banking efficiency and economic growth in the middle east north africa, and south eat asia regions -...

7/29/2019 Banking Efficiency and Economic Growth in the Middle East North Africa, and South Eat Asia regions - Ph.D Thesis Presentation material

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PhD Candidate: Walid GHANNOUCHI

[email protected]

PhD in Banking and Finance (XXII Cycle)

PhD Thesis Viva 7 June 2010

BANKING PRODUCTIVITY AND ECONOMIC

GROWTH IN EMERGING COUNTRIES

UNIVERSITA DEGLI STUDI DI ROMA

“TOR VERGATA”

DOTTORATO IN BANCA & FINANZA



AGENDA

Walid GHANNOUCHI2

I. RESEARCH QUESTIONS

II. THE CONCEPTS OF ISLAMIC FINANCE

III. THE TECHNOLOGY GAP BETWEEN ISLAMIC AND

CONVENTIONAL BANKS IN EMERGING COUNTRIES

IV. BANKING EFFICIENCY AND ECONOMIC GROWTH IN

THE MENA REGION

V. CONCLUDING REMARKS



RESEARCH QUESTIONS

Walid GHANNOUCHI3

RESEARCH QUESTIONS

Are Islamic banks more cost efficient than their conventional

counterparts?

Are there differences in technology between Islamic and conventional

banks?

What is the impact of banking cost efficiency on economic growth in the

MENA region? And does economic growth affect banking cost efficiency?

This thesis is divided into 3 chapters:

1. Concepts and foundations of Islamic finance

2. The technology gap between Islamic and conventional banks in the

MENA & SEA regions

3. The banking cost efficiency and its relationship with economic growth

in the MENA region



Chapter 2

The Concepts of Islamic Finance

Walid GHANNOUCHI4



THE CONCEPTS OF ISLAMIC FINANCE

Walid GHANNOUCHI5

Islamic Finance

Religion :

Islamic Law

Applies

Prohibition of:

Interest

&

Uncertainty

Profit & Loss

Sharing model

Justice in business transaction

Allocation of resources

Social welfare

http://www.free-graphics.com/clipart/Architecture_And_Landmarks/thumbnails1.shtml





Chapter 3

The Technology Gap Between Islamic

and Conventional Banks in Emerging

Countries

Walid GHANNOUCHI6



THE TECHNOLOGY GAP BETWEEN ISLAMIC AND


Walid GHANNOUCHI7

RESEARCH QUESTIONS

Are Islamic banks more cost efficient than their conventional counterparts?

Are there differences in technology between Islamic and conventional banks?

MAJOR CONTRIBUTION

This study provides a cross industry comparison between Islamic and

conventional banks based on the differences in technology

LIMITATIONS

This study was limited by the lack of data availability related mostly to

Islamic banks





Walid GHANNOUCHI8

Literature Review Data & Methodology Results

Islamic banks

more efficient

Al-Shammari (2003)

Hussein (2004)

Turk Ariss (2007)

No significantdifference Majid et al. (2003)

Bader et al. (2008)

Conventional banks

more efficientHasan (2006)

Bos and Schmiedel (2007) used a Stochastic Metafrontier approach

(introduced by Battese and Prasafa Rao, 2002) for cross country efficiency

comparison of the European banking sector

The Metafrontier methodology was considered as ‘methodological

improvement’ by Berger (2007)





Walid GHANNOUCHI9


DATA

12 Countries

1505 Obs.

7 Years time period

VARIABLES

Conventional banks Islamic Banks

Total Loans Debt instruments:

Murabaha, Salam,

Quard fund, Sukuk,

Leasing and Istisna

Securities (OtherEarning Assets)

Equity Financinginstruments: Securities,

Mudaraba,

Musharakah and Other

Investments

Off-balance sheet items

(in nominal value)

Off-balance sheet items

(in nominal value)

Conventional banks Islamic Banks

Price of Labour:

Total personnel expenses / Total asset

Price of funds: Total

interest expenses / Total

funds

Price of funds: Profits

distributed to depositors

/ Total funds

Price of physicalcapital: Total

depreciation and other

capital expenses / Total

fixed assets

Price of physicalcapital: Total

depreciation (includes

physical capital bought

for Leasing) and other

capital expenses / Total

fixed assets

I N P U T S

O U T P U

T S





Walid GHANNOUCHI10


Meta-frontier Cost Efficiency Function Maximumlikelihood

estimates for each

single group

Meta-frontier

estimatesapplying Linear

Programming

(used MATLAB

Optimization

Toolbox)

