research conference on safety and efficiency of the financial system 27 august 2007 asia-link...

RESEARCH CONFERENCE ONSAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM

27 AUGUST 2007

ASIA-LINK PROGRAMMEEuro-Philippines Network in Banking & FinanceEnhancing Teaching and ResearchAsialink/ASIE/B7-3010/2005/105-139

PHILIPPINE RURAL BANKS AND ECONOMIC PERFORMANCE

Celine CrouzilleJessica Los BanosEmmanuelle NysAlain Sauviat

•To examine the link between financial and economic development at the regional level in the Philippines

•To determine the role played by rural banks in regional economic activity

Objectives of the Study

Finance and Growth Nexus Existing studies are anchored on the argument that financial

liberalization and development leads to greater capital formation and productivity, and consequently economic growth.

Since these studies are often cross-country investigations, there is a need to control for institutional, social and political disparities.

Focus on the Philippines at the regional level allows for a valid assumption that macroeconomic conditions and political governance are relatively homogeneous across regions in the country.

Concentration on the structural differences in the banking industry among the regions, more specifically, on the special role of rural banks, to gain deeper insights into the finance and growth nexus in the Philippines.

Methodology and Data

,

Cointegration panel data analysis based on the work of Apergis et al. (2007), Christopoulos and Tsionas (2004) and Pedroni (2004):

Rank-order correlation tests Panel data tests

unit root tests and cointegration tests

The model is applied on four sub-samples of regions in the Philippines (all regions, developed, intermediate developed regions and less developed regions).

Regions were initially classified as less-economically-developed, intermediate-developed, and developed using macroeconomic data from the Philippine National Statistics Office, National Statistical Coordination Board and the Bangko Sentral ng Pilipinas.

Per Capital Real Gross Regional Domestic Product

Source: National Statistical Coordination Board . *CARAGA figure corresponds to 1997.

1993 1993 Rank 2005

2005 Rank

Period Growth

Developed regions

NCR 24793 1 35742 1 44%

CAR 11561 3 17919 2 55%

Northern Mindanao 9721 6 14829 3 53%

Intermediate developed regions

Davao 10169 5 13892 4 37%

Central Visayas 9464 7 13518 5 43%

South Luzon 12477 2 13447 6 8%

Western Visayas 9405 8 12825 7 36%

Socksargen 9021 9 11477 8 27%

Central Luzon 10688 4 11142 9 4%

Less developed regions

Zamboanga Peninsula 7620 10 10159 10 33%

Ilocos 5388 13 7727 11 43%

Cagayan Valley 5591 12 7649 12 37%

CARAGA* 6293 11 6690 13 6%

Eastern Visayas 5305 14 6678 14 26%

Bicol 5224 15 6632 15 27%

ARMM 3439 16 3433 16 0%

Developed regions Intermediate developed regions Less developed regions ABS UKB TB RCB ABS UKB TB RCB ABS UKB TB RCB

Bank Office NMS 37.4% 28.3% 7.59% 1.51% 46.23% 20.89% 8.29% 17.05% 16.3% 7.13% 7.13% 1.34% RMS 100% 75.68% 20.29% 4.03% 100% 45.18% 17.94% 36.88% 100% 43.53% 8.21% 48.26% Bank Assets NMS 87.09% 81.63% 5.25% 0.21% 10.01% 7.81% 1.17% 1.03% 2.9% 2.32% 0.17% 0.41% RMS 100% 93.72% 6.03% 0.25% 100% 77.99% 11.72% 10.29% 100% 79.98% 5.99% 14.03% Deposits NMS 70.09% 63.83% 5.89% 0.38% 23.39% 19.13% 2.55% 1.71% 6.52% 5.55% 0.38% 0.59% RMS 100% 91.06% 8.4% 0.54% 100% 81.79% 10.89% 7.32% 100% 85.08% 5.89% 9.03% NLP NMS 89.65% 80.93% 8.19% 0.53% 7.84% 5.15% 1.01% 1.69% 2.51% 1.54% 0.15% .82% RMS 100% 90.28% 9.14% 0.59% 100% 65.62% 12.82% 21.56% 100% 61.44% 6.03% 32.53% Source: BSP 2007

Bank Statistics (2005)

DataVariable DescriptionRegional economic structure

PC_RGRDP Per capita real domestic regional product

PC_RAgri Per capital gross value added in the agricultural and fisheries sector

Financial Development (Financial depth and local intermediation)

Credit Share of total net loans over nominal gross regional domestic product

Deposit Share of total deposits over nominal gross regional domestic product

Banking office density Number of banking offices per capita

Intermediation Total net loans over total deposits

Rural bank presence

RB Credit share Net loans granted by rural banks per region over total net loans granted per region

