The impact of privatization on the profitability of banks: A Case study of China’s banking system

 Shuhrat Abdusalomov

Tashkent State University of Economics

E-mail: shuhratabdusalomov@yahoo.com

The method of modifying all processes and assets from public sector to private sector is accepted as Privatization. Privatization is considered as a valuable process to improve the performances of banks as well as increase economy of the country. A lot of studies have been conducted to examine the impact of privatization on bank’s profitability using different approaches by previous researchers. According to the findings of prior researchers that there were both positive and negative impacts of privatization upon to bank’s profitability. Obviously, this study has been conducted, in order to investigate the impact of privatization on Chinese bank’s profitability over the period of 2006-2016. For this purpose, this study primarily makes comparative analysis of selected banks of China, 11 from privatized banks and 11 from public banks. The outcomes of study are achieved with the help of Ordinary Least Square (OLS) relying on the panel data demonstrating bank’s financial performances. The finding indicates that privatized banks have performed better than state owned banks over the period of eleven years.  In addition, according to the obtained results that, privatization has effected positively on profitability of banks’ determinants concerning net interest margin, bank size and earning per share, ownership structure. These descriptive variables of the model have contributed significantly on the bank’s profitability, however, the most negative contributor variables are observed in the foreign direct investment ratio and capitalization ratio. The study concluded that privatized banks experienced a significant enhancement in performance and increased profitability in Chinese banking sector.

Keywords: Bank Profitability, Bank’s Financial ratios, Banking Privatization, Ordinary Least Square, China

Banking spheres have changed dramatically throughout world over the last three decades. Recently, the significance of banks’ performances and financial conditions are globally discussed particularly in the developing countries. Undoubtedly, it cannot be denied that banking sector plays an important role in the economic growth. As banks have significant role in the monetary policy, analysing the performance of banking sector is important for owners, investors, depositors and policy makers. In order to raise the bank’s performance productively and to make strong internal control different restructuring modifications have been applied. For instance, one of them is privatization program- the mode of transferring all processes and assets from public hands to private one (Khan, 2002). This transformation allows market forces to operate properly, and enhances efficiency and competition between organizations rather than administrative forces. Indeed, governments use privatization policy to develop economy, strengthen the financial health, progress in output, raise production, decrease unemployment and make an effective monitoring system for utilizing government funds. (Angelini and Cetorelli 2003). Primarily, this policy restructuring along with privatization have been employed by developed and developing countries about three decades ago in the early 1980s (Sathye, 2015; Ilyas, 2011; Nazir 2010; Harold 2010; Wang 2013; Janeth and Cosmas, 2014; Habib 2013; Kathanje 2000; Che and Qian 1998; Gupta 2005; Chen et al 2006;).

In order to improve the sustainable development and the profitability of banks this Privatization reform has been implemented in China in the late 1990s. In fact, China is playing increasing important role in the world economy and its market continues to rise and the banking sphere effects positively on the Chinese financial sector. Hence, China has applied this remarkable transformation changes in the its banking sector and accelerated the restructuring of its state-owned enterprises (Song and Hseih 2015). The main aim of this study is to examine the impact of privatization on the profitability of banks in China. There are so many measures to determine the performance of banking sector such as earnings, capital adequacy, asset quality, liquidity and sustainability. Moreover, out of these performance measures this study is targeted towards evaluating the “profitability” of banks. The scope of the study is to analyse the impact of privatization on the profitability of banks and the area of the study public and private banking sector. The organization of this study is as follows, in the section 2 I will discuss literature review related to the chosen case, next I will describe data and methodology and present the reliability and validity of methods. Then I will represent relevant empirical findings of our study. Finally, section five gives the conclusion of the paper.

