Benefits and Costs of Privatization of Benefits and Costs of Privatization of State-Owned BanksState-Owned Banks

Lessons for Development BanksLessons for Development Banks

Lemma W. SenbetLemma W. SenbetUniversity of MarylandUniversity of Maryland

UN Ad Hoc Expert Group Meeting UN Ad Hoc Expert Group Meeting ““Rethinking the Role of National Development Banks”Rethinking the Role of National Development Banks”

New York, December 1-2, 2005New York, December 1-2, 2005

Bank PrivatizationsBank PrivatizationsRelevance to Development BanksRelevance to Development Banks

In the wake of extensive financial sector reforms and In the wake of extensive financial sector reforms and financial globalization, development banks are being financial globalization, development banks are being increasingly privatized.increasingly privatized.

While development is still central to the agenda of While development is still central to the agenda of development banks, they are, nonetheless, expected to development banks, they are, nonetheless, expected to maintain their financial viability in terms of asset quality, maintain their financial viability in terms of asset quality, profitability, and efficiency.profitability, and efficiency.

Commercial banks do also foster development. Growing Commercial banks do also foster development. Growing evidence for positive linkage between banking evidence for positive linkage between banking development and economic development. Privatization development and economic development. Privatization experiences of these banks relevant to development banks.experiences of these banks relevant to development banks.

Yet, development gap due to financing gap to be bridged Yet, development gap due to financing gap to be bridged

BackgroundBackground

Continuing debate on bank privatizationsContinuing debate on bank privatizations – Pro-privatization reformersPro-privatization reformers– Resisters to privatization; at the extreme even hostile to Resisters to privatization; at the extreme even hostile to

privatization of finance altogether privatization of finance altogether

Pro and anti privatization experience of Africa – a Pro and anti privatization experience of Africa – a region of highly volatile economics and politicsregion of highly volatile economics and politics– Privatization reformist experiments without getting underlying Privatization reformist experiments without getting underlying

governance and incentives right (e.g. Nigeria)governance and incentives right (e.g. Nigeria)– Extreme resisters, even hostile to privatization of finance Extreme resisters, even hostile to privatization of finance

altogether (e.g., Ethiopia)altogether (e.g., Ethiopia)

The available evidence is mixed depending on the The available evidence is mixed depending on the developing regions (say Latin America versus Africa)developing regions (say Latin America versus Africa)– Both reformers and resisters are reassured!Both reformers and resisters are reassured!

Resistance to Bank PrivatizationResistance to Bank PrivatizationIllustration: EthiopiaIllustration: Ethiopia

100% government ownership of the Commercial Bank of Ethiopia 100% government ownership of the Commercial Bank of Ethiopia (CBE(CBE))

Gradual and encouraging entry of private banksGradual and encouraging entry of private banks– But the CBE has a lion’s share of the banking marketBut the CBE has a lion’s share of the banking market– Private banks are not only just small but 100% domestically ownedPrivate banks are not only just small but 100% domestically owned

No foreign ownership in the financial sector, including insurance No foreign ownership in the financial sector, including insurance market; nor is new foreign entry allowed in the financial sectormarket; nor is new foreign entry allowed in the financial sector

No stock marketNo stock market– Hence, no market-based privatizations; no basis for financial Hence, no market-based privatizations; no basis for financial

cooperation and integration with other emerging economies in Africacooperation and integration with other emerging economies in Africa

Thus, no privatization of finance in Ethiopia. Just a command Thus, no privatization of finance in Ethiopia. Just a command financial economyfinancial economy!!

Conceptual Framework: Conceptual Framework: Multiple Functions of a Financial SystemMultiple Functions of a Financial System The firm as a nexus of contracts The firm as a nexus of contracts (Figure 1)(Figure 1) Mobilization of domestic financial resources Mobilization of domestic financial resources Risk sharing and risk diversificationRisk sharing and risk diversification Information production and price discoveryInformation production and price discovery Promotion of corporate governancePromotion of corporate governance Mobilization of global capital and promotion of Mobilization of global capital and promotion of

financial globalizationfinancial globalization Summing up: Mere existence of banks and stock Summing up: Mere existence of banks and stock

markets – value?markets – value?

