Financial Sector Reforms Research Articles

Chronic Poverty in Semi Arid Zimbabwe

This paper examines the causes of chronic poverty in the remote rural areas (RRAs) of Zimbabwe's semi-arid communal lands. We found that persistent poverty was strongly associated with the structural poverty of Zimbabwe's semi-arid communal areas. Relative urban proximity (non-remoteness) assisted income diversification and improvement in a very poor, socially and politically excluded area. Less excluded but remote areas remained poor but not as poor as those in the excluded area. Livelihoods changed and diversified more in the non-remote area, speeding poverty reduction as measured by an index of perceived change. The paper explores what can be done to improve links between policy-makers and programme designers and poor farm households at risk from drought and examines whether diversification into non-farming occupations offers an exit route from poverty. The paper suggests that Zimbabwe's poor are substantially located in the semi-arid regions. These areas have been neglected by both the state and the private sector. Our findings indicate a massive decline in well-being and consumption between 1993 and 1998 and a failure to rebuild assets after the devastating 1991 drought. We found that semi-arid economies are largely unmonetised as huge swathes of semi-arid Zimbabwe have retreated into subsistence. Markets are not generally sufficiently organised or attractive to engage poor people: barter dominates as a form of exchange and poor households make few cash-based transactions through the market. Key findings are that: The very poorest households have very limited non-farm or off-farm livelihood activities, indicating that for them, improvements in their incomes from agriculture are crucial if their well-being is to improve - either that or new low skill employment opportunities Contrary to expectations for an economy dominated by subsistence production, households with large numbers of people in them as well as those with large numbers of economically active adults are more likely to be poor. Despite attempts to provide a safety net during the 1991-92 drought government grain loans and food-for-work programmes were too limited to be effective. Many poorer households have land lying fallow due to insufficient draught oxen and labour shortages - primarily due to migration and HIV/Aids. The livelihood portfolios which generated the best recovery from drought were waged, nonfarm and mixed farm and non-farm with proximity to urban areas. For most households the value of retained output was more significant than cash income from crop/livestock sales, by factors of between 3 and 10. Lastly we suggest a number of areas for pro-poor policy intervention, including social protection and a focus on improved delivery of social services, (appropriate) agricultural extension and pro-poor financial sector reform.

Business as Usual? How Free Trade Agreements Jeopardise Financial Sector Reform

In contrast with the current wide-ranging financial reform agenda in the European Union (EU), the EU continues to liberalise a wide range of risky and non-risky financial services in the General Agreement on Trade in Services (GATS) and other Free Trade Agreements (FTAs) as if the financial crisis never happened. This SOMO briefing paper gives specific examples on how new EU regulations are in contrast with the pre-crisis model that is still being applied in the GATS negotiations, the Cariforum-EU Economic Partnership Agreement (EPA) and the EU-South Korea FTA. The examples serve a general debate about the many problems with financial services liberalisation and the lack of financial reforms that should make the financial sector serve the economy at large as well as the public good rather than promoting the interests of the financial sector itself. The technical nature of the issue and the lack of transparency in the decision making process have so far hampered the public and political debate. This papers provides the technical arguments based on which the many concerns can be raised in public and political debates about the financial reforms in many countries, the G-20 declarations both urging financial reform and more free trade (incl. financial services), the continuing GATS and new FTA negotiations in which the EU and many countries are engaged etc.

Service quality in Indian and foreign banks: Indian customers' perceptions and gender differences

The deregulation and financial sector reforms in India have changed the nature of banking services. Indian customers' quality perceptions pre-liberalisation was primarily dependent on the services offered by public sector banks. The quality expectations of the Indian customers can help banks in planning their strategies. The SERVQUAL model was modified to understand the service quality perceptions with reference to Indian and foreign banks. The banks need to assess the needs of women in planning their strategies. The results show that customers' perceptions regarding Indian and foreign banks differ significantly. The two genders differ in their service quality assessment.

Post‐crisis financial reform: where do we stand?

PurposeThe purpose of this paper is to provide an overview of current progress in financial sector reform and outline some of the remaining challenges.Design/methodology/approachThe paper presents an analytical survey of recent developments.FindingsThe reform agenda is broad, ranging from strengthening prudential regulation; to enhancing supervision; from mitigating pro‐cyclicality to integrating micro‐ and macro‐prudential oversight; from reducing the systemic risk associated with large and complex financial institutions to expanding resolution process and fortifying financial market structure. Reforms are proceeding slowly but important building blocks have been laid down, such as Basel III; other difficult reforms are in the making, such as the resolution framework for cross‐border financial institutions or how to deal with systemically important financial institutions.Originality/valueThe paper presents a concise, comprehensive, and timely survey of the myriad financial reform efforts.

