PONDERADO CATEGORIZACIÓN

It was observed from the earlier empirical chapters that there could be significant differences in excess liquidity across bank typologies in respect to financial liberalisation, business cycle and the recent financial crisis. This chapter aimed to investigate further if these differences persisted in terms of lending. To analyse this, lending at bank-level was examined to see if there were any significant differences across banks according to different typologies. Lending was measured by gross loan in million US dollars. It was summed up for the relevant category when a particular typology was used. For example, there would be two categories of public and private banks for the ownership typology. Following the earlier empirical chapters, the same bank typologies were applied here which were based on ownership (public and private), size (large and small), mode of operation (Islamic and conventional) and age (old and new).

Public and Private Banks

It was observed that banks differed in their lending behaviour in terms of ownership (De Bonis, 1998). Interest rates of public banks were lower than

the private banks and public banks lent more to the large firms. Public banks also lent more in depressed areas. Although some earlier studies concluded that public banks were less efficient and profitable than the private banks (Martiny and Salleo, 1997; Sapienza, 2004), these findings should not be taken on its own as public banks did not operate with the sole objective of profit maximisation but they also had other broader social objectives to fulfil. So, it would be interesting to see whether lending differed across banks according to ownership.

Figure 6.2: Gross loan according to ownership

Sources: Author’s own calculation based on data from Bankscope and Bangladesh Economic Review, various issues.

The graph type was selected to show the comparative scenario of lending between two different types of banks. Significant difference among public and private banks could be observed in terms of direction where share of private banks was less than 30 per cent at the beginning of the study period but continuously increased and more than doubled in the next 15 years to reach almost 70 per cent of the share of lending. The share of public banks decreased continuously over this period and experienced an almost opposite identical scenario where the share was above 70 per cent in 1997 while it was around 30 per cent in 2011. The increase of private banks’ share was continuous almost throughout the period (and vice versa for public banks) except in the first two and the last three years where it

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Public bank gross loan

Private bank gross loan

remained almost constant. Most importantly, over this period of time, the majority share of lending changed from public to private banks.

Large and Small Banks

It was observed by some earlier studies that large banks mainly relied on ‘hard’ information such as financial statements and credit scoring (Haynes et al., 1999; Cole et al., 2004; Berger et al., 2005) while small banks mainly relied on ‘soft’ information which included borrowers’ characteristics and conditions of local market (Park and Pennacchi, 2004). Besides, small banks relied on bank-firm relationship as well as depending on the behaviour of more informed investors with a lag (Barron and Valev, 2000). It was also found that smaller banks had comparative advantage in lending to smaller organisations due to their extensive use of soft information (Kashyap and Stein, 1997). Another interesting observation was that small banks did possess some advantage over the large banks due to the fact that soft information were not easily transferrable while the hard information were (Sharpe, 1990; Rajan, 1992). However, since large firms had more information in record, large banks tended to lend more to large firms. This dichotomy of hard and soft information was also respectively referred to as ‘transaction-based’ and ‘relationship’ lending (Berger and Udell, 2002). According to this, small banks would do better in case of ‘relationship’ lending while large banks would do better in cases of ‘transaction-based’ lending. Dependence on hard information was also called the ‘cookie cutter’ approach and was supported by empirical studies (Cole et al., 2004).

Kashyap and Stein (1995) observed that smaller banks were more responsive to monetary policy changes and they lent more to small businesses whose demands were procyclical (Peek and Rosengren, 1995; Berger et al., 1998). Another finding of the earlier studies was that small banks made ‘high powered loans’. This ‘high powered loans’ implied that the impact was bigger on the economy41 _{when lending of small banks}

41 _{This is measured by gross state product, number of employees, number of firms and real}

declined by a dollar than decline in lending by a dollar of large banks (Hancock and Wilcox, 1998).

However if large banks were public banks (as in many cases) then the lending of large banks might include the implicit guarantee of not being withdrawn. This was mainly related to the hypothesis of ‘too big to fail.’ Additionally, large banks were able and lent at a greater distance (Kashyap and Stein, 2000; Berger et al., 2005).

As large and small banks were grouped according to their assets, therefore it could be observed that there were differences in terms of lending among banks according to this criterion. The magnitude of the aggregate effect of it on the economy depended on the ratio of small and large firms in the economy. However, it was not always true that small banks covered most of the small firm lending. For example, Berger and Black (2011) found that large banks covered 60% of the small firms lending. Similar findings were also observed by de la Torre et al. (2010).