The Public Firm: The Public Firm: A Network of ContractsA Network of Contracts

Management

FirmOther Stakeholders(Product and Factor Market)

Outside (New) Equity

holders

Government/Society

Debt holders

Classes of Agency

Excessive PerquisitesUnderinvestmentOverinvestment

Risk ShiftingAsymmetric InformationBankruptcy and Financial

Distress

ManagementDebt holders, Stakeholders

Government/SocietyDebt holders, Government

New Equity holdersDebt holders, Stakeholders

Potential Benefits of Bank Potential Benefits of Bank PrivatizationPrivatization

The government (politicians and The government (politicians and bureaucrats) is not a benevolent social bureaucrats) is not a benevolent social guardianguardian– State-owned banks can be used for political and State-owned banks can be used for political and

personal gainspersonal gains Privatization improves bank governancePrivatization improves bank governance Privatization improves bank competitionPrivatization improves bank competition Privatization improves bank efficiency and Privatization improves bank efficiency and

performance; and fosters stabilityperformance; and fosters stability

Potential Costs of Bank PrivatizationPotential Costs of Bank Privatization

Private banks shun underserved markets (e.g., Private banks shun underserved markets (e.g., rural sectors)rural sectors)

Private banks engage in excessive risk lending and Private banks engage in excessive risk lending and hence engender banking crisis and instabilityhence engender banking crisis and instability

Private banks provide insufficient but Private banks provide insufficient but concentrated lending if the banking sector is concentrated lending if the banking sector is concentrated post-privatizationconcentrated post-privatization

Borrowers with informational and contractual Borrowers with informational and contractual difficulties are rationed out by private banks difficulties are rationed out by private banks

Bank Privatization and Performance Bank Privatization and Performance Available EvidenceAvailable Evidence

There has been sharp decline in the state There has been sharp decline in the state ownership of banks, particularly in low ownership of banks, particularly in low income countries income countries (Cull, et al, World Bank Data)(Cull, et al, World Bank Data)

The available evidence is primarily on bank The available evidence is primarily on bank performance and efficiency performance and efficiency – Post-privatization profitability versus pre—Post-privatization profitability versus pre—

privatization and private banks privatization and private banks (Performance)(Performance)– Cost reductions Cost reductions (Efficiency)(Efficiency)– Factors affecting performanceFactors affecting performance (e.g., (e.g.,

governance, regulation, competition)governance, regulation, competition)

Government Holdings of Bank AssetsGovernment Holdings of Bank Assets

Source: George Clark, RobertCull, Mary Shirley (2004)

Available EvidenceAvailable Evidence(contd)(contd)

Recent studies based on World Bank projectRecent studies based on World Bank project Performance effects of privatizations vary across Performance effects of privatizations vary across

countries.countries. In most cases, performance improved. In most cases, performance improved. Cost efficiency improved less than measures of Cost efficiency improved less than measures of

profitability (e.g., ROE.)profitability (e.g., ROE.) Performance gains were smaller when Performance gains were smaller when

governments retained partial ownership.governments retained partial ownership. Greater gains when bought by strategic investors.Greater gains when bought by strategic investors. Greater gains with more foreign participation. Greater gains with more foreign participation.

Bank Privatization and PerformanceBank Privatization and PerformanceAfrican ExperienceAfrican Experience

Widespread privatization of banks in Sub-Saharan Widespread privatization of banks in Sub-Saharan Africa in the wake of financial sector reforms Africa in the wake of financial sector reforms

Africa experienced the sharpest decline in state Africa experienced the sharpest decline in state ownership during the 1999-2002 period (see ownership during the 1999-2002 period (see earlier charts)earlier charts)

Otchere and Senbet, 2005Otchere and Senbet, 2005; Based on World Bank ; Based on World Bank Privatization database and supplemental appendix Privatization database and supplemental appendix to Megginson (2000)to Megginson (2000)

Are they gains from African privatizations? (see Are they gains from African privatizations? (see tables)tables)

Gains from African Bank Gains from African Bank Privatizations?Privatizations?

Measures of performance looked at:Measures of performance looked at:– Asset quality, profitability, cost efficiency, etc.Asset quality, profitability, cost efficiency, etc.