Crisis Management and Resolution: Early Lessons from the Financial Crisis

This paper compares the policy choices in recent and past crises, explains why those choices varied, and assesses the current state of financial and operational restructuring and institutional reform. While acknowledging the unique and global nature of the recent crisis and varying country circumstances, analysis suggests that the diagnosis and repair of financial institutions and overall asset restructuring are much less advanced than they should be at this stage and that moral hazard has increased. Consequently, vulnerabilities in the global financial system remain considerable and continue to threaten the sustainability of the recovery. These conclusions point to a number of steps to finish the business of financial sector repair and reform. JEL Classification Numbers: G01; G18; G32; G33; H12

Financial restraints in developing countries: The new orthodoxy of monetary policy

Before the 1970s the thinking of both economists and policy makers was largely dominated by a policy popularly known as financial repression. However, since the 1970s, this agonizing theory, which received massive support from the Keynesians, was replaced by the theory of financial liberalisation – which became the new orthodoxy of monetary theory and policy. Unfortunately, very little is known about the middle-ground policy known as financial restraint, which combines the various aspects of both financial repression and financial liberalisation in a stepwise fashion. In particular, the theoretical underpinnings of the financial restraint theory, as well as its dynamics have not been fully explored. The current study, therefore, fills this lacuna by examining the various forms of financial restraint namely interest rate restraint, restraint on the reserve and liquidity requirements, capital adequacy requirements restraint, capital inflows restraint and restraint on entry into the financial system. In addition, the study revisits the effects of financial repression and financial liberalisation vis-à-vis financial restraints in a stylised fashion. The study concludes that financial restraint may not only be desirable, but also necessary for the efficacy of financial sector reforms.

Ireland: Third Review Under the Extended Arrangement: Staff Report; Letter of Intent; Memorandum of Economic and Financial Policies; Technical Memorandum of Understanding; Letter of Intent and Memorandum of Understanding on Specific Economic Policy Conditionality (College of Commissioners);Staff Supplement; Press Release on the Executive Board Discussion.

The Irish authorities steadfastly maintained strong policy implementation despite a sharp escalation and expansion of stress in euro area sovereign bond markets. Strengthened European support is welcome, but early implementation is key, and restoring broader stability in the euro area is essential. Strengthening supervision and the broader financial framework is critical. Lowering the interest rates on EU loans, and lengthening their maturities, will improve debt and debt service dynamics. Timely and sound implementation of financial sector reforms will help to fully benefit from stronger European support.

Bank Ownership and the Effects of Financial Liberalization: Evidence from India

Do financial sector reforms necessarily result in expansion of credit to the private sector? How does bank ownership affect the availability of credit to the private sector? Empirical evidence is somewhat mixed on these issues. We use the Indian experience with liberalization of the financial sector to inform this debate. Using bank-level data from 1991-2007, we ask whether public and private banks deployed resources freed up by reduced state preemption to increase credit to the private sector. We find that even after liberalization, public banks allocated a larger share of their assets to government securities than did private banks. Crucially, we also find that public banks were more responsive in allocating relatively more resources to finance the fiscal deficit even during periods when state pre-emption (measured in terms of the requirement to hold government securities as a share of assets) formally declined. These findings suggest that in developing countries, where alternative channels of financing may be limited, government ownership of banks, combined with high fiscal deficits, may limit the gains from financial liberalization.

Bank Ownership and the Effects of Financial Liberalization: Evidence From India

Do financial sector reforms necessarily result in expansion of credit to the private sector? How does bank ownership affect the availability of credit to the private sector? Empirical evidence is somewhat mixed on these issues. We use the Indian experience with liberalization of the financial sector to inform this debate. Using bank-level data from 1991-2007, we ask whether public and private banks deployed resources freed up by reduced state preemption to increase credit to the private sector. We find that even after liberalization, public banks allocated a larger share of their assets to government securities than did private banks. Crucially, we also find that public banks were more responsive in allocating relatively more resources to finance the fiscal deficit even during periods when state pre-emption (measured in terms of the requirement to hold government securities as a share of assets) formally declined. These findings suggest that in developing countries, where alternative channels of financing may be limited, government ownership of banks, combined with high fiscal deficits, may limit the gains from financial liberalization.

Business Models in European Banking: A Pre-and Post-Crisis Screening

The next few years will be critical for Europe's banking industry. It faces a number of financial sector reforms that will have a decisive impact on the dominant practices and business models followed across the European Union. This timely volume presents the results of the first screening exercise conducted on the performance, stability, risk, efficiency, and corporate governance of twenty-six major European banks -before, during, and after the financial crisis. The authors use those findings to help identify the key strengths and weaknesses inherent in the dominant business models, in light of the upcoming regulatory changes.