Privatization is considered to be an apparatus in order to increase the performance, efficiency and profitability of banks. According to the large number of previous studies privatization has a positive effect on the profitability of banks (Hassan 2003; Barghandan 2014; Oliveros 2012; Wang 2011; Kumbhakar and Sarkar 2003; Habib 2013; Kathanje 2000; Sathye 2005; Megginson & Netter, 2001; Kikeri and Nellis 2004). From the hypothetical viewpoint, privatization is considered to raise the efficiency of financial sector (Boycko et al. (1996); Prosser and Graham (1991); Vickers and Yarrow (1998).  Nevertheless, at the same time some researchers claimed contradicting findings to the above mentioned statement (Carletti 2005; Alam 2010; Che and Qian 1998; Gupta 2005; Chen et al 2006; Otchere and Zhang 2001).  Beck, Cull and Jerome (2005) investigated the impact of privatization for the Nigerian banks performance for the period from 1990-2001. The outcomes of their study show that privatized banks presented enhanced performance while the state-owned banks were in poor condition.

Karas, A. et al., (2008) studied the impact of ownership on the efficiency of Russian banks. The results of this study is interesting to note that there is higher efficiency in foreign banks than private banks; nevertheless, public banks performed better than domestic private banks.

Despite the fact that the deposit insurance employment in 2004, the efficiency between public and private banks was not lessened, so public domestic banks performed more efficiently than private domestic banks. The author notes that the main reason for private domestic bank’s inefficiency is the influence of deposit insurance moral hazard.

Also, the study conducted by Alam (2010) investigates the relationship between enhancing income of enterprise and privatization and in this paper he included 28 commercial banks of Pakistan for the period 2003-2007. For evaluating the results, he has used DEA (Data Analysis Approach) and traditional method. According to the results of his study from DEA that state-owned banks are more efficient than private banks operations, and also the results of traditional method shows that there is no relationship between privatization and profitability of banks. Furthermore, Che and Qian (1998), argues that government owned sectors has more power and well protected by local politician, but private banks/firms are heavily operated and there is lack of protection for their private property. Gupta (2005) investigated the influences of partial privatization on performance of Indian non-banking services sectors. Concerning to indicators investment, productivity and profitability of firms. The analysis show that transfer of management control to the private sector and partial privatization lead to inefficiency in performance.

Nevertheless, Alam, A. and Nazir, M.S., (2010) investigates the effects of privatization in developing countries such as in Pakistani bank’s profitability for the period between 2003-2007. The results of study show that the privatization could not achieved to augment the bank’s operating income, and still public banks better covered the interest and non-interest expenses rather than private banks. In addition, there is nearly insignificant difference in operating efficiency between public and private banks and public banks indicated more efficiency than private banks. A study conducted by Cosmas S.M. and Janeth P.S., (2014) evaluates the structure of ownership in Tanzanian banks for the years between 2000-2009. The outcomes of the research give contrasting results, particularly, private sector banks operate with higher Return on Assets and operating efficiency ratios are lower corresponding to state-owned banks. Nonetheless, equity deposit ratio, capital adequacy Return on Equity (ROE) are lower in private banks. Findings also show that there is insignificant evidence in the positive of negative relationship between ownership and the profitability of banks. Thus, the authors reveal that privatization by itself alone cannot have huge impact on banks’ performance in Tanzania.

According to a number of studies that focused on the privatization and bank’s performances in China, from 2005, foreign banks suddenly started to buy minority stakes in Chinese banks. Through the process, they supported those banks to enhance their performance appropriately, and gained marketing their own products by wide-ranging extensive branch networks in Mainland China (Yao et al (2008), Lin and Zhang (2009) and Kumbhakar and Wang (2007)).  These scholars assess the impact of privatization policy on profitability and performance of banks in China. Together with they found private banks performed better, have better asset quality and more profitable than state-owned banks as well as privatization could improve the performance of banks efficiently.

Some previous studies considered privatization can avoid unemployment and create available job places for domestic specialists (La Porta, Lopez-de-Silanes., (1999), Harper (2002), Meggisnson, Nash and Randenbourg (1994), Frydman et al (1997) and Boubakri and Cosset (1998). In their studies, they focused on improving performance in terms of efficiency and productivity as well as achieving the employment following privatization in banks within the countries Czech Republic, Poland and Hungary. In this regards, findings indicate consensus that the level of employment increased following privatization and profitability gains. An empirical study by Verrugge et al. (1999) evaluates the effects of privatization on 65 banks in Europe using public security offerings as a divestment method. Outcomes of study give information that there were slight improvements post-privatization in the profitability of banks, leverage ratios, non-interest revenue and operating efficiency.  Even banks are privatized a significant government ownership of banks continued, it resulted to appear different problems in decision-making systems in the newly privatized banks. Afterwards, Boubakri et al. (2005) studied the post-privatization effects on 81 banks from 22 developing countries of the world. Results of study indicate that banks selected for ownership reform have a lower solvency and a lower economic efficiency than state-owned banks. After privatization span profitability increases, but depending on the type of ownership, because investment in capital, risk exposure and operating efficiency may increase or worsen.

