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The Impact of Financial Liberalization on the Performance of the Algerian Public Banks

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The Impact of Financial Liberalization on the Performance of the Algerian Public Banks DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA MINISTRY OF HIGHER EDUCATION AND SCIENTIFI RESEARCH UNIVERSITY OF TLEMCEN FACULTY OF ECONOMICS, COMMERCE AND MANAGEMENT The Impact of Financial Liberalization on the Performance of the Algerian Public Banks. Thesis submitted as a partial fulfillment of the “Doctorate” degree in Economics Thesis presented by: Supervised by: Souad GUESMI Prof. Mohamed BENBOUZIANE Jury Members: Prof. Abdelkader DERBAL President University of Oran Prof. Mohamed BENBOUZIANE Supervisor University of Tlemcen Prof. Ali BOUHANNA Examiner University of Tlemcen Dr. Mohamed BEZZAOUYA Examiner University of Tlemcen Dr. Soufiane SLIMANE Examiner University of Relizane Dr. Mohamed BENSAID Examiner University of Sidi Belabbes 2014-2015 Dedication This thesis is a dedication to my husband, my dearest father and to my beloved tender mother who mean everything to me. To my brothers who mean a lot to me. To all my family -Guesmi and Boutayeba- who believed in me and supported me in practical and constant ways, their confidence in my abilities and their belief in the importance of this work have ensured its completion. i Acknowledgments I am extremely grateful to the almighty Allah who bestowed me the understanding and perseverance to make this accomplishment possible. I would like to express my special thanks, gratitude, and appreciation to my supervisor Prof. Mohamed Benbouziane for his guidance, suggestions, and valuable comments made this work possible. My special thanks and respects go to the members of the examining committee, for their consent to take part in reading and discussing this thesis. This thesis would not have been accomplished without the help and support of my husband Dr. Faiçal Boutayeba. Finally, I express my sincere gratitude to my parents for their prayers and their moral support. Thanks a lot. ii Abstract: The main aim of this study is to investigate the impact of financial liberalization on the performance of the Algerian public banks. In order to achieve this goal, a quantitative analysis has been conducted for a panel data sample covering five public banks over the period (1997-2012). The model of this study includes the determinants of performance which are bank specific variables and macroeconomic variables. The banks’ performance was proxied by using return on assets (ROA), return on equity (ROE), and net interest margin (NIM). Besides, the financial liberalization was also proxied by using: the size of intermediation, real interest rates, and bank concentration. The study showed evidence that both the size of intermediation and bank concentration impact positively the performance of Algerian public banks. In contrast, it showed that real interest rates do not impact this latter. Keywords: financial liberalization, public banks’ performance, panel data, Algeria. iii Table of Contents Dedication…………………………………………………………………………….……….i Acknowledgements………………………………………………………………….……….ii Abstract……………………………………………………………………………...……….iii Table of contents………………………………………………………………….…………iv List of tables…………………………………………………………………….….……….viii List of figures………………………………………………………………………..……….ix List of appendixes……………………………………………………………………….……x Introductory Chapter…………………………………………………….....…01 1.1. Preface……………………………………………………………………………………01 1.2. Research Problematic……………………………………………………………………02 1.3. Research Hypothesis……………………………………………………………………..02 1.4. Importance of the Study……………………………………………………………….…02 1.5. Objectives of the Study………………………………………………………………..…02 1.6. Justification for the choice of subject…………………………………………………....03 1.7. Data and Methodology……………………………………………………………..…….03 1.8. Previous Studies……………………………………………………………………..…..04 1.9. Difficulties of the Study……………………………………………………………..…..06 1.10. Limitations of the Study…………………………………………………………….…06 1.11. Structure of the Study…………………………………………………………….……06 Chapter Two: Theoretical Framework………………………………………07 Introduction………………………………………………………………………………….08 2.1. The importance of financial development sector………………………………….….09 2.1.1. Defining financial system…………………………………………………………..…09 2.1.2. Structure of a Financial System……………………………………………………....09 2.1.3. The role of banking sector on economy……………………………………………....11 2.1.4. What is financial development?....................................................................................11 iv 2.1.5. The relationship between FD and Economic growth……………………………..…..14 2.1.6. The hypotheses of financial development……………………………………….….. 16 2.2. The impact of financial liberalization…………………………………………………17 2.2.1. Financial repression before financial liberalization………………………………..17 2.2.1.1. Rational for and policies of financial repression………………………………….