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2008 YEAR

A MONETARY UNION FOR SELECTED CARIBBEAN COUNTRIES: EMPIRICAL EVIDENCE BASED ON TIME VARYING PARAMETERS  A MONETARY UNION FOR SELECTED CARIBBEAN COUNTRIES: EMPIRICAL EVIDENCE BASED ON TIME VARYING PARAMETERS

CARLTON AUGUSTINE and KENRICK HUNTE    

This paper examines the case for a monetary union in selected Caribbean countries. We examine two scenarios: The enlargement of the Eastern Caribbean Monetary Union and the formation of a new union, centered on Trinidad and Tobago. The Kalman Filter is applied to derive time varying estimates for the degree of convergence of shocks that measure the extent to which Caribbean economies are synchronized. Based on the findings, there is no support for either scenario and we recommend the strengthening and deepening of intra-regional trade and institutional arrangements as the precursor to establishing a single CARICOM currency in the Caribbean.


ARE POVERTY REDUCTION PROGRAMMES LESS EFFECTIVE IN TROUBLED STATES? AN EMPIRICAL HOUSEHOLD LEVEL INVESTIGATION IN RURAL INDIA  ARE POVERTY REDUCTION PROGRAMMES LESS EFFECTIVE IN TROUBLED STATES? AN EMPIRICAL HOUSEHOLD LEVEL INVESTIGATION IN RURAL INDIA

ARINDAM BANIK and PRADIP K BHAUMIK    

A large amount of money is spent by developing countries in designing and implementing poverty alleviation and reduction programmes. Many of these programmes have well defined objectives and sub-objectives – but the achievements are quite often uncertain. Most of the studies conducted to investigate the effectiveness of these programmes emphasize structural bottlenecks, asymmetric information, and rent seeking behaviour as hurdles preventing these programmes from reaching comprehensive benefits to their target households. This paper moves the investigation one step further and probes whether effective governance or its absence has any effect on the effectiveness of the poverty reduction programmes. The paper thus provides an analytical characterization of beneficiary households from both troubled and non-troubled Indian states and studies factors that were important in the beneficiaries realizing income benefits from the SITRA programme of the government of India.


CORPORATE GOVERNANCE, CONCENTRATION, AND ECONOMIC GROWTH IN THE GCC BANKING SECTOR  CORPORATE GOVERNANCE, CONCENTRATION, AND ECONOMIC GROWTH IN THE GCC BANKING SECTOR

IBRAHIM AL KARASNEH and ALI BOLBOL    

The aim of this paper is to study the growth and corporate governance implications of market concentration in the GCC banking sector. It will begin by defining corporate governance, its significance in the context of banks, and how it can be improved by more competition or less concentration in the banking market. It will then discuss the importance of corporate governance to “better functioning and well-behaved” financial systems, and how both can favorably affect growth. A discussion of the GCC economies and banking system will follow, with an emphasis on market concentration in the banking system. To document empirically the effect of banking market concentration on growth, we estimate a growth model to capture this effect, and find that the effect is positive but conditioned by the level of financial development. The paper conclude by stating that policies aimed at opening the GCC banking market, and creating less concentration in the process, will have a positive effect on growth when the financial system is relatively more developed.


EVOLUTION OF RURAL FINANCE IN CHINA: INSTITUTIONAL “LOCK IN” OR GRADUALISM?  EVOLUTION OF RURAL FINANCE IN CHINA: INSTITUTIONAL “LOCK IN” OR GRADUALISM?

XIANGPING JIA and PEI GUO    

To mobilize savings and credit with earmarked priority to implement development strategies, financial depression and policy-driven financial institutions dominated the rural financial system in China. The ongoing reforms encourage the entry of private capitals into the rural economy to liberalize the rural financial market. By making a retrospective review on the evolution of the rural financial system in China, we find that there has been negligible progress. The policy-led financial institutions ended up as merely a disbursement window and a costly drain on state budget. Institutional changes were blocked by patching up the existing institutions. Current reform faces challenges for a sustainable and pro-poor financial system.


EXCHANGE RATE AND EQUITY PRICES RELATIONSHIP: AN EMPIRICAL EVIDENCE FROM PAKISTANI FINANCIAL MARKETS  EXCHANGE RATE AND EQUITY PRICES RELATIONSHIP: AN EMPIRICAL EVIDENCE FROM PAKISTANI FINANCIAL MARKETS

KHALID MUSTAFA and MOHAMMED NISHAT    

The relationship between stock prices and exchange rate in Pakistan has been examined by using monthly data from July 1981 to June 2004. The cointegration and error-correction model and Granger trivariate causality techniques are used to test the causal relationship between exchange rate and stock prices. The empirical results indicate the uni-directional causal relationship between stock prices and exchange rate. The results indicate that the stock price has negative significant short run causal effect on exchange rate in Pakistan. However, during short run the exchange rate has a bi-directional causal effect on stock prices. No significance relationship is found between stock prices and gold. It suggests that the stock market in Pakistan is inefficient with respect to gold prices. However, money supply and interest rate do affect stock prices, suggesting that monetary policy could be used more effectively to check the movement in stock prices in Pakistan.


