Download Assessing Banking Institutions: Scope, Outreach and

Assessing Banking
Institutions: Scope, Outreach
and Effectiveness
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
Overview
•
•
•
•
Depth and scope of banking system
Market structure and competition
Interest spreads and margins
Other issues
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
society’s savings to its most productive use
• Monitor investments and exert corporate governance
after providing finance
• Help diversify and reduce
– Liquidity risk
– Intertemporal risk
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
Liquid Liabilities (M3)
2.5
2.0
1.5
1.0
0.5
0.0
Sub-Saharan Africa
Rest of the World
Sample size: 120 countries
Time period: 2004
Source: Financial Structure Database, 2006 (The World Bank)
Private Credit
2.0
1.5
1.0
0.5
0.0
Sub-Saharan Africa
Rest of the World
Sample size: 134 countries
Time period: 2004
Source: Financial Structure Database, 2006 (The World Bank)
Financial System Indicators
1990-2004 Mean Trends (SSA)
35%
30%
Private Credit / GDP
Bank Deposits / GDP
Liquid Liabilities / GDP
25%
20%
15%
10%
1990
1992
1994
1996
1998
2000
2002
2004
M3/GDP vs. GDP per capita
2
1
SYC
MUS
CPV
GHA
KEN
NAMZAF
GMB
ZMB
MWI
MOZ
GNB
NGA
LSO
BWA
MDG
BDI
SWZ
BEN
SEN
CIV
MLITGO
TZA
BFA
SLE UGA
RWA
MRTCMRZAR
CAF
GAB
TCD
SDN COG
NER
ETH
0
-1
AGO
-2
-4
-2
0
(GDP per capita/Inflation) residual
2
4
Sub-Saharan Africa
All Other Regions
Sample size: 139 countries
Time period: 2000-2004
Private Credit/ GDP vs. GDP per capita
2
ZAF
1
NAM
0
ETH
-1
NGA
MWI
CPV
GMB LSO
SEN
MLITGO MDG CIV
BEN
BFARWA
MRT
TZA
UGA
CAF
NER
TCD
GNB
SLE
-2
GHA
KEN
BDI
MUS
MOZ
CMR
ZAR
AGO
ZMB
SWZ
SYC
BWA
GAB
COG
SDN
-3
-4
-2
0
(GDP per capita/Inflation) residual
2
4
Sub-Saharan Africa
All Other Regions
Sample size: 151 countries
Time period: 2000-2004
Source: Financial Structure Database, 2006; World Development Indicators, 2005 (The World Bank)
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
Access by region -- composite data
100
90
80
70
%
60
50
40
30
20
10
0
Africa
Carib and
Pac
ECA
Lat Am
MNA
S&E
Asia
Sub-Saharan Africa: Share of Households with Bank Access
Legend
< 10%
20-20%
20-30%
30-40%
> 40%
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?
Overview
•
•
•
•
Depth and scope of banking system
Market structure and competition
Interest spreads and margins
Other issues
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?
Bank ownership: Africa and ROW
Bank ownership (Rest of Developing World)
Bank ownership (Africa)
Mainly local
20%
Equally
shared
18%
Foreign+Govt
9%
Mainly govt
7%
Mainly local
25%
Mainly govt
12%
Mainly
foreign
29%
Mainly
foreign
46%
Equally
shared
25%
Foreign+Govt
9%
Bank ownership: Africa
Mainl y Govt
Eritrea
Ethiopia
Togo
Mainl y Foreign
Botswana
Cape Verde
Central Afr Rep
Chad
Côte d'Ivoire
Gambia
Gu inea-Bissau
Gu inea
Lesotho
Liberia
Madagascar
Malawi
Mozambique
Namibia
Níger
Seychelles
Swaziland
Tanzania
Uganda
Zamb ia
Foreign+Govt
Burkina Faso
Congo, DR
Sierra Leone
Togo
Equally Shared
Burundi
Cameroon
Congo (Brazza)
Gabon
Ghana
Kenya
Rwanda
Senegal
Mainl y Local
Benin
Mali
Mauritania
Mauritius
Rwanda
Somalia
South Africa
Sudan
Zimbabwe
Sub-Saharan Africa: Predominant Form of Bank Ownership
Legend
Mainly Govt
Mainly Foreign
Foreign+Govt
Equally Shared
Mainly Local
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
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
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
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
Illustration of market segment analysis
(Tanzania)
Sub-Markets Served by Different Groups of Banks
NBC
Large/foreign
SME
Regional
Micro/household



NMB
CRDB
Fgn
TPB
Other
MFI



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



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
Overview
•
•
•
•
Depth and scope of banking system
Market structure and competition
Interest spreads and margins
Other issues
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
Net Interest Margins
Regional Distributions
1. High Income
2. East Asia & Pacific
3. Europe & Central Asia
4. Latin America & Caribbean
5. Middle East & North Africa
6. South Asia
7. Sub-Saharan Africa
0
.05
.1
Net Interest Margin
Sample size: 142 countries
Time period: 2004
Source: Financial Structure Database, 2006 (The World Bank)
.15
Real interest rates
Real Interest Rate
20
10
0
-10
1990
1995
2000
Interest Rate (Lending)
Tresury Bill Rate
Interest Rate (Deposit)
Source: IFS, 2006 (IMF)
2005
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
Kenya: Banks’ income
statement
Percentage
points
5.3
Share in
spread (%)
33
Loan loss provisions
2.7
17
Reserve requirements
0.3
2
Tax
2.3
14
Profit margin
5.3
34
Total spread
15.8
100
Overhead costs
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
Market size and Spreads
Interest Spread
40
30
20
10
0
0
.5
Private Credit/GDP
1
1.5
Going behind the costs: what
makes Kenya different
Interest
margin
Overhead
costs
Kenya
6.99
5.90
World-wide average
3.61
3.02
Difference
3.38
2.88
Of which: Bank size
0.90
0.68
Other bank characteristics
-0.25
0.53
Property right protection
1.43
0.81
Other country characteristics
0.10
0.02
Kenya residual
1.2
0.84
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
Overview
•
•
•
•
Depth and scope of banking system
Market structure and competition
Interest spreads and margins
Other issues
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
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
Sectoral lending
• Is lending limited to specific sectors?
– Legal issues (collateral?)
– Ownership links
– Lending quota
• Some sectors are traditionally
underserved (agriculture)
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)
Regulatory barriers to banking
system efficiency and access
• Entry barriers
• Branch/outlet barriers
• Regulatory burden
– Reporting requirements
– Requirements for applications etc.