Technology Gap

Ratio = MF

potential Output

over SF of each

group (0<TGR<1)

Inputs

(P)

Output

(Y)Single

Frontiers

Meta-

frontier

Pooled

Frontier

Frontier 1 : f 1(x;βi) Frontier 2 : f 2(x;βj)

Meta-frontier : f MF(x;β* )

Pooled frontier : f n(x;βn)





Walid GHANNOUCHI11


Conventional Banks Observations Mean Std. Dev. Max Min

Pooled Cost Efficiency 1390 0.860 0.076 1.000 0.185

Single Cost Efficiency 1390 0.853 0.087 1.000 0.150

Technology Gap Ratio 1390 0.982 0.018 1.000 0.836

Metafrontier Cost Efficiency 1390 0.838 0.088 0.998 0.147

Islamic Banks Observations Mean Std. Dev. Max Min

Pooled Cost Efficiency 115 0.842 0.108 0.974 0.271

Single Cost Efficiency 115 0.845 0.092 0.968 0.464

Technology Gap Ratio 115 0.979 0.020 1.000 0.898

Metafrontier Cost Efficiency 115 0.828 0.092 0.943 0.453





Walid GHANNOUCHI12


0.760

0.780

0.800

0.820

0.840

0.860

0.880

0.900

2000 2001 2002 2003 2004 2005 2006

Average cost efficiency evolution

Conve ntional Banks Islamic Banks

0.650

0.700

0.750

0.800

0.850

0.900

2000 2001 2002 2003 2004 2005 2006

Average Meta-frontier cost efficiencyevolution

Conventional Banks Islamic Banks



ContractFees



Walid GHANNOUCHI13


Islamic banks are not sufficiently involved in the Profit & Loss Sharing model

Islamic banks tend to replicate conventional debt-like financial products

through the adaptation of contracts mechanisms

Interest

Arabic contracts names

Scholars

certify

compliance

Promote Social welfare and

provide a better allocation of resources

Islamic finance contracts adaptation

Emphasize their difference

Develop products based on Profit & Loss Sharing

Islamic banks should:



Chapter 4

Banking Efficiency and Economic

Growth In The MENA Region

Walid GHANNOUCHI14



15 Walid GHANNOUCHI

BANKING EFFICIENCY AND

ECONOMIC GROWTH IN THE MENA REGION

RESEARCH QUESTION

What is the impact of banking cost efficiency on economic growth in the

MENA region? And does economic growth affect banking cost efficiency?

MAJOR CONTRIBUTION

This study provides a investigation of the relationship between banking

productivity and economic growth

LIMITATION

This study was limited by the level of data disclosure for some countries





Walid GHANNOUCHI17


DATA

7 Countries

583 Obs.

7 Years time period

VARIABLES

Variable Description

CE Cost Efficiency

CPR Credit to the private sector in terms of GDP

CPI Annual percentage change in inflationTRADE Summation of exports and imports in terms of GDP

GOV Government expenditure in terms of GDP

XRATE Average exchange rate (national currency to USD)

GDP per capita Average GDP per capita

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2000 2001 2002 2003 2004 2005 2006

CPR/GDP

BAHRAIN

JORDAN

KUWAIT

QATAR

SAUDI ARABIA

TUNISIA

UAE





Walid GHANNOUCHI18


STEP 2 : Following Windmeijer (2005) we apply a two-step GMM estimation

STEP 1 : We estimate Cost Efficiency using the stochastic translog function

T P Y TC j

i j

jiikt 1

3

1

3

1

0lnlnln

ii

i j

ij

i j i j

jiij jiij P Y T P P Y Y lnlnlnlnlnln2

13

1

3

1

3

1

3

1

3

1

3

1

2

11

3

1

3

1

lnlnlnlnlnlnln2

1

i j

kt j jE iiE E EE E P E Y E E E

Cost efficiency and economic growth reverse causality

t it it it it it it iCPI CE CE CE CPRCPR

,52,41,3,21,1,,

t iit it it it t i taGDPpercapi XRATE GOV TRADE ,,8,8,7,6

Cost efficiency and economic growth causality

t iit it it it t i taGDPpercapi XRATE GOV TRADE ,,8,8,7,6

t it it it it it it i CPI CPRCPRCPRCE CE ,52,41,3,21,1,,





Walid GHANNOUCHI19


0.70

0.75

0.80

0.85

0.90

0.95

1.00

2000 2001 2002 2003 2004 2005 2006

Cost Efficiency mean scores

BAHRAIN

JORDAN

KUWAIT

QATAR

SAUDI ARABIA

TUNISIA

UNITED ARAB EMIRATES

Cost Efficiency Estimates

High cost efficiency

scores overall

Strengthening

regulation causes

banks to increase the

costs of compliance,

leading to a temporary decrease in cost

efficiency





Walid GHANNOUCHI20


Cost efficiency and economic growth causality

CE ( main model) CE ( model 1 ) CE ( model 2 ) CE ( model 3 )

