Related Lending and Bank Performance: Evidence from Indonesia

After the Asian financial crisis of 1997, it was confirmed that banks lend to their related parties in many countries. The question examined in this article is whether related lending functions to alleviate the problems of asymmetric information or transfers profits from depositors and minority shareholders to related parties. The effects of related lending on the profitability and risk of banks in Indonesia are examined using panel data from 1994 to 2007 comprising a total of 74 Indonesian banks. The effects on return on asset (ROA) varied at different periods. Before and right after the crisis, a higher credit allocation to related parties increased ROA. In middle of the crisis, it turned to negative; and this has also been the case in the most recent period as the Indonesian economy has normalized. Effects of related lending on bank risk measured by the Z-score and non-performing loan is not clear. After undergoing bank restructuring, related lending has decreased and the profit structure of banks has changed.

The Central Bank and bank credits in the Philippines : a survey on effectiveness of monetary policy and its measures

In the post-Asian crisis period, bank loans to the manufacturing sector have shown a slow recovery in the affected countries, unexceptionally in the Philippines. This paper provides a literacy survey on the effectiveness of the Central Bank’s monetary policy and the responsiveness of the financial market, and discusses on the future works necessary to better understand the monetary policy effectiveness in the Philippines. As the survey shows, most previous works focus on the correlation between the short-term policy rates and during the period of monetary tightening and relatively less interest in quantitative effectiveness. Future tasks would shed lights on (1) the asset side – other than loan outstanding – of banks to analyze their behavior/preference in structuring portfolios, and (2) the quantitative impacts during the monetary easing period.

Toward an inclusive and a little bit ethical world trading system : listening to the voices of the people in LDCs

Many specialists in international trade have started saying that the era of a mega FTA is approaching. If the three poles of the global economy, namely East Asia, EU and the United States, form mega FTAs, most of the volume of global trade will be covered. That may be fine, but there will be many countries left out of the mega FTA, most of which will be the least developed countries (LDCs). Since the inception of the Doha Development Agenda (DDA) negotiations in 2001, the WTO and its member countries have tried to include LDCs in the world trading system through various means, including DFQF and AfT. Although these means have some positive impact on the economic development of LDCs, most of the LDCs will never feel comfortable with the current world trading system. To overcome the stalemate in the DDA and to create an inclusive world trading system, we need more commitment from both LDCs and non-LDCs. To surmount the prolonged stalemate in the DDA, we should understand how ordinary people in LDCs feel and think about the current world trading system. Those voices have seldom been listened to, even by the decision makers of their own countries. So as to understand the situation of the people in LDCs, IDE-JETRO carried out several research projects using macro, meso and micro approaches. For the micro level, we collected and analyzed statements from ordinary people concerning their opinions about the world trading system. The interviewees are ordinary people such as street vendors, farmers and factory workers. We asked about where they buy and sell daily necessities, their perception of imported goods, export promotion and free trade at large, etc. These ‘voices of the people’ surveys were conducted in Madagascar and Cambodia during 2013. Based on this research, and especially the findings from the ‘voices of the people’ surveys, we propose a ‘DDA-MDGs hybrid’ strategy to conclude DDA negotiations and develop a more inclusive and a little bit more ethical world trading system. Our proposal may be summarized in the following three points. (1) Aid for Trade (AfT) ver. 2 Currently AfT is mainly focused on coordinating several aid projects related to LDCs’ capacity building. However, this is inadequate; for the proposed ‘DDA-MDGs hybrid’, a super AfT is needed. The WTO, other development agencies and LDC governments will not only coordinate but also plan together aid projects for trade capacity building. AfT ver. 2 includes infrastructure projects either gran aid, ODA loans and private investment. This is in accordance with the post-MDGs argument which emphasizes the role of the private sector. (2) Ethical Attitude Reciprocity is a principle of multilateral agreement, and it has been a core promise since GATT. However, for designing an inclusive system, special and differential treatment (S&D) is still needed for disadvantaged members. To compromise full reciprocity and less than full reciprocity, an ethical attitude on the part of every member is needed in which every member refrains from insisting on the full rights and demands of its own country. As used herein, the term ‘ethical’ implies more consideration for LDCs, and it is almost identical to S&D but with a more positive attitude from developed countries (super S&D). (3) Collect Voices of the People In order to grasp the real situation of the people, the voices of the people on free trade will continue to be collected in other LDCs, and the findings and leanings will be fed back to the WTO negotiation space.

Deposit dollarization in Myanmar

Myanmar has peculiar conditions of deposit dollarization that were shaped by administrative controls. On the one hand, restrictive controls encouraged the accumulation of foreign currency deposits (FCD). On the other hand, foreign currency loans (FCL) were not practiced officially; therefore, FCD was not utilized for credit. Given the adverse effects and persistence of dollarization in other dollarized economies and the recent recovery of local currency deposits in Myanmar, this paper opts for the prohibition of FCL and offers policy measures for de-dollarization.

