Reforms, Incentives and Banking Sector Productivity: A Case of Nepal

Kul Luintel (luintelk@cardiff.ac.uk), Sheikh Selim (s.t.selim@bham.ac.uk) and Pushkar Bajracharya

No E2014/14, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We model banks as profit-cum-utility maximizing firms and study, inter alia, bankers incentives (optimal effort) and incentive driven productivity following deregulations. Our model puts to test a panel of Nepalese commercial banks which went through deep financial reforms in the recent past. We find that (i) bankers efforts and productivity have notably improved in Nepal, (ii) bankers efforts significantly explain the banking sector s productivity, (iii) the proportion of non-performing loans has considerably declined, and (iv) banking services have become costly, although the bank spread has moderately declined. Our approach is different from the widely used data envelopment analysis (DEA) of bank productivity, hence complements the literature. It also informs the current policy debate in Nepal where the Central Bank is seen to be geared towards regulating the financial system and micro-managing the banking institutions.

Keywords: Reforms; incentives; productivity; panel integration; cointegration; simulation (search for similar items in EconPapers)
JEL-codes: G21 G28 O43 O53 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-08
New Economics Papers: this item is included in nep-ban, nep-cse, nep-eff and nep-hrm
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