The Relationship between Institutions, Banking Regulation and Banking Development in the Mena Region
| Author | Samouel Beji; Darine Youssef |
| Position | Teaching Assistant and Ph.D. candidate at University Paris-Nord (France)/Ph.D. candidate at University Paris-Nord (France) |
| Pages | 267-282 |
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The issue of the paths to follow in order to realize the financial development for the developing economies and even for the developed ones has not finished provoking reactions, suggestions and polemics. So what makes this debate interesting? If we trust on the works of McKinnon (1973); Shaw (1973) and for the recent studies of Greenwood and Jovanovic (1990); Bencivenga and Smith (1991); Roubini and Sala-i-Martin (1992); King and Levine (1993); Levine (2004) we conclude that the financial development is prominent for the growth and the economic development. Although the fact that this question has not yet been distinct concerning the effectiveness and especially for the sense of the causality between the two concepts.
After the beginning of the vast wave of the financial globalization which accompanied a larger movement of globalization, we attend, since the end of the eighties, to many attempts of the developing countries to insert the globalized financial sphere. This trend is explained by the thought on the benefits of the openness and the exchange on a large scale. Following the example of the commercial liberalization, the policymakers in that period thought that the financialPage 268 integration would be advantageous for the economic development. Nonetheless, the financial crises episode for many developing countries, threw doubts about the advantages of the financial liberalism and the trust on the financial integration, yet defended strongly by the “Washington Consensus” ideas. Since these countries already engaged on reforms plans in order to abolish the restrictions on capital movements and to liberalize their financial systems. In the same way for the decision makers of economic policies in these emergent countries, this understood that the financial opening is not like the commercial liberalization. They also understood that the financial liberalization requested a number of economic, financial and almost institutional and political prerequisites, to do so. The question was then, how to liberalize instead of to liberalize or not, in order to realize the financial development and so the economic development.
These crises attracted the attention on the necessity to be doted by an adequate frame for the financial openness. Furthermore, it’s necessary to proceed by steps and by following progressive plan to avoid the risks of speedy openness. The examples of South Korea, China, Malaysia in Asia defend the idea of the sequencing and the importance of the gradualism in the process of the financial openness. Indeed, these countries opted for an exclusive and alternative way of financial openness, different from the globalized version recommended by the International Financial Institutions (IFI). This “protected” financial openness avoided them to live the mishaps of the other experiences of financial globalization.
This analysis lead us to express the same interrogations for the case of the South Mediterranean Sea countries (SMS), given the need to the economic development for these countries on one hand, and their specificities in the other. The aim of this paper is to try to show the importance of a gradualist approach in a globalized world. In fact, we will try to show, using a dynamic panel model with the GMM method, the importance of the banking regulation and the quality of the institutions in fostering the banking development without provoking risks and financial disturbances. In our econometric study, we will also test whether the banking development has an effect on the economic development in the SMS countries. The value of this study is to try to provide some clarification on a subject that has not been much discussed, namely, the link between institutional development and financial development. Our study is also important because it involves the region of North Africa and the Middle East (MENA), which has not been the subject of previous studies on the effectiveness of these links
The link between the financial openness and the financial development is not free of ambiguity. Indeed, in order to profit from the capital account liberalization, the financial systems have to be strengthened by a developed legal and institutional framework. Specifically, the economies where the legal and judicial system don’t guarantee the property rights, or don’t look after the enforcement of financial contracts, suffer in general from a lack of incentives to lending activities and the settlement of financial transactions. Lenders and borrowers legal rights, the credibility and transparency level of laws organizing the financial sector are the main factors that govern the financial sector in an economy, and give or not incentives to turn to the financial system. According to this, Claessens and al (2002)1 and Caprio and al (2004)2 founded that morePage 269 lenders are protected by an efficient judicial system, deeper is the financial system. By considering the effective level of legal and institutional development, we can then surround the ambiguity between the financial openness and financial development. Indeed, we can adopt the hypothesis that the financial development can be the outcome of the financial openness, only if the whole economy reaches a reasonable level of institutional and legal development.
In addition to the legal environment quality which is important to realize the financial development, we notice in the recent economic literature the emergence of another important factor, considered as the natural complement of a good institutional structure. It’s the concept of social capital approximated by the level of trust and cooperation among individuals.
Fukuyama (1997) considers that: « Social capital can be defined simply as the existence of a certain set of informal rules or norms shared among members of a group that permits cooperation among them. The sharing of values and norms does not in itself produce social capital, because the values may be the wrong ones… The norms that produce social capital… must substantively include virtues like truth-telling, the meeting of obligations, and reciprocity »3. For Bowles. S and Gintis. H (2002): « Social capital generally refers to trust, concern for one’s associates, a willingness to live by the norms of one’s community and to punish those who do not »4
The social capital is a concept borrowed from sociology, related to the benefits taken by individuals via their adhesion to communities and associations (Bourdieu, 1985). It is also the quality of human relationships in a society and its potential to be enhanced (Coleman, 1990). In this context, a high level of social capital leads to the exclusion and the punishment of all who deviate from a set of social conventional standards.
The relationship between social capital and financial development attracted the attention of few economists, comparing to the studies on the link between social capital and economic development. Only the studies of Guiso. L, Sapienza. P and Zingales. L (2000); Hong. H, Kubik. J. D and Stein. J. C (2001); Calderon. C, Chong. A and Galindo. A (2001) had clearly analyze the link between the two concepts, via empirical studies connecting indicators of social capital and financial development indicators. The existence’s intuition of a link between social capital and financial development is the result of the fact that a financial contract between a lender and a borrower needs a given level of trust to be accomplished and to its clauses to be respected. Since in a financial contract, the lender transfer an amount of money at the date t to the borrower, in the hope to recover it at t+1 in the future. In order to avoid an opportunist behavior, another clauses comes complete the contract, like collateral requirement. However, in several cases and given many factors, the collateral system looses its effectiveness because of the lack of the system of regulation adopted (like the difficulty to the lender to access to collateral in case of the borrower’s insolvency) or a lack in the system of contracts enforcement. Even, in the case of a strict application of laws, the financial contracts are intrinsically incomplete. It involves that no contract can guarantee completely the refund of a loan. It involves also, even if the law is strictly respected, that trust will have an important role to play in defining the financial market deepness, given the fact that a financial contract is basically incomplete.
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Furthermore, trust is more important in the economies where legal rights of lenders are less protected and judicial system is weak. Hence, a high level of trust would favor the settlement of financial contracts between individuals and then contribute to the development of financial markets. Moreover, the respect of financial contracts is not necessarily due to the threat of legal punishment, but it’s an issue of mutual trust among different market participants. Indeed, if...
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