FINANCIAL INCLUSION, VULNERABILITY AND MENTAL MODELS: FROM PHYSICAL ACCESS TO EFFECTIVE USE OF FINANCIAL SERVICES IN A LOW-INCOME AREA OF MEXICO CITY  FINANCIAL INCLUSION, VULNERABILITY AND MENTAL MODELS: FROM PHYSICAL ACCESS TO EFFECTIVE USE OF FINANCIAL SERVICES IN A LOW-INCOME AREA OF MEXICO CITY

MAX M. NINO-ZARAZUA and JAMES COPESTAKE    
Quantitative analysis indicates that variation in use of regulated and unregulated financial services in a low-income area of Mexico City can only partially be attributed to differences in socio-economic variables including gender, employment, education and housing status. Qualitative evidence suggests cognitive resources (including financial knowledge, attitudes and values) and socialised experiential learning are also important to financial inclusion and its relationship to vulnerability. Better understanding of these links requires more research into actual and potential users’ diverse and malleable mental models

GANDHI VS GAUSS: ETHICAL ISSUES IN MICRO AND SMALL BUSINESS FINANCE  GANDHI VS GAUSS: ETHICAL ISSUES IN MICRO AND SMALL BUSINESS FINANCE

J.D. VON PISCHKE    

Efforts to discern ethical behaviour can lead to quite different results. Gandhi uses the most wretched person as the guide, Gauss stresses central tendencies, and Hayek suggests that specialisation is essential for a productive society. Use of finance has always been a lightening rod for ethical debate.
Microfinance (MF) serves the entrepreneurial working poor, getting people into business for themselves and moving the frontier of formal finance somewhat closer to Gandhi’s benchmark. MF that succeeds on a commercial basis generates other positive social effects through financial markets. For many microentrepreneurs, MF may enable them to participate in their first formal contract. Formality advances the power of contracts rather than of class, tribe or status to strike mutually remunerative commercial transactions. Power diffusion is more likely. Women are especially suited to these new opportunities: Grameen Bank in Bangladesh issues loans to women who have never before held a coin or banknote in their hand. However, savings, not credit, is historically the engine of enterprise. Few microentrepreneurs become small business people or build medium-size firms. Competition and capacity tend to keep micro micro.
Micro and small business interest rates may appear “high”, but they are often the lowest available. In a sense, interest rates are a mathematical abstraction – the microentrepreneur’s concern is the size of the payment due and whether the loan was helpful. Transparency, with uniform rules of calculation, constitutes best practice.
Tangible collateral is not very important in MF when information and incentives are properly aligned. Loans to small and medium businesses are usually collateralised because these entrepreneurs have more options and hence more complex cash flows.
Micro, small and medium-size businesses in many countries face dreadfully inefficient financial markets. World Bank economists have found that financial market development is pro-poor because it creates jobs and economic activity generally.
MF is subsidised, creating ethical ambiguities. These appear in ownership patterns and in economic rents, and will continue as long as subsidies flow to microfinance institutions.
Mission drift is said to occur when service to an original target group is expanded to embrace other target groups. This is usually justified by a desire to grow with clients, by providing access to formal financial services, and by creating employment. Consumer finance is often non-transparent, costly and unproductive. It is the biggest threat to MF.
Pensions lose value when currencies collapse. If history is a guide, collapses are likely to occur in many countries over a working lifetime. How could the savings of nascent middle classes and of the working poor be protected when hyperinflation occurs?
Finally, Compartmos, a highly successful Mexican microfinance institution, made a secondary offering on the New York and Mexican stock exchanges in 2007. Its individual and institutional shareholders reaped extraordinarily returns. At the same time, Compartmos has achieved very high rates of expansion, serving more and more poor Mexicans. The scale of its returns has created a large stage for ethical debate.