There was deterioration in asset quality.There was deterioration in asset quality. Profitability worsened post privatization.Profitability worsened post privatization. No significant improvement in efficiency.No significant improvement in efficiency. Privatized banks experienced negative abnormal Privatized banks experienced negative abnormal

returns.returns. Possible factorsPossible factors

– share issue privatizations and partial privatizationsshare issue privatizations and partial privatizations

YearYear

DifferenceDifference

PrivatizedPrivatized

BanksBanks

RivalsRivals DifferenceDifference

(Priv-Rival)(Priv-Rival)

PrivatizedPrivatized

BanksBanks

RivalRival

-1-1 2.38 (0.89)2.38 (0.89)

00 3.06 (1.34)3.06 (1.34) 0.27 (1.36)0.27 (1.36) 2.79 (1.74)* ----- -----2.79 (1.74)* ----- -----

11 1.97 (1.89)1.97 (1.89) 1.43 (2.61)***1.43 (2.61)*** 0.54 (0.80) 5.73 (0.01)0.54 (0.80) 5.73 (0.01) 7.33 (1.90)*7.33 (1.90)* -1.6 (0.59)-1.6 (0.59)

22 3.69 (1.89)*3.69 (1.89)* 1.42 (3.60)***1.42 (3.60)*** 2.27 (1.33) 31.61 (0.89)2.27 (1.33) 31.61 (0.89) 6.45 (2.62)***6.45 (2.62)*** 25.16 (1.06)25.16 (1.06)

33 2.00 (2.10)**2.00 (2.10)** 0.94 (4.19)***0.94 (4.19)*** 1.06 (0.80) 6.33 (1.34)1.06 (0.80) 6.33 (1.34) 7.29 (3.03)*** 7.29 (3.03)*** -0.96 (0.51)-0.96 (0.51)

44 2.54 (2.10)**2.54 (2.10)** 1.31 (4.61)***1.31 (4.61)*** 1.23 (0.57) 20.25 (1.34)1.23 (0.57) 20.25 (1.34) 7.25 (2.77)***7.25 (2.77)*** 13.0 (1.27)13.0 (1.27)

55 1.04 (1.64)*1.04 (1.64)* 1.21 (3.97)***1.21 (3.97)*** -0.17 (0.33) 15.26 (0.89)-0.17 (0.33) 15.26 (0.89) 6.09 (1.70)*6.09 (1.70)* 9.18 (1.15)9.18 (1.15)

Pre-meanPre-mean 2.83 (1.86)2.83 (1.86)

Post-meanPost-mean 3.05 (2.72)**3.05 (2.72)** 1.44 (15.10)***1.44 (15.10)*** 1.61 (1.43) 21.64 (2.40)*1.61 (1.43) 21.64 (2.40)* 9.34 (6.58)***9.34 (6.58)*** 12.30 (1.35)12.30 (1.35)

Difference (Post-Pre)Difference (Post-Pre) -0.22 (0.12)-0.22 (0.12)

Table 7 Bank Privatization and PerformanceOperating performance of Privatized Banks in Africa

This table contains the median operating performance measures for the sample firms the operating performance measures analyzed include Asset quality, Management efficiency, Earnings ability and Labor (employment levels and labor productivity). The z-statistics for the Wilcoxon signed rank test of the difference in median ratios between the two samples are presented in Panel C. The median ratios and z-statistics are reported where enough observations exist to compute the z-statistic.

Panel A: Asset Quality Ratios:

YearYear Privatized BanksPrivatized Banks RivalsRivals DifferenceDifference Privatized BanksPrivatized Banks RivalsRivals DifferenceDifference

-3-3 3.41 (0.89)3.41 (0.89) 28.19 (0.89)28.19 (0.89)

-2-2 4.27 (0.89)4.27 (0.89) 27.55 (0.89)27.55 (0.89)

-1-1 3.53 (1.34)3.53 (1.34) 12.52 (1.34)12.52 (1.34)

00 4.23 (1.33)4.23 (1.33) 1.89 (1.90)*1.89 (1.90)* 2.34 (0.30)2.34 (0.30) 16.25 (1.33)16.25 (1.33) 33.25 (1.90)*33.25 (1.90)* 17.0 (1.19)17.0 (1.19)

11 3.56 (1.64)*3.56 (1.64)* 2.43 (2.10)**2.43 (2.10)** 1.13 (0.96)1.13 (0.96) 16.52 (1.64)*16.52 (1.64)* 29.24 (2.10)29.24 (2.10) -12.72 (1.39)-12.72 (1.39)

