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Assessing Banking Institutions: Scope, Outreach and Effectiveness.

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Presentation on theme: "Assessing Banking Institutions: Scope, Outreach and Effectiveness."— Presentation transcript:

1 Assessing Banking Institutions: Scope, Outreach and Effectiveness

2 Why do we assess banking institutions In most countries, banks are by far the most important part of the formal financial system in terms of –Size –Number of clients Banks are the most vulnerable part of the financial system because of demandable deposits Banks are also the most important component of the financial system for access of small borrowers and savers

3 Overview Depth and scope of banking system Market structure and competition Interest spreads and margins Other issues

4 The role of banks Ease the exchange of goods and services by providing payment services Mobilize and pool savings from a large number of depositors (delegated monitor) Acquire and process proprietary information about investments and enterprises, thus allocating societys savings to its most productive use Monitor investments and exert corporate governance after providing finance Help diversify and reduce –Liquidity risk –Intertemporal risk

5 Depth of banking system Total assets –Relative to GDP –Relative to total financial sector assets –No good cross-country data Private Credit/GDP; Deposits/GDP –Compare across countries –Compare over time

6 Liquid Liabilities (M3)

7 Private Credit


9 M3/GDP vs. GDP per capita

10 Private Credit/ GDP vs. GDP per capita

11 Banking penetration Branch/outlet network ATM network Mobile banking/correspondent banking Access to phone- and e-finance Take into account near-banks and informal intermediaries Cross-country comparisons difficult

12 Access by region -- composite data AfricaCarib and Pac ECALat AmMNAS&E Asia %


14 Scope of bank activities Universal banking vs. banks limited to traditional intermediation and array of specialized NBFI (leasing, investment banking, factoring) –Mostly for historic reasons –Important: level playing field Important that services are provided, not by whom –Assess provision of services, not existence of specific institutions –Issue of missing markets Regulatory restrictions on activities and delivery channels?

15 Overview Depth and scope of banking system Market structure and competition Interest spreads and margins Other issues

16 Ownership structure 1 Foreign – domestic –Expertise –Competition –Does foreign bank ownership reduce access? Distinguish between different ways of foreign bank entry Private – government –Do government banks deliver? –Do they distort the market? –Do they introduce governance problems?

17 Bank ownership: Africa and ROW

18 Bank ownership: Africa


20 Ownership structure 2 Widely-held - privately held Ownership links within financial system –Level playing field –Banks holding back financial market development Ownership links with non-financial sector –Related/insider lending

21 Competitiveness and market structure Competitiveness affects efficiency, costs and incentives of financial institutions and markets to innovate Indicators of market structure: –Herfindahl index –Concentration ratio –Number of banks

22 Competitiveness and market structure Problems of market structure indicators: –Market structure does not capture contestability Entry restrictions Activity restrictions History of rejections of license applications –Ownership structure important determinant of competitiveness: Entry and presence of foreign banks Dominant role of government banks

23 Competitiveness and segmentation Aggregate market structure indicators do not capture segmentation of the market –Specialization, niche banks, –Reputational biases, borrower hold-up How to assess segmentation and its effect on competitiveness: –Analyze business lines and client groups of banks –Assess sub-markets (product, client groups) –Often more anecdotal than quantitative evidence

24 Illustration of market segment analysis (Tanzania)

25 Overview Depth and scope of banking system Market structure and competition Interest spreads and margins Other issues

26 Spreads and margins as basis for banking sector assessment Interest spreads and margins are measures of intermediation efficiency and competitiveness Countries with higher interest margins and spreads margins have lower levels of financial intermediation Definition: –Interest spread = difference between average lending and average deposit rate – ex-ante –Interest margin = net interest revenue as share of total earning assets – ex-post

27 Net Interest Margins

28 Real Interest Rate Interest Rate (Lending) Tresury Bill Rate Interest Rate (Deposit) Source: IFS, 2006 (IMF) Real interest rates

29 How to reduce interest spreads and margins High spreads and margins are the result of deficiencies and impediments Deficiencies can be addressed by policies Interest rate regulations or controls would result in –Rationing (less access) –Non-transparency

30 Kenya: Banks income statement Percentage points Share in spread (%) Overhead costs5.333 Loan loss provisions2.717 Reserve requirements0.32 Tax2.314 Profit margin5.334 Total spread

31 Contributors to costs Overhead costs –Bank size (economies of scale) –Low productivity (consider assets, loans or net interest per employee) –Security/infrastructure-related costs –Inefficient payment system –Regulatory burden, legal costs Loan loss provisions –Legal system deficiencies –Lack of transparency (accounting standards, credit information sharing) Profit margin: –Market structure/segmentation –Lack of contestability Taxation: –Deposit insurance premium –Income tax

32 Market size and Spreads Interest Spread Private Credit/GDP

33 Going behind the costs: what makes Kenya different Interest margin Overhead costs Kenya World-wide average Difference Of which: Bank size Other bank characteristics Property right protection Other country characteristics Kenya residual

34 Interest spreads and margins – how to use the analysis Use decomposition and cross-country comparisons to identify major component/cause of high spreads/margins Identify underlying structural impediment/deficiency for this component/ cause Develop policy measures to address these impediments/deficiencies Analysis of spreads/margins can be linked to analysis of competitiveness

35 Overview Depth and scope of banking system Market structure and competition Interest spreads and margins Other issues

36 Maturity structure - issues Trade-off: financial intermediaries should perform maturity transformation, but this makes them fragile A system based on checking accounts and short-term loans is a system for transaction, but not intermediation Concentration on short-end of yield curve hurts especially new and small borrowers –Longer gestation period for new investments –Small borrowers more easily cut-off in crises

37 Maturity structure - indicators Time deposits/total deposits –Average maturity of time deposits Savings deposits/total deposits Checking deposits/total deposits Average maturity of loans Interest rate structure/yield curve

38 Sectoral lending Is lending limited to specific sectors? –Legal issues (collateral?) –Ownership links –Lending quota Some sectors are traditionally underserved (agriculture)

39 Financial product range and missing markets? Are common financial products offered at competitive price? If not, why? –Legal issues (leasing, housing finance) –Regulatory issues –Taxation issues –No demand –Market structure (hostile to innovation)

40 Regulatory barriers to banking system efficiency and access Entry barriers Branch/outlet barriers Regulatory burden –Reporting requirements –Requirements for applications etc.

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