How does contract design affect the uptake of microcredit among the ultra-poor? : experimental evidence from the river islands of Northern Bangladesh

Despite the professed claims of microcredit alleviating poverty, little is known about what kind of credit contract is suitable for extremely poor households, also called the ultra-poor. To fill this knowledge gap, we initiated a field experiment in the river islands of northern Bangladesh, where a substantial portion of dwellers could be categorized as ultra-poor due to cyclic floods. We randomly offered four types of loans to such dwellers: regular small cash loans with one-year maturity, large cash loans with three-year maturity both with and without a one-year grace period, and in-kind livestock loans with three-year maturity and a one-year grace period. We compared uptake rates as well as the determinants of uptake and found that the uptake rate is the lowest for the regular contract, followed by the in-kind contract. Contrary to prior belief, we also found that the microcredit demand by the ultra-poor is not necessarily small, and in particular the ultra-poor are significantly more likely to join a microcredit program than the moderately poor if a grace period with longer maturity is attached to a large amount of credit, irrespective of whether the credit is provided in cash or in kind. This paper provides evidence that a typical microcredit contract with one-year maturity and without a grace period is not attractive to the ultra-poor. Microfinance institutions may need to design better credit contracts to address the poor's needs.

Changes in source of profits and business strategies? : some evidence from the Philippines' universal banks in the 2000s

In the 2000s, the Philippines' local banking sector have conducted very conservative lending behavior and at the same time, gradually but continuously improved their profitability in terms of ROE (return on equity). A set of analyses on the flow of funds and segment reports (information) of local universal banks, whose loans outstanding to the industrial sector have dominated more than three fourths of the total outstanding, shows that (1) they have actively manage assets overseas, (2) their profitability has come from investment activities in the securities markets, and (3) some universal banks have shifted their resources into the consumer/retail segment. Although further refinement in the dataset is needed for a more detailed analysis, diverse business strategies would be expected among the local universal banks in the near future.

Excess capital and bank behavior : evidence from Indonesia

The Indonesian banking sector has been restructured since Asian financial crisis and restored to soundness. The capital adequacy ratio (CAR) returned to a sound level; however, the average excess capital has become too high, while credit disbursement has remained low. This paper investigates the determinants of excess capital among Indonesian banks and its effects on credit growth during the 2000s. The results indicate that the determinants of excess capital vary widely depending on bank type. Return on equity (ROE) affects excess capital negatively among domestic banks, and the effect of non-performing loans is mixed, differing for various bank types. Excess capital affects credit growth positively, except among foreign banks.

The Economic Value of Residential Land in Historical Areas: An Application of the Residual Method to the Secondary Market

Land value bears significant weight in house prices in historical town centers. An essential aim for regulating the mortgage market, particularly in the financial and property crisis that countries such as Spain are undergoing, is to have at hand objective procedures for its valuation, whatever the conditions (location, construction, planning). Of all the factors contributing to house price make-up, the land is the only one whose value does not depend on acquisition cost, but rather on the location-time binomial. That is to say, the specific circumstances at that point and at the exact moment of valuation. For this reason, the most commonly applied procedure for land valuation in town centers is the use of the residual method: once the selling price of new housing in a district is known, the other necessary costs and expenses of development are deducted, including those of building and the developer’s profit. The value left is that of the land. To apply these procedures it is vital to have figures such as building costs, technical fees, tax costs, etc. But, above all, it is essential to obtain the selling price of the new housing. This is not always feasible, on account of the lack of newbuild development in this location. This shortage of information occurs in historical town cities, where urban renewal is slight due to the heritage-protection policies, and where, nevertheless there is substantial activity in the secondary market. In these circumstances, as an alternative for land valuation in consolidated urban areas, we have the adaptation of the residual method to the particular characteristics of the secondary market. To these ends, there is the proposal for the appreciation of the dwelling which follows, in a backwards direction, the application of traditional depreciation methods proposed by the various valuation manuals and guidelines. The reliability of the results obtained is analyzed by contrasting it with published figures for newly-built properties, according to different rules applied in administrative appraisals in Spain and the incidence of an eventual correction due to conservation state.