22 1.24 (0.54)1.24 (0.54) 2.05 (3.55)***2.05 (3.55)*** -0.81 (0.63)-0.81 (0.63) 13.94 (0.54)13.94 (0.54) 21.77 (3.44)***21.77 (3.44)*** -7.83 (2.11)**-7.83 (2.11)**

33 2.22 (0.25)2.22 (0.25) 2.32 (4.07)***2.32 (4.07)*** -0.10 (0.60)-0.10 (0.60) 12.58 (0.59)12.58 (0.59) 16.86 (3.58)***16.86 (3.58)*** -4.28 (0.59)-4.28 (0.59)

44 1.49 (0.51)1.49 (0.51) 1.88 (3.77)***1.88 (3.77)*** -0.39 (0.33)-0.39 (0.33) 15.35 (0.71)15.35 (0.71) 16.19 (4.02)***16.19 (4.02)*** -0.84 (0.62)-0.84 (0.62)

55 2.22 (1.10)2.22 (1.10) 1.70 (2.05)**1.70 (2.05)** 0.52 (1.19)0.52 (1.19) 21.97 (0.93)21.97 (0.93) 15.89 (1.83)*15.89 (1.83)* 6.08 (1.00)6.08 (1.00)

Pre-MeanPre-Mean 3.23 (2.36)3.23 (2.36) 21.47 (1.84)21.47 (1.84)

Post-MeanPost-Mean 2.55 (1.62)2.55 (1.62) 1.84 (5.40)***1.84 (5.40)*** 0.41 (0.69)0.41 (0.69) 10.45 (1.23)10.45 (1.23) 10.60 (2.80)***10.60 (2.80)*** -0.15 (0.17)-0.15 (0.17)

DifferenceDifference 0.68 (0.22)0.68 (0.22) 11.02 (0.63)11.02 (0.63)

Panel B: Profitability Return on Assets (ROA) Return on Equity (ROE)

YearYear

DifferenceDifference

PrivatizedPrivatized

BanksBanks

RivalsRivals DifferenceDifference

(Priv-Rival)(Priv-Rival)

PrivatizedPrivatized

BanksBanks

RivalRival

-1-1 2.38 (0.89)2.38 (0.89)

00 3.06 (1.34)3.06 (1.34) 0.27 (1.36)0.27 (1.36) 2.79 (1.74)* ----- -----2.79 (1.74)* ----- -----

11 1.97 (1.89)1.97 (1.89) 1.43 (2.61)***1.43 (2.61)*** 0.54 (0.80) 5.73 (0.01)0.54 (0.80) 5.73 (0.01) 7.33 (1.90)*7.33 (1.90)* -1.6 (0.59)-1.6 (0.59)

22 3.69 (1.89)*3.69 (1.89)* 1.42 (3.60)***1.42 (3.60)*** 2.27 (1.33) 31.61 (0.89)2.27 (1.33) 31.61 (0.89) 6.45 (2.62)***6.45 (2.62)*** 25.16 (1.06)25.16 (1.06)

33 2.00 (2.10)**2.00 (2.10)** 0.94 (4.19)***0.94 (4.19)*** 1.06 (0.80) 6.33 (1.34)1.06 (0.80) 6.33 (1.34) 7.29 (3.03)*** 7.29 (3.03)*** -0.96 (0.51)-0.96 (0.51)

44 2.54 (2.10)**2.54 (2.10)** 1.31 (4.61)***1.31 (4.61)*** 1.23 (0.57) 20.25 (1.34)1.23 (0.57) 20.25 (1.34) 7.25 (2.77)***7.25 (2.77)*** 13.0 (1.27)13.0 (1.27)

55 1.04 (1.64)*1.04 (1.64)* 1.21 (3.97)***1.21 (3.97)*** -0.17 (0.33) 15.26 (0.89)-0.17 (0.33) 15.26 (0.89) 6.09 (1.70)*6.09 (1.70)* 9.18 (1.15)9.18 (1.15)

Pre-meanPre-mean 2.83 (1.86)2.83 (1.86)

