Subika Farazi

The Status of Bank Lending to Smes in the Middle East and North Africa Region: The Results of a Joint Survey of the Union of Arab Bank and the World Bank

Among the principal constraints for SME lending is the lack of SME transparency, poor credit information from credit registries and bureaus, and weak creditor rights. If constraints can be addressed, lending can potentially reach bank targets of 21 percent. State banks still play an important role in financing SMEs in the MENA region, but they use less sophisticated risk management systems than private banks. On another hand, credit guarantee schemes are a popular form of support to SME finance in the region, and are associated with higher levels of SME lending. The paper concludes that MENA policy makers should prioritize improvements in financial infrastructure, including greater coverage and depth of credit bureaus, improvements in the collateral regime (especially for movable assets), and increased competition between banks and also non-banks. Weaknesses in insolvency regimes and credit reporting systems should also be alleviated. Direct policy interventions through public banks, guarantee schemes, lower reserve requirements and subsidized lending and other measures have played a role in compensating for MENAs weak financial infrastructure, but more sustainable structural solutions are needed.

Bank Ownership and Performance in the Middle East and North Africa Region

Abstract Although both domestic and foreign private banks have gained ground in Middle East and North Africa (MENA) in recent years, state banks continue to play an important role in many countries. Using a MENA bank-level panel dataset for the period 2001–2008, the article contributes to the empirical literature on bank ownership and performance by documenting recent ownership trends and assessing the relations between bank ownership and performance in MENA while accounting for key bank characteristics such as size and balance sheet composition. The article is the first to analyze headline performance indicators as well as their key drivers and finds that state banks exhibit significantly weaker performance, despite their larger size and potential scale economies. This result is mainly driven by larger holdings of government securities, higher costs due to larger staffing, and larger loan-loss provisions reflecting weaker asset quality. These results seem to reflect both operational inefficiencies and policy mandates. Taken together, the results do not reject the development role of state banks, but show that their policy interventions come at a cost. As such, the article argues that there is scope to reduce the share of state banks in some MENA countries and to clarify the mandates, improve the governance, and strengthen the operational efficiency of most state banks in the region.

Lazy Banks? Government Borrowing and Private Credit in Developing Countries

When government borrows one dollar from domestic banking sector, how much does it reduce private credit in developing countries? There is surprisingly no reliable estimate in the literature on this. We provide robust estimates of the causal effect of government borrowing on private credit using panel data on 60 developing countries and instruments based on the structure of the political system. The point estimates indicate that a

Global liquidity and external bond issuance in emerging markets and developing economies

1.00 more borrowing by governmentreduces private credit by about

Informal Firms and Financial Inclusion: Status and Determinants

1.40. We also estimate bounds on the crowding out effect under the assumption that the instruments are plausibly exogeneous. The evidence is consistent with a lazy bank model of bank behavior in developing countries.

Bank Competition, Concentration, and Credit Reporting

Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve’s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.

Stock Price Synchronicity

Many firms in the developing world -- including a majority of micro, small, and medium enterprises -- operate in the informal economy. The informal firms face a variety of constraints, making it harder for them to do business and grow. Lack of access to finance is often cited as the biggest operational constraint these firms face. This paper documents the use of finance and financing patterns of informal firms, highlights differences between use of finance by formal and informal firms, and identifies the most significant characteristics of informal firms that are associated with higher use of financial services. The analysis shows that use of loans and bank accounts for business by informal firms is very low and a vast majority finances their day-to-day operations and investments through sources other than financial institutions (internal funds, moneylenders, family, and friends). A majority of informal firm owners would like their firms to become formal but do not do so as it would require them to pay taxes. Registered firms are 54 percent more likely to have a bank account and 32 percent more likely to have loans. Results also show that firm size, the level of education of the owner, and whether the owner has a job in the formal sector are significantly associated with financial inclusion of informal firms.