La dimensión de la subjetividad en la formación del valor inmobiliario : aplicación del método de análisis de ecuaciones estructurales al mercado residencial de Lisboa

The discretionality and the appraisers’ subjectivity that characterize traditional real estate valuation are still allowed to take part in the formation of the asset price even when respecting international standards (EVS, IVS) or Appraisal Institution´s regulations (TEGOVA, RICS, etc.). The application of econometric and statistical methods to real estate valuation aims at the elimination of subjectivity on the appraisal process. But the unanswered question underneath this subject is the following: How important is the subjective component on real estate appraisal value formation? On this study Structural Equation Models (SEM) are used to determine the importance of the objective and subjective components on real estate valuation value formation as well as the weight of economic factors and the current economic context on real estate appraisal for mortgage purposes price formation. There were used two latent variables, Objective Component and Subjective Component, witch aggregate objective observed variables and subjective observed and unobserved variables, respectively. Factorial Exploratory Analysis is the statistical technique used in order to link the observed variables extracted from the valuation appraisal reports to the latent constructs derived from the theoretical model. SEM models were used to refine the model, eliminate non‐significant variables and to determine the weight of Objective and Subjective latent variables. These techniques were applied to a sample of over 11.000 real estate assets appraisal reports throughout the time period between November of 2006 and April of 2012. The real assets used on this study are located on Lisbon’s Metropolitan Area – “Grande Lisboa” –, Portugal. From this study, we conclude that Subjective Component has a considerable weight on real estate appraisal value formation and that the external factor Economic Situation has a very small impact on real estate appraisal value formation.

Infrastructure Finance in Developing Countries by State and Multilateral Development Banks

Infrastructure concession is an alternative widely used by governments to increase investment. In the case of the road sector, the main characteristics of the concessions are: long-term projects, high investments in the early years of the contract and high risks. A viability analysis must be carried out for each concession and consider the characteristics of the project. When the infrastructure is located in a developing country, political and market growth uncertainties should be add in the concession project analysis, as well as economic instability, because they present greater risks. This paper is an analysis of state bank participation in road infrastructure finance in developing countries. For this purpose, we studied road infrastructure financing and its associated risks, and also the features of developing countries. Furthermore, we considered the issue of state banks and multilateral development banks that perform an important role by offering better credit lines than the private banks, in terms of cost, interest and grace period. Based on this study, we analyzed the Brazilian Development Bank - BNDES – and their credit supply to road infrastructure concessions. The results show that BNDES is the main financing agent for long-term investment in the sector, offering loans with low interest rates in Brazilian currency. From this research we argue that a single state bank should not alone support the increasing demand for finance in Brazil. Therefore, we conclude that there is a need to expand the supply of credit in Brazil, by strengthening private banks in the long-term lending market.

International for-profit investiments in microfinance institutions equity

In recent years international investors are increasing the focus on the social consequences of their investments along with its financial returns. The microfinance sector, considered as an asset class is a relatively young concept but the microfinance industry is experiencing a tremendous growth and has a high potential for the future. Today most social responsible investments in microfinance are performed through loans or fixed income structured finance vehicles. The possibilities to invest in the equity tranche of the industry are still scarce since the number of listed microfinance institutions is reduced and the private equity investments are limited and difficult to reach for the majority of investors. In this document we present a study on the characteristics of the MFIs and we try to shed some light on this subsector of the equity assets universe that may become important in the coming future. Keywords: Microfinance institutions, Micro-credits, Financial Institutions, Equity; Stock Exchange

UBURYO: open source software for managing microcredits in education

One of the major problems in developing countries is minority access to higher education. Traditional scholarships usually focus on paying tuition fees for bringing brilliant students to developed countries (from where they seldom return). But local grants seldom target the more needy students. We propose a system of student loans to pay tuition fees in exchange for technical work. This appears to be a satisfactory and sustainable solution. We also provide UBURYO (a Kirundi word meaning opportunity). UBURYO is the free open source software, that we have developed, to manage this loan system in a simple, trustworthy, fair and efficient way.

Evaluation of an application for managing microcredits in education

One of the major problems in developing countries is minority access to higher education. Traditional scholarships usually focus on paying eventually tuition fees or bringing brilliant students to develop countries. Additionally, these systems used to be opaque and, consequently, a corruption source. We propose a system of student loans to pay tuition fees in exchange for work. We also provide UBURYO. It is the FOSS, that we have developed, to manage this loan system in a simple, trustworthy, fair and efficient way. We deployed the loan system in the University of Ngozi (UNG, Burundi). A shallow evaluation demonstrates that system sustainability is feasible.