Figure 6.3: Gross loan according to size

Sources: Author’s own calculation based on data from Bankscope and Bangladesh Economic Review, various issues.

Figure 6.3 showed that if there was any difference in lending between large and small banks. It could be observed that share of lending by small

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Large bank gross loan Small bank gross loan

banks were less than 30 per cent at the beginning of the study period but the share continuously increased, except the last year, and more than doubled reaching more than 60 per cent by the end of this study period. On the other hand, the share of large banks almost continuously decreased throughout this period reaching a share of less than 40 per cent in 2011 which was more than 70 per cent in 1997. This change of direction and amount led the majority of share in lending changing from large to small banks.

Islamic and Conventional Banks

The third category of bank classification was based on their mode of banking operation. Islamic banking in Bangladesh flourished significantly and this study also aimed to look at whether there was any difference in lending between Islamic and conventional banking system.

On one side, it was expected that Islamic banks could be under additional pressure to lend due to their mode of operation where profit and loss were shared when returns for depositors were calculated (Khan and Ahmed, 2001). Although it was true that Islamic banks paid according to profit-loss sharing and, therefore, were not forced theoretically to pay a specific amount on deposit but practically they needed to be competitive to survive the competition since there could be loss in some cases which they needed to compensate with higher profits42_{. The additional pressure could be}

related to screening about whom to lend as Islamic banks could not force borrowers to pay original and profit if they make loss.

On the other hand, it was also witnessed that religious feeling played a key role in the mind of most of the depositors and there was less chance of withdrawal of deposits even if the return was not competitively high. In a study by Gerrard and Cunningham (1997), it was observed that over 60% of Muslim borrowers declared that they would not withdraw their deposits even if there was no return. This probably played a key role during liquidity

42 _{Moreover, due to the fact that Islamic banks were not allowed to carry out all types of}

crisis when it was found that Islamic banks faced less withdrawal than their conventional counterparts (Zaheer and Farooq, 2013). Moreover, it was also found in some studies that Islamic banks were better capitalised, had superior asset quality and strong liquidity positions. Therefore, it would be interesting to see how these two types of banks differed in their lending behaviour after and with the process of financial liberalisation.

The lending data for these two types of banks are presented in Figure 6.4. This graph showed that lending of conventional banks held the majority of share and it remained so throughout the period of this study. It was more than 90 per cent at the beginning and though it experienced a fall, it still had a share of around 80 per cent by the end of this period. Share of lending of Islamic banks were very low (around 5 per cent) but it continuously rose, except in 1998, reaching almost 20 per cent of the share of lending.

Figure 6.4: Gross loan according to mode of operation

Sources: Author’s own calculation based on data from Bankscope and Bangladesh Economic Review, various issues.

New and Old Banks

Banks could also differ in terms of lending due to their difference in age. It was seen that new banks might be in a relatively disadvantageous position as they took some time before starting operating at their full capacity. This

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Islamic bank gross loan Conventional bank gross loan

was known as the ‘learning by doing’ hypothesis (Mester, 1996; DeYoung and Hasan, 1998; Kraft and Tirtiroglu, 1998). This time period was found to be between three to five years and during that time, there was probability of small bank-failure (DeYoung, 1999).

Therefore, it could happen that banks perform better with age. This was supported empirically by Staikouras et al. (2007) who found that banks established before performed better than the banks established later. However, management could become less proactive and prominent overtime which might decrease their efficiency (Esho, 2001).

Thus, it would be interesting to see the effect of bank age on lending along with the process of the financial liberalisation. Figure 6.5 shows the lending of new and old banks.

Figure 6.5: Gross loan according to age

Sources: Author’s own calculation based on data from Bankscope and Bangladesh Economic Review, various issues.

It could be seen from the graph that there was difference between old and new banks. As mentioned earlier, banks established after 1990 were in the new bank category while those established before 1990 were in the old category. Share of lending of old banks was much higher than the new banks but they converged overtime. The share was more than 90 per cent

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Old bank gross loan New bank gross loan

in 1997 but gradually decreased and reached a share of less than 60 per cent by 2011. Contrarily, the share of new banks experienced a sharp rise in their share from a mere share of less than 5 per cent in 1997 to more than 40 per cent in 2011.