Spain--Staff Report for the 2011 Article IV Consultation; Public Information Notice; Statement by the Staff Representative; and Statement by the Executive Director for Spain.: Staff Report for the 2011 Article IV Consultation; Public Information Notice; Statement by the Staff Representative; and Statement by the Executive Director for Spain.

A decade of strong expansion in the Spanish economy led by a credit-fueled housing boom was hit by three major shocks. The policy response to Spain’s economic challenges has been strong and wide-ranging, helping to strengthen market confidence. A decisive implementation of the envisaged financial sector reform strategy would help allay lingering market concerns. A bold strengthening of labor market reforms is needed to substantially reduce unacceptably high unemployment. Further progress needs to be made on enhancing competition in nontradable sectors.

What Drives the Performance of Selected MENA Banks? A Meta-Frontier Analysis

This study examines the effect of financial-sector reform on bank performance in selected Middle Eastern and North African (MENA) countries in the period 1994 -2008. We evaluate bank efficiency in Egypt, Jordan, Morocco, Lebanon and Tunisia by means of Data Envelopment Analysis (DEA) and we employ a meta-frontier approach to calculate efficiency scores in a cross-country setting. We then employ a second-stage regression to investigate the impact of institutional, financial, and bank specific variables on bank efficiency. Overall, the analysis shows that, despite similarities in the process of financial reforms undertaken in the five MENA countries, the observed efficiency levels of banks vary substantially across markets, with Morocco consistently outperforming the rest of the region.Differences in technology seem to be crucial in explaining efficiency differences. To foster banking sector performance, policies should be aimed at giving banks incentives to improve their risk management and portfolio management techniques. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency.

What Drives the Performance of Selected Mena Banks? A+L4624 Meta-Frontier Analysis

This study examines the effect of financial-sector reform on bank performance in selected Middle Eastern and North African (MENA) countries in the period 1994 -2008. We evaluate bank efficiency in Egypt, Jordan, Morocco, Lebanon and Tunisia by means of Data Envelopment Analysis (DEA) and we employ a meta-frontier approach to calculate efficiency scores in a cross-country setting. We then employ a second-stage regression to investigate the impact of institutional, financial, and bank specific variables on bank efficiency. Overall, the analysis shows that, despite similarities in the process of financial reforms undertaken in the five MENA countries, the observed efficiency levels of banks vary substantially across markets, with Morocco consistently outperforming the rest of the region.Differences in technology seem to be crucial in explaining efficiency differences. To foster banking sector performance, policies should be aimed at giving banks incentives to improve their risk management and portfolio management techniques. Improvements in the legal system and in the regulatory and supervisory bodies would also help to reduce inefficiency.

Interdependence And Volatility Spillovers Under Market Reforms: The Case Of National Stock Exchange

India, one of the emerging markets in Asia initiated the financial sector reforms by introducing international practices in its financial market. In this paper an attempt has been made to examine whether and to what extent, Indian stock market is integrated with stock markets in the United States, Japan and U.K before and after the structural changes. It also examines whether such a relationship, if it exists, is affected by the structural changes that began in 1998 using daily data for the period April 1998 to December 2008. The main findings are: No evidence of long run relationships was found between the stock prices of India and its major trading partners before and after the structural changes. Second, in terms of short – run movements of international stock market returns, bidirectional Granger causality exist between the stock returns of India and those of US and UK and Japan after the structural changes but unidirectional relationship exists between India and the UK before the structural changes period. The estimates from causality – type models suggest that volatility spillovers from UK and Japan were non –existent prior to structural changes and volatility spillovers from US and Japan have become quite pronounced after the structural changes. The results identify the US and Japan markets as the main sources of volatility spillovers for the NSE.

Financial sector reforms and household savings in Pakistan: An ARDL approach

The study empirically examined the relationship between the financial sector reforms and household savings in Pakistan by applying the ARDL cointegration technique on annual time series data for the years 1988 to 2008. Empirical findings indicated that the financial liberalization index negatively created an impact on the household savings in the short-run, as well as in the long-run, suggesting that financial liberalization slid down the savings instead of enhancing it. Policy-makers should not rely on financial reforms to augment household savings. However, per-capital income, agriculture sector GDP and remittances positively affected the household savings in the short-run, while the real deposit rate negatively affected the household savings in the long-run. It is important for the country to maintain high growth rate for the increasing per-capital income which would contribute in enhancing household savings. As such, the growth of the agriculture sector and remittances should also be a part of the policy. Nonetheless, the dependency ratio also negatively affected the household savings in the short-run. Key words: Financial reforms, household savings, deposit rate, financial liberalization, Pakistan, ARDL.