CE lagged(t-1) 0.486 *** 0.454 *** 0.472 *** 0.533 ***

PCR 0.164 ** 0.047 -0.001

PCR lagged(t-1) -0.096 0.048 0.065

PCR lagged(t-2) -0.030 -0.060

CPI -0.001 0.003 ** 0.003 ** 0.001

TRADE -0.038 *** -0.038 *** -0.034 *** -0.030 ***

GOV 0.201 0.489 *** 0.497 ** 0.193

XRATE -0.009 -0.009 *** -0.008 ** -0.008

GDP per capita 0.006 0.010 0.010 0.001

Cte. 0.421 0.336 0.313 0.429

AR(1) -2.630 -2.680 -2.680 -2.670

p-value 0.009 0.007 0.007 0.008

AR(2) -0.160 -0.780 -0.760 -0.180

p-value 0.873 0.434 0.444 0.857

Hansen J test 55.380 80.180 79.040 59.970

p-value 0.821 0.928 0.930 0.716

Observations 321 441 441 321





Walid GHANNOUCHI21


Cost efficiency and economic growth reverse causality

CPR ( main model) CPR ( model 4 ) CPR ( model 5 ) CPR ( model 6 )

CPR lagged(t-1) 0.895 *** 0.896 *** 0.895 *** 0.896 ***

CE 0.146 *** 0.025 0.001

CE lagged(t-1) -0.084 0.056 *** -0.023

CE lagged(t-2) 0.124 *** 0.141 ***

CPI 0.007 *** 0.007 *** 0.006 *** 0.007 ***

TRADE 0.067 *** 0.069 *** 0.070 *** 0.063 ***

GOV 0.164 0.384 *** 0.357 *** 0.184 ***

XRATE 0.001 ** 0.002 * 0.003 ** 0.000

GDP per capita -0.018 *** -0.015 *** -0.016 *** -0.018 ***

Cte. -0.071 0.020 -0.001 -0.006

AR(1) -4.340 -4.210 -4.240 -4.890

p-value 0.000 0.000 0.000 0.000

AR(2) -0.760 -1.790 -1.670 -1.690

p-value 0.446 0.073 0.096 0.091

Hansen J test 81.150 104.590 105.020 81.880

p-value 0.099 0.357 0.320 0.104

Observations 321 441 441 321



Chapter 5

Concluding Remarks

Walid GHANNOUCHI22



CONCLUDING REMARKS

Walid GHANNOUCHI23

Islamic banks tend to be slightly less cost efficient than their conventional

peers, suggesting that the contracts mechanisms to certify Islamic financial

products as Sharia compliant cost more than the conventional products

they seek to replace

There exists very small, non significant technology gap in the studied

sample between Islamic and conventional banking in the MENA and SEAregions, suggesting that Islamic banks are not sufficiently involved into

profit and loss sharing thus mostly replicating debt like existing

conventional financial products



Beyond interest and uncertainty banning, profit and loss sharing is a

cornerstone in the Islamic banking industry to promote social welfare

THE CONCEPTS OF ISLAMIC FINANCE



CONCLUDING REMARKS

Walid GHANNOUCHI24

Positive causality and reverse causality between banking productivity and

financial deepening

Financial deepening can be negatively affected in a poorly regulated

environment if the economy witnesses investments allocative inefficiencies

A stable financial system in the MENA region should rely on increasedregulation and investments efficiency to initiate and maintain a virtuous

cycle between financial deepening and banking productivity



LIMITATION & FUTURE RESEARCH

Strong limitation related to data availability in emerging countries

Investigate the post 2008 financial crisis in emerging countries and analyse

to which extend Islamic banking has moderated the impact of the crisis

Analyse the investment portfolio of Islamic banks and assess their impact on

the industry’s productivity as a mean of strategic selection for resources

allocation

banking efficiency and economic growth in the middle east north africa, and south eat asia regions -...

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