INTEREST RATE DETERMINATION IN DEVELOPING COUNTRIES  INTEREST RATE DETERMINATION IN DEVELOPING COUNTRIES

TROY LORDE, BRIAN FRANCIS, KIMBERLY WAITHE and TIMOTHY G. TAYLOR    

This paper seeks to determine nominal interest rates in five small developing countries - The Bahamas, Barbados, Guyana, Jamaica, and Trinidad and Tobago. The traditional Fisher equation augmented with the US nominal interest rate is employed. Results indicate the existence of a long-run relationship for The Bahamas, Jamaica (when the country’s exchange rate is floating), and Trinidad and Tobago. The Bahamian nominal interest rate moves one-for-one with the US interest rate, while for the others, the movement is greater than one-for-one. Fisher’s relation does not appear to be a suitable framework for determination of nominal interest rates in Barbados and Guyana.


INTEREST RATE REFORMS, FINANCIAL DEPTH AND SAVINGS IN TANZANIA: A DYNAMIC LINKAGE  INTEREST RATE REFORMS, FINANCIAL DEPTH AND SAVINGS IN TANZANIA: A DYNAMIC LINKAGE

NICHOLAS M. ODHIAMBO    

In this paper, the impact of interest rate reforms on financial deepening and savings in Tanzania is examined using two models, namely the financial deepening model and the savings model. Using cointegration and error-correction techniques, the empirical results of this study reveal that there is abundant support for the positive impact of interest rate reforms on financial deepening in Tanzania. Likewise, the study finds financial deepening, which results from interest rate reforms, to have a positive influence on domestic savings. However, the study failed to find any strong support for the direct positive interest rate elasticity of savings in Tanzania.


IS THERE A DIFFERENCE IN POVERTY OUTREACH BY TYPE OF MICROFINANCE INSTITUTION? COUNTRY STUDIES FROM ASIA AND LATIN AMERICA  IS THERE A DIFFERENCE IN POVERTY OUTREACH BY TYPE OF MICROFINANCE INSTITUTION? COUNTRY STUDIES FROM ASIA AND LATIN AMERICA

MANFRED ZELLER and JULIA JOHANNSEN    

Microfinance is often seen as an effective tool to reach the poor, yet there is a paucity of studies on the poverty level of microfinance clients, differentiated by type of microfinance institution. This paper seeks to make a contribution in closing that knowledge gap, and focuses on Bangladesh and Peru, two of the pioneering countries in microfinance. We examine the poverty status of savers and borrowers with micro-banks, savings and credit cooperatives, and NGO-based microfinance institutions. In order to determine the poverty status of clients, the analysis is carried out for national as well as international poverty lines. Member- or NGO-based microfinance institutions are found to have a higher poverty outreach


LE CREDIT SCORING: UNE NOUVELLE VOIE POUR REDUIRE LES PROBLEMES DE REMBOURSEMENT ET AMELIORER LA PERFORMANCE DES IMFs  LE CREDIT SCORING: UNE NOUVELLE VOIE POUR REDUIRE LES PROBLEMES DE REMBOURSEMENT ET AMELIORER LA PERFORMANCE DES IMFs

BEN SOLTANE BASSEM    

L’objectif de cette recherche est de développer un modèle de crédit scoring en utilisant un échantillon de 496 emprunteurs individuels des IMF Tunisiennes. Les résultats ont montré que le genre, le rationnement du crédit, la possession d’une maison, d’autres sources de richesse, un revenu permanent, et finalement l’âge de l’association sont négativement corrélés avec la probabilité de défaut. Cependant, il s’est avéré que l’état civil, la possession d’un garant, la présence d’autres institutions dans la même zone géographique, contracter un prêt afin de mettre en œuvre un nouveau projet, sont positivement corrélés avec la probabilité de défaut. La prise en compte des cas rejetés dans un second modèle (modèle corrigé), a montré une certaine cohérence entre les prédictions du modèle et les décisions de rejet de l’institution et a permit également d’échapper aux jugements subjectifs des agents de crédit.


MACROECONOMIC VARIABLES AND STOCK MARKET PERFORMANCE: TESTING FOR DYNAMIC LINKAGES WITH A KNOWN STRUCTURAL BREAK  MACROECONOMIC VARIABLES AND STOCK MARKET PERFORMANCE: TESTING FOR DYNAMIC LINKAGES WITH A KNOWN STRUCTURAL BREAK

ABDUL RASHID    

This paper investigates the dynamic interactions between four macroeconomic variables and stock prices in Pakistan, using cointegration and Granger causality tests that are robust to structural breaks. The results strongly suggest cointegration between the stock prices and macroeconomic variables viz. consumer prices, industrial production, exchange rate and the market rate of interest. Estimates of bivariate error-correction models reveal that there is long-run bidirectional causation between the stock prices and all the said macroeconomic variables with the exception of consumer prices that only lead to stock prices. The results also provide some evidence that the stock prices are Granger-caused by changes in interest rates in the short run. However, the analysis is unable to explore any short-run causation between the stock prices and the remaining three macroeconomic variables. It may therefore be stated that the association between the health of the stock market in the sense of rising share prices and the health of the economy is only a long-run phenomenon.