Funds Management In Banks: A Cost-Benefit Perspective

The Indian banking witnessed a paradigm shift in their operations after the financial sector reforms in 1991. These reforms led to the emergence of new banks, new instruments, new methods of doing business, and finally heightened competition in the banking industry. In this context, it is imperative on the part of the Indian banking industry to strengthen financial base, increase overall efficiency, and improve profitability by designing appropriate funds management policies and practices. This paper examines the profitability of funds management of the select Indian banks with a cost-benefit perspective.

‘Finance Matters!’ The Influence of Financial Sector Reforms on the Development of the Entrepreneurial Elite in Egypt

Since the beginning of the 1990s, Egypt has conducted comprehensive reforms aiming to liberalize the state-controlled financial sector. This article analyses the possible impact of these reforms on the political sphere, arguing that financial liberalization could enhance the political independence of members of the private sector, helping them to play a more influential role in Egyptian politics leading to greater political liberalization. The empirical analysis of the Egyptian reform process does not support this assumed causality. Design and sequencing of financial reforms benefited first and foremost members of the entrepreneurial elite close to the regime. Nevertheless, financial reforms impact on power relations in Egypt by strengthening the position of these large-scale entrepreneurs within the political decision-making process.

Issues of Sub-Contracting in Small-Scale Enterprises in India in the Face of Liberalisation

The remarkable shift in policy directions in the 1990s has exposed the SSEs to market competition in a significant way. While in the pre-liberalization era the SSEs were protected from competition from large-scale enterprises and imports and they had isolated sheltered markets due to geographical and product market segmentation, policies of dereservation of items, reduction of tariffs, and removal of quantitative restrictions on imports and entry barriers on multinational corporations (MNCs) have created possibility of extensive competitive threats to these enterprises. This competitive pressure on the SSEs has been intensified further with the financial sector reforms that have squeezed the benefits of lower interest rates and priority sector lending, and reduction in price control that has taken away the advantages of obtaining scarce raw materials at nominal prices. In this new policy regime, the SSEs should, therefore, be able not only to compete with the LSEs, MNCs and imports in the domestic market, but also to export successfully without any external support in the international market. This means that the SSEs need to improve their competitiveness significantly by enhancing productivity, efficiency and quality of product and services for their survival and growth. Developing sub-contractual linkages with larger firms (both domestic and foreign) might be an important strategy for the SSEs in this regard. The present paper, thus, emphaises on subcontracting as a novel way out for SSEs to take a new turn in their growth path in the current globalised competitive industrial environment.

Pursuit of complete markets: the missing perspectives

India's financial sector reform path has been a measured, cautious and steady process, aiming to attain standards of international best practice, but fine-tuning the process keeping the context in view. Although much has been achieved, this paper focuses on the remaining gaps. But post-crisis the pursuit of complete markets is no longer the holy grail of regulation. In particular, underlying needs and systemic risk assessment should drive the regulatory framework for cash markets, not the elusive search for market completion and efficient derivatives markets.

Some empirical evidence on the demand for money in the Pacific Island countries

PurposeThe purpose of this paper is to analyze narrow money demand functions for the Pacific Island countries (PICs) and evaluate their stability. The selected PICs are Fiji, Vanuatu, Samoa (SAM), Solomons and the Papua New Guinea. The stability of the demand for money is vital for the formulation of the monetary policy.Design/methodology/approachThe augmented Dicky‐Fuller method is employed to test the time series properties of the variables. Alternative time series techniques such as general to specific (GETS) and Johansen maximum likelihood (JML) are used with annual data from 1974 to 2004 (except for SAM with data from 1980 to 2004) to estimate the narrow money demand equations. To draw inferences relative to the stability of the parameters, the study applies the cumulative recursive sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ).FindingsThe results from the time series approaches of GETS and JML suggest that real income, nominal rate of interest and real narrow money are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and, therefore, the respective monetary authorities may consider targeting money supply in their conduct of monetary policy. It is argued that the financial sector reforms and liberalization is yet to have any significant effects on the money demand in the PICs.Research limitations/implicationsThe methods of estimation does not allow for structural breaks in the cointegrating relationship. It is hoped that future research may focus on using the structural break techniques and also investigate the stability of the demand for broad money in the PICs. Further due to limitations in the data, the authors were only able to select five PICs.Originality/valueThis is the first paper in the literature that provides long‐run estimates and stability results of the narrow money demand using the newest time series techniques for a group of PICs over the period 1974‐2004.