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Bank Ownership and Performance

Although there has been a sharp reduction in the role of state-owned banks in the past three decades, reflecting a general disappointment with their contribution to financial and economic development, state banks still play a substantive role in many emerging regions, including the Middle East and North Africa. In the aftermath of the recent global financial crisis, however, policy-makers have been reevaluating the role of state bank interventions in creating an accessible and resilient financial sector.

A statistical analysis of bank ownership and performance on non-GCC countries finds state-owned banks are significantly less profitable than private banks. The poorer performance seems to be due to a combination of policy mandates and operational inefficiencies. State banks finance more of the government than do private banks, which may reflect a government financing mandate that contributes to lower net interest margins. State banks are also found to have higher ratios of operating costs to assets controlling for their size and balance sheet structures, primarily due to a much higher ratio of employees to total assets, a result which may reflect an access mandate. State-owned banks also tend to generate much larger non-performing loans (NPLs), which translate into larger loan loss provisions and lower profitability. These results reflect the imposition of various development mandates on state banks.

While there are arguments that the weaker performance of state-owned banks might be due to their development mandates, the analysis indicates that the effectiveness of MENA state banks in contributing towards SME financing, housing financing, and long-term investment finance has been mixed. There is also no evidence that MENA state banks have made a significant contribution to access as measured by the number of deposit accounts per adult.

Policy interventions in many countries may be justified, but state bank interventions may come with a significant cost. Policy makers should take into account many factors, including the past performance and contribution of state banks in their countries and elsewhere. Moreover, even in the cases where the presence of state banks may be justified, clear mandates and sound governance structures are essential to minimizing political interference and avoiding credit misallocation and large financial losses. Some of these costs are a result of the mandates themselves, while some are a result of excessive political interference and poor governance structures and operational deficiencies of these banks. There is scope for reducing the market share of state banks in the countries where they still hold very large shares and dominate financial intermediation, i.e., Algeria, Libya and Syria. There is also scope for clarifying the mandates, improving the governance structures, and strengthening the operational efficiency of most if not all state banks in the region. MENA countries that do not have state banks may not find it necessary to create new ones, because they have been addressing their policy objectives through alternative and probably more effective policy interventions (e.g. credit guarantee schemes).

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