NEW ESTIMATES OF THE EFFECT OF FINANCIAL LIBERALISATION ON ECONOMIC GROWTH IN NIGERIA  NEW ESTIMATES OF THE EFFECT OF FINANCIAL LIBERALISATION ON ECONOMIC GROWTH IN NIGERIA

BABAJIDE FOWOWE    

The theory of financial liberalisation advocates the freeing up of financial markets so as to ensure a more efficient allocation of investment and a consequent improvement in economic growth. Nigeria’s experience with financial liberalisation started in 1987 but this resulted in a banking crisis 5 years later. Using an index which tracks the specific policies associated with financial liberalisation, this paper conducts an empirical evaluation of the impact of financial liberalisation on Nigeria’s economic growth. The results show that liberalisation has exerted a significant positive effect on growth in the long run, thus lending credence to the views that even though financial liberalisation might result in financial fragility in the short run, it is growth-enhancing in the long run.


RISKS AND EFFICIENCY IN MALAYSIAN BANKING  RISKS AND EFFICIENCY IN MALAYSIAN BANKING

FADZLAN SUFIAN    
ISBN: anno 2008

Applying a non-parametric Data Envelopment Analysis (DEA) method, this paper attempts to investigate the efficiency of Malaysian banks during the post-merger period. We further analyzed the impact of risk and problem loans on Malaysian bank efficiency, when compared to the results attained from the basic DEA model. We found that the merger has largely benefited small and medium sized banks while on the other hand, large banks suffer from scale inefficiency and have been consistently operating at declining returns to scale (DRS). We found that the inclusion of loan loss provisions has resulted in an increase in the estimated mean efficiency levels for all banks under study. Our results also suggest that the mean pure technical efficiency estimates are much more sensitive than the mean scale efficiency estimates to the exclusion of risk factors.


THE MONETARY POLICY TRANSMISSION FROM OFFICIAL RATE TO UNOFFICIAL RATE UNDER LIQUIDITY ADJUSTMENT FACILITY IN INDIA  THE MONETARY POLICY TRANSMISSION FROM OFFICIAL RATE TO UNOFFICIAL RATE UNDER LIQUIDITY ADJUSTMENT FACILITY IN INDIA

PURNA CHANDRA PADHAN    

This paper empirically examines the dynamic relationship between two short-term interest rates namely, repo rate (official) and call money rate (unofficial) during the full-fledged working of the liquidity adjustment facility in India. Using daily data, the study finds a strong relationship between the two rates in the long run and short-run, through cointegration tests and Error Correction Mechanism (ECM) respectively. The ECM and Granger causality test results reveal the bi-directional causality between the two rates in the short run and unidirectional causality from official to unofficial rate in the long run. The paper also examines the transmission of monetary policy impulses from official rates to unofficial rates and vice-versa. The Impulse Response Functions result shows that, in the short run, the interest rates responds to shocks to itself and other variables in the system, suggesting that monetary policy impulse can be efficiently transmitted to other financial markets.


THE ROLE OF BANK LENDING IN THE MONETARY TRANSMISSION PROCESS OF A DEVELOPING ECONOMY: EVIDENCE FROM MALAYSIA  THE ROLE OF BANK LENDING IN THE MONETARY TRANSMISSION PROCESS OF A DEVELOPING ECONOMY: EVIDENCE FROM MALAYSIA

SALINA H. KASSIM and M. SHABRI ABD. MAJID    

This study attempts to provide empirical evidence on the importance of bank loan in channelling monetary policy effects to the real economy. Based on the Malaysian data, the study focuses on a sample period spanning from January 1989 to December 2006. It explores the causal relationships between bank loan and monetary policy variable using two major tests; first, the auto-regressive distributed lag (ARDL) model which is used to examine the long-run relationship among the variables and second, the vector error-correction model (VECM) which is adopted to explore the short- and long-run dynamics between the variables. To further enrich the discussion, the study includes bank deposit so as to compare the importance of bank asset (loan) and liability (deposit) in the monetary transmission process. The results of the study show that both bank loans and deposits play a crucial role in the monetary transmission process in the Malaysian case. In particular, bank loan is shown to provide an important nexus from monetary policy to output in the short run, while bank deposit is an important channel of monetary policy in the long run. The relevance of bank loans and deposits in the monetary transmission process implies the importance of ensuring the stability of the banking system as a pre-requisite to effective monetary policy implementation and economic stability in the country.




