Diapositive 1

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ASIA-LINK PROGRAMMEEuro-Philippines Network in
Banking FinanceEnhancing Teaching and
ResearchAsialink/ASIE/B7-3010/2005/105-139
RESEARCH CONFERENCE ONSAFETY AND EFFICIENCY
OF THE FINANCIAL SYSTEM 27 AUGUST 2007
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PHILIPPINE RURAL BANKS AND ECONOMIC PERFORMANCE

• Celine Crouzille
• Jessica Los Banos
• Emmanuelle Nys
• Alain Sauviat

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Objectives of the Study

• 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

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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.

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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-develope
  d, and developed using macroeconomic data from
  the Philippine National Statistics Office,
  National Statistical Coordination Board and the
  Bangko Sentral ng Pilipinas.

,
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Per Capital Real Gross Regional Domestic Product
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Bank Statistics (2005)
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Data
Variable Description
Regional economic structure Regional 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) 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 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
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Estimation Results Rank-order correlation
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Unit Root Tests

• 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.

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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).

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Results of Cointegration Tests
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Long Run Estimation Results
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Long Run Estimation Results
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Conclusion

• 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.

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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.

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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.