Financial Liberalization and Bank Lending Behavior in Turkey

Hatice Jenkins

No 1996-05, Development Discussion Papers from JDI Executive Programs

Abstract: The literature indicates that financial liberalization improves the efficiency of credit allocation by reducing credit rationing. This argument, based on the availability doctrine, states that financial liberalization increases the amount of investable funds; hence, reduces the number of loan applicants that are turned down by banks. Availability of funds, however, does not necessarily create access to borrowers who were previously rationed by banks. What are critical are the lending patterns and criteria of banks that determine to whom the loanable funds are allocated. This empirical study examines how financial liberalization changed the lending behavior of banks and what implications this change has had on the efficiency of credit allocation in Turkey. The findings show that financial reforms brought modernization and market oriented management techniques that improved banks’ ability to screen their customers. However, the credit rationing attitudes of banks were not eliminated. The benefits of financial liberalization were partly offset because of the unstable macro-economic environment and the increased cost of funds to the banking sector. Liberaliza¬tion of interest rates in an inflationary environment increased the level of uncertainty and market risk that adversely affected banks’ lending behavior. Instead of financing private investment, bank credits were channeled towards low risk financial instruments, such as Government bonds and Treasury bills, short term working capital for domestic trade and consumer credits.

Keywords: Banks; financial liberalization; allocative efficiency; Turkey (search for similar items in EconPapers)
JEL-codes: D61 G21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 1996-05
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Persistent link: https://EconPapers.repec.org/RePEc:qed:dpaper:256

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