Post-meanPost-mean 3.05 (2.72)**3.05 (2.72)** 1.44 (15.10)***1.44 (15.10)*** 1.61 (1.43) 21.64 (2.40)*1.61 (1.43) 21.64 (2.40)* 9.34 (6.58)***9.34 (6.58)*** 12.30 (1.35)12.30 (1.35)

Difference (Post-Pre)Difference (Post-Pre) -0.22 (0.12)-0.22 (0.12)

Bank Privatization and Performance: Africa (Senbet and Otchere, 2005)Operating performance of Privatized Banks in Africa

This table contains the median operating performance measures for the sample firms the operating performance measures analyzed include Asset quality, Management efficiency, Earnings ability and Labor (employment levels and labor productivity). The z-statistics for the Wilcoxon signed rank test of the difference in median ratios between the two samples are presented in Panel C. The median ratios and z-statistics are reported where enough observations exist to compute the z-statistic.

Panel A: Asset Quality Ratios:

YearYear Privatized BanksPrivatized Banks RivalsRivals DifferenceDifference Privatized BanksPrivatized Banks RivalsRivals DifferenceDifference

-3-3 3.41 (0.89)3.41 (0.89) 28.19 (0.89)28.19 (0.89)

-2-2 4.27 (0.89)4.27 (0.89) 27.55 (0.89)27.55 (0.89)

-1-1 3.53 (1.34)3.53 (1.34) 12.52 (1.34)12.52 (1.34)

00 4.23 (1.33)4.23 (1.33) 1.89 (1.90)*1.89 (1.90)* 2.34 (0.30)2.34 (0.30) 16.25 (1.33)16.25 (1.33) 33.25 (1.90)*33.25 (1.90)* 17.0 (1.19)17.0 (1.19)

11 3.56 (1.64)*3.56 (1.64)* 2.43 (2.10)**2.43 (2.10)** 1.13 (0.96)1.13 (0.96) 16.52 (1.64)*16.52 (1.64)* 29.24 (2.10)29.24 (2.10) -12.72 (1.39)-12.72 (1.39)

22 1.24 (0.54)1.24 (0.54) 2.05 (3.55)***2.05 (3.55)*** -0.81 (0.63)-0.81 (0.63) 13.94 (0.54)13.94 (0.54) 21.77 (3.44)***21.77 (3.44)*** -7.83 (2.11)**-7.83 (2.11)**

33 2.22 (0.25)2.22 (0.25) 2.32 (4.07)***2.32 (4.07)*** -0.10 (0.60)-0.10 (0.60) 12.58 (0.59)12.58 (0.59) 16.86 (3.58)***16.86 (3.58)*** -4.28 (0.59)-4.28 (0.59)

44 1.49 (0.51)1.49 (0.51) 1.88 (3.77)***1.88 (3.77)*** -0.39 (0.33)-0.39 (0.33) 15.35 (0.71)15.35 (0.71) 16.19 (4.02)***16.19 (4.02)*** -0.84 (0.62)-0.84 (0.62)

55 2.22 (1.10)2.22 (1.10) 1.70 (2.05)**1.70 (2.05)** 0.52 (1.19)0.52 (1.19) 21.97 (0.93)21.97 (0.93) 15.89 (1.83)*15.89 (1.83)* 6.08 (1.00)6.08 (1.00)

Pre-MeanPre-Mean 3.23 (2.36)3.23 (2.36) 21.47 (1.84)21.47 (1.84)

Post-MeanPost-Mean 2.55 (1.62)2.55 (1.62) 1.84 (5.40)***1.84 (5.40)*** 0.41 (0.69)0.41 (0.69) 10.45 (1.23)10.45 (1.23) 10.60 (2.80)***10.60 (2.80)*** -0.15 (0.17)-0.15 (0.17)

DifferenceDifference 0.68 (0.22)0.68 (0.22) 11.02 (0.63)11.02 (0.63)

Panel B: Profitability Return on Assets (ROA) Return on Equity (ROE)

YearYear Privatized BanksPrivatized Banks RivalsRivals Difference (Priv-Rival)Difference (Priv-Rival) Privatized BanksPrivatized Banks RivalRival DifferenceDifference

-1-1 80.85 (0.89)80.85 (0.89) 73.92 (1.66)*73.92 (1.66)* 6.93 (0.69)6.93 (0.69) 3.10 (0.89)3.10 (0.89)