To sum up, according to previous findings that on average there is a positive linear relationships between privatization and banks’ profitability (Berger et al. (2009), Dobson and Kashyap (2006), Hu et al. (2008), Kumbhakar and Wang (2007), Lin and Zhang (2009), and Yao et al. (2008) Hassan 2003; Barghandan 2014; Oliveros 2012; Wang 2011; Kumbhakar and Sarkar 2003; Habib 2013; Kathanje 2000; Sathye 2005; Megginson & Netter, 2001; Kikeri and Nellis 2004; Sathye 2015; Hassan et al., 2003; Salyas. 1987).

In conclusion, Banking sector plays an important role in establishing the efficient network of funds between borrowers and savers. Actually, the effectual creating of this process allows to increase qualified customer services, the flow of capital and profits. In order to make stable economic growth within the country, governments rely on the most significant determinates of financial sector such as the level of savings, investments, enhanced performance of banks. China is classified as a developing country, despite having the world’s second-largest economy, and the banking sector is considered one of the vital industries in the development of country. Even though, there are several aspects of banks, this study is focused on the profitability of banks upon to the policy of privatization.  Undoubtedly, privatization is considered one of the common used methods to improve the performances of banks as well as increase economy of the country. In addition, the financial reforms improve the competition and enhance the quality of products and services. The mode of transforming all processes and assets from public sector to private sector is accepted as Privatization. Using different approaches, a lot of studies have been conducted to analyze the impact of privatization on the profitability of banks. The empirical literature gives robust suggestion concerning the substantial effects of financial reforms on the performance of banks. According to the findings of previous scholars that there were both positive and negative impacts of privatization upon to bank’s profitability. Obviously, this study has been conducted, in order to investigate the impact of privatization on Chinese bank’s profitability over the period of 2006-2016. For this purpose, this study primarily made comparative analysis of selected banks of China, 11 from privatized banks and 11 from public banks. The outcomes of study were achieved with the help of Ordinary Least Square (OLS) relying on the panel data demonstrating bank’s financial performances. During the study period, the high level of profitability of private banks were evaluated, however, operating efficiency of public banks was founded to be much lower than public banks. The outcomes of our study are consistent with a number of previous researchers (Nuray 2015; Wang 2011; Ayesha Kausar 2014; Sathye 2005; Berger et al. 2009; Bonin JP, Hasan I, 2005).

Furthermore, state-controlled banks are identified to have a large amount of capital in government reserves that reduce its liquidity risk and it can slowdown the enhancement of profitability. Thus, in order to improve the operating efficiency, private banks have to lessen the number of administrative expenses and non-performing loans.

References and bibliography 

  1. Agricultural Bank of China (2018) [online]; Available from :< http://www.abchina.com/en/investor-relations/performance-reports/annual-reports/default_2.htm>: Accessed [20 January 2018]
  2. Andrews, M.A. (2005). “State-Owned Banks, Stability, Privatization, and Growth: Practical Policy Decisions in a World without Empirical Proof”. IMF Working Paper, 05(10).
  3. Allen, F., Qian, J., Qian, M., 2005. Law, finance, and economic growth in China, Journal of Financial Economics 77, 57-116.
  4. Amel, D., C. Barnes, F. Panetta, and C. Salleo (2004). Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence. Journal of Banking and Finance 28 (10), 2493–2519.
  5. Angelini, P. and N. Cetorelli (2003, October). The Effects of Regulatory Reform on Competition in the Banking Industry. Journal of Money, Credit, and Banking 35 (5), 663–84.

Добавить комментарий

Ваш e-mail не будет опубликован. Обязательные поля помечены *