Los instrumentos convertibles en acciones para la financiación empresarial en un entorno económico de restricción del crédito bancario

(SPA) Los bonos convertibles en acciones son instrumentos de financiación corporativa que en general comparten varias de las características de las emisiones de deuda senior corporativa, como el pago regular y fijado de cupones, vencimiento definido, momento en el que se repaga la totalidad del principal, y prelación en caso de default con respecto a otras obligaciones crediticias. En cambio, el repago del principal se ofrecerá bajo determinadas circunstancias en acciones de la compañía emisora en una proporción acordada previamente. Pero los instrumentos convertibles son instrumentos heterogéneos que suelen incorporar otras características particulares a cada caso, como son repagos anticipados bajo determinadas condiciones, reducción del ratio de conversión a determinados precios de la acción, pagos compensatorios o "make-whole" y otros. Los instrumentos convertibles son ejemplos de activos híbridos que comparten características de deuda y de capital y por tanto tienen impacto específico en la contabilidad de las empresas y en la posible dilución de sus accionistas. En España y otros países de la periferia de Europa, la emisión de bonos convertibles ha aumentado considerablemente desde el inicio de la crisis financiera, fundamentalmente debido a la restricción de otras formas de crédito empresarial, principalmente los créditos bancarios. En el presente artículo se explican algunas de las características comunes a los bonos convertibles emitidos recientemente por empresas españolas, se analizan las ventajas, y las razones para la emisión de estos activos, y se indican sus implicaciones contables. Los instrumentos convertibles pueden ser una alternativa estable a la deuda bancaria y a la renta fija tradicional en los mercados de capitales para la financiación de las compañías medianas, que tienen menos acceso a fuentes de financiación en situaciones de aversión riesgo por parte de los inversores y entidades financieras. (ENG)Convertible bonds share several characteristics with secure corporate debt, such as the regular coupon payments, fixed maturity and similar seniority in case of default. Nevertheless the investor of the convertible bond has the option of receiving the principal amount repayment at maturity in cash or receiving a previously agreed number of shares. But convertible securities can be complex financial instruments that possess exotic or specific features, such as soft calls, put options, cash options, cash top up features, or make whole amounts. Convertible securities are hybrid instruments that share characteristics of both debt and equity, and therefore suffer an specific accounting treatment under International Financial Reporting Standards, where the issuing company must separately identify the debt and equity components in its financial statements In peripheral European countries and in Spain in particular, convertible issuance has significantly increased since the start of the Global Financial Crisis, an increase mainly driven by the restriction of other forms of credit, namely banking loans. This article summarizes some of the common characteristics of convertible securities, analyzes its advantages for both issuers and investors, and introduces the accounting of convertible bonds. Convertible Bonds can become a viable and stable alternative to bank loans and to high yield or investment grade bonds for the funding of mid-sized corporates which normally have a more difficult access to credit in regional banking crisis or credit restrictive environments.

La aplicación de métodos estadísticos en la valoración masiva de inmuebles: una propuesta de regulación en el marco normativo del Banco de España

Las valoraciones automatizadas (AVM según sus siglas en inglés) son modelos matemáticos de valoración que permiten estimar el valor de un inmueble o una cartera de inmuebles mediante la utilización de información de mercado previamente recogida y analizada. Las principales ventajas de los modelos AVM respecto a las valoraciones tradicionales son su objetividad, rapidez y economía. Existe regulación al respecto y estándares profesionales en otros países, no obstante en España los criterios de valoración mediante modelos AVM siguen siendo excesivamente básicos, al no establecer procesos concretos ni distinguir entre los diversos métodos estadísticos existentes y la aplicación adecuada de los mismos. Por otra parte, desde la publicación de la Circular 3/2008 del Banco de España se ha extendido el uso de este tipo de valoraciones en España para la actualización de valor de inmuebles en garantía de préstamos hipotecarios. La actual desregularización en nuestro país en cuanto a normativa de valoraciones automatizadas nos permite plantear propuestas y metodologías con el fin de aportar un punto de vista nuevo desde la investigación, la experiencia en otros países y la práctica empresarial más reciente. Este trabajo de investigación trata de sentar las bases de una futura regulación en España en materia de valoraciones masivas adaptadas al marco hipotecario español. ABSTRACT The Automated Valuation Models (AVM) are mathematically based valuation models that allow to estimate the value of a property or portfolio of properties by using market information previously collected and analyzed. The main advantages of the AVMs in comparison to traditional valuations are the objectivity, speed and economy. In other countries there is regulation and standards regarding the use of AVMs. However, in Spain the norms that apply to AVM valuations are still too basic, since these norms do not define specific processes and do not distinguish between the different statistical approaches available and their correct use. On the other hand, following the ratification of the 3/2008 Bank of Spain Circular the use of AVM models in Spain for the value update of mortgaged properties has increased. The current deregulation in Spain regarding Automated Valuation Models allows to provide propositions and methodologies in order to offer a new point of view based on the research, experience in other countries and the most recent professional practice. The present research thesis aims to provide basic principles and criteria for a future Spanish regulation on massive valuation in the context of the Spanish mortgage framework.