THE ROLE OF COMMUNITY BANKS IN ECONOMIC DEVELOPMENT: A NIGERIAN CASE STUDY  THE ROLE OF COMMUNITY BANKS IN ECONOMIC DEVELOPMENT: A NIGERIAN CASE STUDY

O. FELIX AYADI, LADELLE M. HYMAN and JOHNNIE WILLIAMS    
The Decree 46 of 1992 created the National Board for Community Banks which was granted the power to license community banks. Community banks were created to: (1) promote rural development through provision of banking and financial services, (2) enhance rural productive activities, and (3) improve economic status of small-scale producers in rural and urban areas. According to Marx (2004), Nigeria has a dynamic informal financial sector. A key to growth strategy is to assist the development of this informal sector. The recent government policy to rid the economy of community banks defeats the original purpose underlying the creation of community banks. In view of the important role of community banks in Nigeria, the authors propose that community banks should continue to be rural financial institutions with specialized methods to serve broad segments of the rural population. The National Board for Community Banks should be vested with power to license, monitor and regulate community banks, and the regulatory power of the Central Bank of Nigeria over community banks should not go beyond that necessary for the performance of its monetary policy function. Furthermore, a partnership should be formed between the National Board for Community Banks, National Association of Community Banks and the Nigeria Agricultural, Cooperative and Rural Development Bank for the purpose of funding rural ventures through loan syndication. The Bankers’ Committee initiative for small and medium enterprises funding should be channeled through the Nigeria Agricultural, Cooperative and Rural Development Bank.

THE ROLE OF NON-GOVERNMENT ORGANISATIONS IN MICROFINANCE  THE ROLE OF NON-GOVERNMENT ORGANISATIONS IN MICROFINANCE

BARCLAY O’BRIEN    

This paper contends that international Non-Governmental Organisations (NGOs) have played a substantial role in developing financial services for the poor (or microfinance). Their influence has been greatest in:

Pursuing a broader common vision and mission, particularly towards the poorest;

Offering clients a larger range of products and services;

Better engaging with industry regulators;

Advocating for microfinance generally and conducting research.

Furthermore, even in cases where the role of these NGO Networks is no greater than other microfinance network support organizations, it appears the former are more willing to subsidise the costs of these benefits, such as with respect to innovation and creativity.
Secondly, the financial performance of the NGO networks and the NGO microfinance institutions themselves do not suffer as a result. Based on the available evidence, there is no significant variation in the performance of NGO MFIs around the world compared to the average for all MFIs. In Asia, the NGOs perform slightly worse than the average in three out of four indicators.
Therefore, whilst the long-term trend is likely to see more formal and regulated financial institutions delivering microfinance, the NGO Networks themselves will retain a crucial role in the sector as a whole.


THE TRANSACTION COSTS OF LENDERS AND BORROWERS IN A BRAZILIAN MICROCREDIT ORGANIZATION  THE TRANSACTION COSTS OF LENDERS AND BORROWERS IN A BRAZILIAN MICROCREDIT ORGANIZATION

CRISTINA FACHINI, DENISE BENETTI RAMIREZ and ROBERTO ARRUDA DE SOUZA LIMA    

One of the main obstacles for the expansion of microcredit availability is the high transaction costs of credit operations for both lenders and borrowers. In order to decrease transaction costs, institutions adopt the solidarity groups lending system in order to transfer transaction costs to the group, making it assume a large amount of the risk.
However, in Brazil, there are several microcredit institutions, such as Banco do Povo-Crédito Solidário, Vivacred, and others, which still adopt the individual credit lending system, instead of the solidarity system, and there are hardly any studies about the transaction costs to either the institutions or the borrowers. The objective of this work is to investigate the transaction costs of short-term operations in Banco do Povo-Crédito Solidário in the city of Santo André and its outskirts.


WHAT MACRO FACTORS MAKE MICROFINANCE INSTITUTIONS REACH OUT?  WHAT MACRO FACTORS MAKE MICROFINANCE INSTITUTIONS REACH OUT?

ANNABEL VANROOSE    

This paper identifies factors that explain why microfinance institutions are reaching more clients in some countries than in others. To that end, the paper applies a cross-country analysis on a unique dataset covering 115 countries. Results indicate that the microfinance sector is more present in the richer countries of the developing world. It also reaches more clients in countries that receive more international support. Population density plays a positive role, which could in part explain why the sector is still underdeveloped in rural areas. The level of industrialisation and inflation do not seem to influence microfinance outreach, while regional dummies do.