importance of having a strong banking system, the issue of bank performance evaluation and analysis becomes essential for the bank regulation process in the countries with an emerging economy. For banking performance evaluation and analysis various methods are used in international practice. These methods have many disadvantages and are unusable for the banking systems in the countries with transition economy. In this article a new and complex system of analysis and evaluation of bank performance is described. This is a multidimensional system of bank performance indicators. This system enables to analyze bank performance through integrated indicators, viewing them in corresponding surfaces. Implementation of this system will allow to efficiently analyze bank performance by different directions, to reveal existing problems in the bank, to make corresponding regulation decisions for each bank, and to and group banks according to different criteria.     

Healthy, educated and wealthy: A primer on the impact of public and private welfare expenditures on economic growth

In this paper, we provide first evidence of the impact of public and private expenditures in health and education on economic growth, via their influence on people's health, skills and knowledge. We consider a growth accounting framework in order to test whether countries that devote a larger amount of resources to the consumption of health and educational services experience higher growth rates. We also test whether the effects on economic growth of public expenditure in health and education differ from those of private expenditure. Our empirical analysis is based on a panel of 19 OECD countries observed between 1971 and 1998. The results are consistent with the hypothesis that health and education expenditure affects positively growth. The estimated impact is stronger for health than for education. More importantly, we find some evidence that public expenditure influences GDP growth more than private expenditure.     

LEANING AGAINST WINDY BANK LENDING

Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the United States during the Great Moderation. It then shows that the optimized simple interest‐rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning‐against‐the‐wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade‐off between inflation and financial stabilization. (JEL E32, E44, E52)     

Testing an Economic Model of Nonprofit Growth: Analyzing the Behaviors and Decisions of Nonprofit Organizations,Private Donors,and Governments

This study draws an economic model of the growth of nonprofit organizations by analyzing the behaviors of three major actors—nonprofit organizations, private donors, and governments—in making decisions on the allocation of limited resources for nonprofit services. Since decisions made by each actor affect resource allocation, it is important to understand what drives these decisions. The model was tested using an unbalanced, 463 panel dataset collected from 28 OECD countries over a 23-year period. The results indicated that macro- and micro-economic trends and government policies framed the decision premises of the three major actors, which led them to leverage the supply and demand for goods and services and, in turn, determined how they allocated limited resources for nonprofit services. This result implies that understanding the interdependencies of all sectors of the economy is critical to comprehending the size and development of the nonprofit sector. Effective management of micro-economic policies and macro-economic stability is necessary. More important, however, is understanding how a decision in one part of the economy will have intended and unintended effects on the nonprofit sector.     

MORE MORTGAGES,LOWER GROWTH?

In newly collected data on 46 economies over 1990–2011, we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets, which has a negative growth coefficient. We also distinguish between growth effects of stocks and flows of credit. We find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows. By accounting for the composition of credit stocks and for the effect of credit flows, we explain the insignificant or negative growth effects of financial development in recent times. What was true in the 1960s, 1970s, and 1980s when the field of empirical credit‐growth studies blossomed, is no longer true in the 1990s and 2000s. New bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth. These trends predate the 2008 crisis. They prompt a rethink of the role of banks in the process of economic growth. (JEL E44, O16, O40, C33)     

MONETARY POLICY AND ANTI‐CYCLICAL BANK CAPITAL REGULATION

The financial crisis of 2008–2009 revived attention given to booms and busts in bank credit, and their effects on real activity. This interest sparked two different strands of research in macro. The first one focuses on monetary policy in the context of financial frictions. The second studies capital regulation in banking. To the best of our knowledge, so far these two topics have mostly been studied in isolation from each other. Thus, we still lack an understanding of how monetary policy and bank capital regulation interact in the presence of financial fragility. This paper aims to contribute to furthering this understanding. Specifically, we ask how the monetary policy rule should look like in the presence of cyclical capital requirements. We extend the dynamic stochastic general equilibrium model with bank capital in Aliaga‐Díaz and Olivero by introducing price rigidities in the spirit of the New‐Keynesian literature. We find that: First, anti‐cyclical requirements have important stabilization properties relative to the case of constant requirements. This is true for all types of fluctuations that we study, which include those caused by productivity, preference, fiscal, monetary, and financial shocks. Second, output and consumption volatilities present in the no regulation economy can be recovered with anti‐cyclical requirements as long as the policy rate responds only slightly to credit spreads. Third, monetary policy rules that respond to credit conditions also perform better in terms of welfare. (JEL E32, E44)     

Does Remittance Outflow Stimulate or Retard Economic Growth?

This article evaluates the association between remittance outflow (RMO) and economic growth in the Gulf Cooperation Council (GCC) countries. The results of this evaluation indicate that RMO Granger creates gross domestic product (GDP) per capita in three countries, namely, Bahrain, Oman and Saudi Arabia. Similarly, the results for causality from GDP per capita to RMO are significant for four countries, namely, Bahrain, Kuwait, Qatar, and Saudi Arabia. The findings differ from those of the household consumption model, stating that higher RMO will decrease economic activity. GDP per capita is the main determinant of RMO, suggesting that economic growth promises and encourages continuous RMO and vice versa. The adverse impact of RMO can be minimized by encouraging the local population to be productive in the private sector, as local productivity will reduce the huge influx of foreign workers and provide valuable local investment opportunities to lessen the amount being remitted.     

How To Prepare the EU Integration: Banking System, Monetary Policy, and Exchange Rate in Macedonia

The significant progress in the reform of the financial sector, including the amendments to the banking law and the reinforcement of the deposit insurance scheme, has been reflected in increased confidence in the Macedonia banking sector. Monetary policy and exchange rates represent a crucial aspect for the countries of Southeast Europe which would like to position themselves on the threshold of negotiations on their accession to the European Union. In the case of Macedonia, which has already formally applied for EU membership, a very cautious approach has to be taken in order to facilitate the stability of the economic system as a whole. Such a policy will make an important contribution to the stabilization of the whole West Balkan area and in particular to the quadrangle of Albania, Kosovo, Montenegro, and Serbia. The preparation of a favourable ground for EU membership negotiations leads first and foremost through a strict monetary and exchange rate policy, which the National Bank is pursuing firmly. Macedonia is now facing optimal conditions for creating the prerequisites for a faster negotiation with less rigorous internal repercussions of the pre-adhesion period. One should not forget the indirect impact of the shadow economy in the general context of efficiency of the instruments of economic and monetary policy. Finally, there is the question to be answered on the interrelation existing between transmission mechanisms linking productivity to the real exchange rate in Macedonia. At first glance, the stylized facts – low labor productivity growth and a trend of real depreciation – could even suggest that a Balassa–Samuelson effect is in play. But the depreciation of the real exchange rate could reflect mainly the behaviour of prices in the tradable sector and a prolonged transition associated with slow technological growth and the low quality of the country's tradable-goods basket.