RB Resource share Share of total resources of rural banks per region over total resources for all banks per region

Estimation Results – Rank-order correlation

Table 2. Correlation Analysis: Spearman rank-order with PC_RGRDP as referent variable All regions Developed

regions Intermediate

developed regions Less developed regions

- PC_RAgri 0.083 -0.648*** 0.721 0.705***

Financial depth

- Credit 0.233*** 0.841*** -0.824 0.043

- Deposit 0.244*** 0.884*** 0.247** 0.246**

- Banking office density 0.652*** 0.948*** 0.314*** 0.358***

Local intermediation

- Intermediation 0.181*** 0.485*** -0.397*** 0.110

Rural banks market share

- RB Credit share -0.261*** -0.489*** 0.297*** 0.284***

- RB Resources share -0.380*** -0.653*** 0.080 0.313***

Boldface values denote a presence of a rank-order correlation. (***), (**) and (*) signify rejection of the null hypothesis of absence of rank-order correlation at the 1%, 5% and 10% levels respectively.

Unit Root TestsTable 3. Im, Pesaran and Shin (IPS) panel unit root tests

Variable in level Variable in first difference

IPS IPS

PC_RGDRP 2.77 -3.86***

Financial depth

- Credit 0.25 -2.75***

- Deposit -1.55**

- Banking office density -2.83 -1.52**

Local intermediation

- Intermediation 0.91 -2.67***

Rural banks market share

- RB Credit share 6.37 -2.04***

- RB Resources share 1.93 -2.69*** (***), (**) and (*) signify rejection of the null hypothesis of absence of unit root at the 1%, 5% and 10% levels respectively.

•Panel unit root tests support the hypothesis of a unit root for most variables in level.

•For Deposit, we reject the null hypothesis at the 5% level with the IPS test and at the 10% level with ADF test.

Cointegration Tests To test long-term relation between financial and

economic development using Pedroni ((1999);(2004)), given the heterogeneity of bank coverage and regional economic performance.

PC_RGRDP = c + Financial Depth/Intermediation + RBS

We use as explanatory variables: one of the two I(1) measures for financial depth (Credit or

Banking office density) or the local intermediation variable, and one of the two I(1) measures for rural banks market share (RB

Credit share or RB Resources share).

Results of Cointegration Tests

Dependent variable: PC_RGDRP

Financial depth

Credit Banking office density

All regions

(N1 = 204 (Included observations = 156) ; N2 = 16)

Financial depth -1.14 (3.60)

-2.35 (-1.94)

Rural bank credit market share -0.85 (-0.87)

-0.27 (-0.42)



Financial depth -2.48 (-3.30)

-2.94 (-2.15)


0.75 (1.67)

Long Run Estimation Results


Financial depth




Financial depth 7.633 (0.954)

0.99 (0.28)

Rural bank credit market share 5.68 (1.24)

1.28 (1.52)

Less developed regions for which RB Credit share > 25%

(N1 = 48 (Included observations = 36) ; N2= 4)


1.18 (4.00)


0.11 (1.50)

Long Run Estimation ResultsTable 5. Cointegration relationship: long run estimation between financial and economic development


Financial depth


All regions


Financial depth -1.14 (3.60)

-2.35 (-1.94)


-0.27 (-0.42)



Financial depth -2.48 (-3.30)

-2.94 (-2.15)


0.75 (1.67)




0.99 (0.28)


1.28 (1.52)

Less developed regions for which RB Credit share > 25%

(N1 = 48 (Included observations = 36) ; N2= 4)


1.18 (4.00)


0.11 (1.50)

N1 and N2 are respectively the number of observations and the number of cross-section units.

The study sought to identify the role played by rural banks, as part of the Philippine financial nexus, on regional economic development data.

The short period studied because of data availability, and the Asian financial crisis made it difficult to identify a long term relationship between financial and economic development in the Philippines.

Conclusion

Our results cannot show an impact of rural banks at the national level because rural finance represents only a small proportion of the banking activity.

However, in the case of the less developed regions, and when rural bank presence is relatively significant, an increase in the credit market share of rural banks strengthens the economic development of the region.

Conclusion

Our research may encourage continuing government efforts aimed at developing the Philippine rural banking sector and in increasing the volume of investments in the regions.

Policy implications may include the need to enhance confidence in the Philippine rural banking system, to encourage savings in regional rural banks, and to ensure efficient transfer of resources from savers to investors.

Conclusion

research conference on safety and efficiency of the financial system 27 august 2007 asia-link...

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