The Future of State-Owned Financial Institutions

2. The Transformation of State-Owned Banks

 The Transformation of State-Owned Banks 2 S-  often have high nonperforming assets and high costs and make only a limited contribution to development. Improving their performance is important because they still dominate banking for the majority of people in developing countries, despite the rash of bank privatizations in the 1990s. In 2002 these banks held 60 percent or more of bank assets in Algeria, Bangladesh, China, Egypt, Ethiopia, India, Indonesia, Iran, and Vietnam (table 2-1).1 In Latin America, privatizations have reduced the role of state-owned banks, but they remain important in Argentina, Brazil, Ecuador, and Uruguay. In the transition countries, the role of state-owned banks also has declined since 1992 because of the entry of private banks and the privatization or closure of  .  The author is grateful to Jerry Caprio, Michael Fuchs, Ruth Neyens, Michael Pomerleano, Elisabeth Sherwood, and Ahmet Soylemezoglu for comments. 1. Two databases exist on public sector banks around the world. Barth, Caprio, and Levine (2001a, 2001b, updated in 2004) refer to the share of government ownership in all commercial banks in 150 countries , as reported by the country’s central bank. La Porta, López-de-Silanes, and Shleifer (2000, 2002) study the share of government ownership (direct and indirect) in the ten largest commercial and development banks in ninety-two countries in 1970, 1985, and 1995. The data of La Porta, López-de-Silanes, and Shleifer tend to show a higher percentage of public sector ownership, as might be expected. In addition to these two sources, Sherif, Borish, and Gross (2003) report data in transition countries. Since 2002, major privatizations include the remaining renationalized banks in Mexico, most of the banks taken over after the crisis in Indonesia, and two of the three state-owned banks that remained in Pakistan. 02-1335-5-CH 02 12/9/04 3:34 PM Page 13 state-owned banks. Nonetheless, state-owned banks remain important in Russia and some other transition countries.2 In Africa, the picture is also mixed. Improving the performance of state-owned banks involves understanding the rationale for them and how the hopes for their performance compare with actual   2. Sherif, Borish, and Gross (2003). Table 2-1. State Ownership of Banks, Selected Developing Countries, 2000–02 Percent of bank assets Less than 10 percent Armenia Estonia Kyrgyz Republic Paraguay Aruba Gambia, The Latvia Peru Bolivia Georgia Lebanon Samoa Botswana Guatemala Liechtenstein Seychelles Cayman Islands Honduras Macedonia South Africa Croatia Hungary Malaysia Tajikistan Cyprus Jordan Mauritius Tonga El Salvador Kazakhstan Moldova Venezuela 10 to 24 percent Bulgaria Czech Republic Nigeria St. Kitts and Nevis Cambodia Guyana Panama Trinidad and Tobago Chile Jamaica Philippines Ukraine Colombia Kenya Poland Vanuatu Côte d’Ivoire Nepal Solomon Islands Zambia 25 to 59 percent Argentina Indonesia Morocco Sri Lanka Bosnia and Herzegovina Korea, Republic of Romania Tanzania Brazil Lesotho Russian Federation Thailand Costa Rica Lithuania Rwanda Tunisia Ecuador Malawi Slovak Republic Turkey Ghana Mexico Slovenia 60 to 100 percent Afghanistan Belarus India Turkmenistan Albania Bhutan Indonesia Uruguay Algeria China Iran Uzbekistan Azerbaijan Egypt Maldives Vietnam Bangladesh Ethiopia Source: Barth, Caprio, and Levine (2001b); Sherif, Borish, and Gross (2003); and World Bank estimates. 02-1335-5-CH 02 12/9/04 3:34 PM Page 14 outcomes. To improve performance also requires an analysis of the interactions between the owner (the government), the bankers, and the clients to see how these interactions can be improved. Numerous attempts have been made to improve these banks, without much success, but there are some lessons to be learned for improving their performance by making their incentives, managerial accountability , and governance more like those of private banks. Privatizing a state-owned bank is a major transformation, but many issues need attention if privatization is to succeed, particularly in unfavorable institutional environments. Some other options also exist for transforming these banks when neither reform nor privatization seems feasible; these include closing the bank or turning it into either an agency or a narrow bank. Rationales for State-Owned Banks Various overlapping political and economic rationales have been advanced for state-owned banks. One rationale is political: to counter the substantial economic and political power of large private banks. Although private banks are chartered and regulated by the government, officials may nonetheless consider them to be abusing their power. As U.S. President Andrew Jackson said in the speech accompanying his 1832 veto of the rechartering of...