00 70.03 (1.64)*70.03 (1.64)* 65.66 (1.90)*65.66 (1.90)* 4.73 (0.12)4.73 (0.12) 12.36 (1.34)12.36 (1.34) 4.40 (1.66)*4.40 (1.66)* 7.96 (1.95)*7.96 (1.95)*

11 73.17 (1.65)*73.17 (1.65)* 66.20 (2.61)***66.20 (2.61)*** 6.97 (0.08)6.97 (0.08) 7.09 (1.34)7.09 (1.34) 3.20 (1.90)*3.20 (1.90)* 3.89 (0.01)3.89 (0.01)

22 83.04 (1.89)*83.04 (1.89)* 68.54 (3.60)***68.54 (3.60)*** 14.5 (1.18)14.5 (1.18) 2.67 (1.88)**2.67 (1.88)** 7.05 (2.61)***7.05 (2.61)*** -4.38 (0.27)-4.38 (0.27)

33 81.03 (2.10)**81.03 (2.10)** 71.85 (4.19)***71.85 (4.19)*** 9.18 (1.48)9.18 (1.48) 3.52 (1.89)*3.52 (1.89)* 3.20 (3.60)***3.20 (3.60)*** 0.32 (0.55)0.32 (0.55)

44 85.04 (2.09)**85.04 (2.09)** 72.08 (4.36)***72.08 (4.36)*** 12.96 (1.98)**12.96 (1.98)** 2.32 (2.10)**2.32 (2.10)** 4.10 (4.27)***4.10 (4.27)*** -1.78 (2.10)-1.78 (2.10)

55 70.55 (1.65)*70.55 (1.65)* 73.46 (3.81)***73.46 (3.81)*** -2.91 (0.61)-2.91 (0.61) 3.10 (1.64)*3.10 (1.64)* 3.03 (3.71)***3.03 (3.71)*** 0.07 (0.43)0.07 (0.43)

Pre-meanPre-mean 80.35 (5.63)80.35 (5.63) 75.64 (8.85)***75.64 (8.85)*** 4.71 (0.30)4.71 (0.30) 3.10 (1.56)3.10 (1.56)

Post-meanPost-mean 80.61 (20.39)***80.61 (20.39)*** 83.65 (13.87)***83.65 (13.87)*** -2.91 (0.24)-2.91 (0.24) 4.10 (5.81)***4.10 (5.81)*** 5.08 (11.53)***5.08 (11.53)*** -0.90 (1.01)-0.90 (1.01)

Difference (Post-Pre)Difference (Post-Pre) -0.26 (0.03)-0.26 (0.03) -8.01 (0.47)-8.01 (0.47) -1.00 (0.62)-1.00 (0.62)

Panel C: Efficiency

YearYear Privatized BanksPrivatized Banks RivalsRivals DifferenceDifference

11 -1.21 (0.01)-1.21 (0.01) 0.12 (0.01)0.12 (0.01) -1.33 (0.61)-1.33 (0.61)

22 0.70 (0.01)0.70 (0.01) 2.66 (1.94)*2.66 (1.94)* -1.96 (1.03)-1.96 (1.03)

33 -1.22 (0.27)-1.22 (0.27) 2.66 (2.87)***2.66 (2.87)*** -3.88 (1.21)-3.88 (1.21)

44 1.54 (0.51)1.54 (0.51) 0.87 (1.95)*0.87 (1.95)* -0.67 (0.59)-0.67 (0.59)

55 -2.06 (1.01)-2.06 (1.01) 1.10 (3.39)***1.10 (3.39)*** 0.316 (0.38)0.316 (0.38)

Post-MeanPost-Mean -4.67 (1.00)-4.67 (1.00) 1.33 (2.69)**1.33 (2.69)** -6.00 (3.14)***-6.00 (3.14)***

Difference (Post-Pre)Difference (Post-Pre) (1.35)(1.35)

Panel D: Changes in Employment

Results:: Asset Quality ratios:Loan loss provision has increased in the post privatization period. The privatized firms’ loan loss provision of 3.05 is significantly different from that of rival banks at 1%.

Impaired assets of the privatized banks have also worsened in the post privatization period.

