Adolfo Barajas

The impact of liberalization and foreign investment in Colombia's financial sector

Abstract This study analyzes financial liberalization measures undertaken in 1990, of which an opening to foreign investment was a major component. After a brief description of the major changes in legislation on foreign investment, we compare performance of foreign-owned vs. domestic banks, first using a descriptive approach, then in a more systematic manner using econometric analysis. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia, by increasing competition, lowering intermediation costs and improving loan quality. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality, particularly among domestic banks.

Interest Spreads in Banking in Colombia, 1974-96

This paper examines the determinants of the high intermediation spread observed in the Colombian banking sector for over two decades. A reduced-form equation is estimated on the basis of a bank profit maximization model that permits a decomposition into operational costs, financial taxation, market power, and loan quality. Although the average spread did not change between the preliberalization (1974-88) and postliberalization (1991-96) periods, its composition did, with market power being significantly reduced and the responsiveness to loan quality increased. Colombias progress in reducing operational costs and financial taxation and improving loan quality will determine whether it can narrow the spread.

The Finance and Growth Nexus Re-Examined: Do All Countries Benefit Equally?

A large theoretical and empirical literature has focused on the impact of financial deepening on economic growth throughout the world. This paper contributes to the literature by investigating whether this impact differs across regions, income levels, and types of economy. Using a rich dataset for 150 countries for the period 1975–2005, dynamic panel estimation results suggest that the beneficial effect of financial deepening on economic growth in fact displays measurable heterogeneity; it is generally smaller in oil exporting countries; in certain regions, such as the Middle East and North Africa (MENA); and in lower-income countries. Further analysis suggests that these differences might be driven by regulatory/supervisory characteristics and related to differences in the ability to provide widespread access to financial services.

The Global Financial Crisis and Workers' Remittances to Africa : What's the Damage?

Using data on the distribution of migrants from Africa, GDP growth forecasts for host countries, and after estimating remittance multipliers in recipient countries, this paper estimates the impact of the global economic crisis on African GDP via the remittance channel during 2009-2010. It forecasts remittance declines into African countries of between 3 and 14 percentage points, with migrants to Europe hardest hit while migrants within Africa relatively unaffected by the crisis. The estimated impact on GDP for relatively remittance-dependent countries is 2 percent for 2009, but will likely be short-lived, as host country income is projected to rise in 2010.

Did the Basel Accord Cause a Credit Slowdown in Latin America

Drawing from a unique data set comprising 2,893 banks and 152 countries over the period 1987 to 2000, we test whether the adoption of the Basel Accord by Latin American and Caribbean countries was responsible for the serious slowdowns in credit growth experienced by these countries. We find that, on average, both bank capitalization and lending activities in Latin America increased after Basel. Consequently, Basel did not seem to lead to an overall credit decline. However, we do find evidence that loan growth became more sensitive to some risk factors. Our study suggests that the upcoming adoption of Basel II might cause greater procyclicality of credit.

Too Cold, Too Hot, or Just Right? Assessing Financial Sector Development Across the Globe

This paper introduces the concept of the financial possibility frontier as a constrained optimum level of financial development to gauge the relative performance of financial systems across the globe. This frontier takes into account structural country characteristics, institutional, and macroeconomic factors that impact financial system deepening. We operationalize this framework using a benchmarking exercise, which relates the difference between the actual level of financial development and the level predicted by structural characteristics, to an array of policy variables. We also show that an overshooting of the financial system significantly beyond levels predicted by its structural fundamentals is associated with credit booms and busts.

Can Islamic Banking Increase Financial Inclusion

Financial inclusion has become an increasingly important concern for a vast number of countries worldwide. At the same time, a fast-growing amount of literature has emerged to examine its measurement, determinants and impacts. Governments have made the promotion of it a priority. For example, the World Bank’s 2014 Global Financial Development Report (GFDR), devoted to financial inclusion, reports that more than two-thirds of regulatory and supervisory agencies have been tasked with encouraging financial inclusion, and more than 50 countries have set formal targets. Last year, the World Bank President announced a global target of universal financial access by 2020. Defined as the share of the population who use financial services, financial inclusion has proven to be linked to desirable economic outcomes above and beyond those associated with the more familiar concept of financial depth. In this chapter, we analyse the existing country-level information on both financial inclusion and the penetration or presence of Islamic banking in order to ascertain the extent to which Islamic banking has contributed to financial inclusion. This chapter tests for a possible financial inclusion of Islamic banking relationships across a wide variety of measures. Our findings suggest a weak and tentative evidence of Islamic banking’s positive impact on some types of inclusion. This weakness in the results may be partially related to data issues, including the limited coverage of Islamic banking indicators and of financial inclusion indicators among the Organization for Islamic Cooperation (OIC) countries.

Remittances Channel and Fiscal Impact in the Middle East, North Africa, and Central Asia

This paper identifies a remittances channel that transmits exogenous shocks, such as business cycles in remittance-sending countries, to the public finances of remittance-receiving countries. Using panel data for remittance-receiving countries in the Middle East, North Africa, and Central Asia, three types of results emerge. First, remittances appear to be strongly procyclical vis-a-vis sending country income. Second, remittances tend to be spent on consumption of both imported and domestically produced goods, rather than on investment. Third, shocks in the sending countries are transmitted via remittances to the public finances—specifically, tax revenues—of receiving countries. In the case of the 2009 global downturn, this impact was particularly strong for several countries in the Caucasus and Central Asia, whereas in the subsequent recovery in 2010 virtually all receiving countries benefitted from an upturn in remittance-driven tax revenues.

Interest Spreads in Banking : Costs, Financial Taxation, Market Power, and Loan Quality in the Colombian Case 1974-96

This paper examines the determinants of the high intermediation spread observed in the Colombian banking sector for over two decades. A reduced-form equation is estimated on the basis of a bank profit maximization model that permits a decomposition into operational costs, financial taxation, market power, and loan quality. Although the average spread did not change between the pre liberalization (1974-88) and post liberalization (1991-96) periods, its composition did, with market power being significantly reduced and the responsiveness to loan quality increased. Colombia`s progress in reducing operational costs and financial taxation and improving loan quality, will determine whether it can narrow the spread.

Recent Credit Stagnation in the Mena Region; What to Expect? What Can Be Done?

This paper examines the recent credit slowdown among Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth is likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals - capitalization and loan quality - helped to explain differences in credit growth across banks and countries.