…18 2.2.1.2. The effects of financial repression……………………………………………………20 2.2.2. The process of financial liberalization………………………………………………23 2.2.2.1. The theoretical arguments for financial liberalization……………………………….24 2.2.2.2. Elements of financial liberalization………………………………………………... 25 2.2.2.3. The McKinnon Shaw paradigm (analysis)…………………………………………..27 2.2.2.4. Extensions and criticisms of the McKinnon Shaw approach…………………….…28 2.2.2.5. Financial liberalization and banking performance and efficiency……………….…29 2.2.2.6. Potential benefits qualifications and risks to liberalization………………………...32 Conclusion……………………………………………………………………………………36 Chapter Three: Empirical Evidence……………………………..………..….37 Introduction…………………………………………………………………………….…….38 3.1. East Asia and Pacific……………………………………………………………….……..39 3.2. Europe and Central Asia………………………………………………………………….45 3.3. Latin America and the Caribbean………………………………………………………..47 3.4. Sub-Saharan Africa………………………………………………………………………49 3.5. Middle East and North Africa……………………………………………………………53 3.6. South Asia………………………………………………………………………………..54 Conclusion…………………………………………………………………………………….58 v Chapter Four: Banking System Reform in Algeria…………………...………….59 Introduction……………………………………………………………………………….…60 4.1. Algerian banking system under financial repression …………………………..…….61 4.1.1. From 1962 to 1979……………………………………………………………….…...…61 4.1.2. From 1980 to 1989……………………………………………………………....………65 4.2. Financial liberalization of the Algerian banking system..............................................67 4.2.1. Algerian banking system under the law 90/10..............................................................68 4.2.2. Development of the Algerian banking system after the law of 90/10…………….……72 4.2.3. The Adoption of the financial liberalization in the Algerian banking system…….…74 Conclusion……………………………………………………………………………………83 Chapter Five: Econometric Methodology and Results Discussion...............84 Introduction……………………………………………………………………………….…85 5.1. General Framework and Objectives of the Econometric Study..................................86 5.2. The Decision Rule………………………………………………………………………86 5.3. Data, Methodology and the Model Used………………………………………………87 5.3.1. Data……………………………………………………………………………….……87 5.3.2. Research Methodology and Model Specification……………………………….……87 5.3.2.1. Research methodology………………………………………………………………87 5.3.2.2. Model specification………………………………………………………………….89 5.4. Presentation and interpretation of empirical results…………………………………96 5.4.1. Results of stationary tests………………………………………………………………96 5.4.2. Results of first selections………………………………………………………………98 vi 5.4.3. Results of second selections………………………………………………….….……101 5.4.4. Results of third selections………………………………………………………..……107 5.4.5. Results of fourth selections……………………………………………………………111 5.5. Results discussion…………………………………………………………………..…116 Conclusion……………………………………………………………………………….…118 General Conclusion……………………………………………………………………119 References…………………………………………………………………………………123 Appendixes…………………………………………………………………………..…….143 vii List of Tables N Title Page 01 The level of banks' margin, capital, deposit allocation, liquidity and profit 31 02 Evolution of withdrawal’s public institutions for the period (77-81) 63 03 The most important proposals put forward by the IMF 75 04 Credits to state and economy 81 05 Results of panel unit root tests (significant at 5%) 97 06 Results of Kao's Residual Co-integration Test for S1, S2, and S3 98 07 Equation estimation for S1 99 08 Equation estimation for S2 100 09 Equation estimation for S3 101 10 Results of Kao's Residual Co-integration Test for S4, S5, and S6 102 11 Results of Hausman specification test for S4 102 12 Granger causality test for S4 103 13 Hausman specification results test for S5 104 14 Granger causality test for S5 104 15 Hausman specification results test for S6 105 16 Granger causality test for S6 106 17 Results of Kao's Residual Co-integration Test for S7, S8, and S9 107 18 Hausman specification results test for S7 107 19 Granger causality test for S7 108 20 Hausman specification results test for S8 109 viii 21 Granger causality test for S8 109 22 Hausman specification results test for S9 110 23 Granger causality test for S9 111 24 Results of Kao's Residual Co-integration Test for S10, S11, and S12 111 25 Hausman specification results test for S10 112 26 Granger causality test for S10 113 27 Hausman specification results test for S11 113 28 Granger causality test for S11 114 29 Hausman specification results test for S12 115 30 Granger causality test for S12 115 List of Figures N Title Page 01 The Channels through which the financial sector influences 13 economic growth 02 A Repressed Financial System 20 03 Mckinnon-shaw financial repression 21 04 Rates of rediscount (1990-2010) 73 05 Real interest rates (1994-2013) 76 06 The evolution
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