Profitability

ROA: Profitability has reduced in the post privatization period, even so the privatized banks are more profitable than rivals albeit the difference is not statistically significant.

ROE of the privatized banks have also fallen. This could be due to the increase in equity following the privatization and the issue of more equity.

Efficiency

No perceptible change in the efficiency of the privatized firms vis-à-vis the rivals.

Changes in staff levels:

The privatized firms have significantly reduced their staff levels. The change in staff levels of -4.67% is significantly different from that of the rivals of 1.33% at the 1% level.

Overall observation:

Consistent with Otchere (2004) the privatized firms have not significantly improved upon their operating performance.

Challenges to African Bank Challenges to African Bank PrivatizationsPrivatizations

Volatile economic and political Volatile economic and political environmentenvironment

Quality of dataQuality of data Measurement issues (e.g., benchmarking)Measurement issues (e.g., benchmarking) Limited measures of privatization gains Limited measures of privatization gains

(private gains versus social gains)(private gains versus social gains)

– Bank profitability (ROE, ROA, NPL)Bank profitability (ROE, ROA, NPL)– Cost efficiencyCost efficiency

Gains from Bank Privatizations? Gains from Bank Privatizations? Incomplete! Incomplete!

Performance and cost efficiency effects are Performance and cost efficiency effects are incomplete in terms of judging the overall gains of incomplete in terms of judging the overall gains of bank privatizations bank privatizations (Private vs. social gains) (Private vs. social gains) – Lending to government vs. private sectorLending to government vs. private sector

– Non-intermediation (lending to government and non-Non-intermediation (lending to government and non-banking activities) dominates in terms of performancebanking activities) dominates in terms of performance

– Rent-seeking and dysfunctional banking systemRent-seeking and dysfunctional banking system

Thus, apparently positive performance is a reflection Thus, apparently positive performance is a reflection of malfunctioning banking system and rent-seeking of malfunctioning banking system and rent-seeking behaviorbehavior

Improvements in quality of financial intermediation (notice Improvements in quality of financial intermediation (notice exorbitant bank spreads in Africa)exorbitant bank spreads in Africa)

Improvements in in capacity to manage and control risk Improvements in in capacity to manage and control risk Improvements in bank governanceImprovements in bank governance

– Management, compensation structure, ownership, board Management, compensation structure, ownership, board effectivenesseffectiveness

Bank privatization and stock market development Bank privatization and stock market development – Market depth and liquidity; Pricing efficiency; Risk managementMarket depth and liquidity; Pricing efficiency; Risk management

Quality of bank regulationQuality of bank regulation– (Cull, Sorge, Senbet, JMCB, 2005)(Cull, Sorge, Senbet, JMCB, 2005)

Toward Complete Gains from Bank Toward Complete Gains from Bank PrivatizationsPrivatizations

Conclusions Conclusions Lessons for Development BanksLessons for Development Banks

Development banks should play a role in creating Development banks should play a role in creating an environment for gains from bank an environment for gains from bank privatizations; gains from bank privatizations are privatizations; gains from bank privatizations are linked to economic developmentlinked to economic development

Thus, an indirect role of development banks in Thus, an indirect role of development banks in economic development through the development economic development through the development of traditional financial institutionsof traditional financial institutions

Strengthening institutions: bankruptcy code, Strengthening institutions: bankruptcy code, contract enforcement, rule of law, etc.contract enforcement, rule of law, etc.

For share issue privatizations: get corporate For share issue privatizations: get corporate governance right; concentrated ownership, yet governance right; concentrated ownership, yet protection of minority shareholdersprotection of minority shareholders

ConclusionsConclusionsLessons for Development BanksLessons for Development Banks

Development banks should play a role in the Development banks should play a role in the development of benchmark bond markets as well as development of benchmark bond markets as well as stock markets – e.g., regional integration of thin stock markets – e.g., regional integration of thin local markets – regional stock marketslocal markets – regional stock markets

Human capital and financial manpower Human capital and financial manpower development; also, regional synergy in skills development; also, regional synergy in skills development development

Ultimately helping establish an appropriate platform Ultimately helping establish an appropriate platform for the development banks themselves to be for the development banks themselves to be privatizedprivatized

Separating the development agenda from ownership Separating the development agenda from ownership structure; development banks need not be owned by structure; development banks need not be owned by governments governments