Total Factor Productivity of Commercial Banks in Thailand

By Chansarn, Supachet | International Journal of Business and Society, June 2014 | Go to article overview

Total Factor Productivity of Commercial Banks in Thailand


Chansarn, Supachet, International Journal of Business and Society


ABSTRACT

This study employed growth accounting equation to examine the total factor productivity of 14 commercial banks in Thailand during 2000 - 2009. The findings revealed that commercial banks in Thailand on average had low and very volatile total factor productivity with the average total factor productivity growth rate ranging from -13.35 - 10.06 percent per annum. In terms of individual bank, the findings revealed that most of commercial banks had the negative average total factor productivity growth rate during the study period, implying their lower productivity. In addition, the findings suggested that there were four factors which significantly determined the total factor productivity growth of commercial banks. They were credit risk as measured by the percentage of loan to total asset, management quality as measured by the percentage of non-interest expense to total asset, diversification as measured by the percentage of non-interest income to total asset and capital adequacy as measured by the percentage of owners' equity to total asset. Furthermore, small commercial banks were found to have the highest total factor productivity growth whereas large banks were found to have the lowest one.

Keywords: Total Factor Productivity; Commercial Bank; Banking Sector; Thailand.

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

Commercial banks have long been considered as the most important financial intermediaries in Thailand. In 2009, more than 7.1 trillion baht of deposits or deposits equivalent was accepted by Thailand's commercial banks. This figure was approximately accounted for 79 percent of Thailand's gross domestic product in 2009 (Bank of Thailand, 2010). They are also the most crucial source of loans. In 2009, commercial banks provided lending more than 7.8 trillion baht, accounting roughly for 87 of the GDP in that year (Bank of Thailand, 2010). In addition, based on Bank of Thailand (2010), commercial banks in Thailand accepted more than 4.4 and 1.4 trillion baht of deposits from households and businesses, respectively, while they provided lending more than 2.3 and 3.6 trillion baht to households and businesses, respectively. Moreover, commercial banks employed more than 120,000 workers in 2009, creating income over 86 billion baht for them (Bank of Thailand, 2010). In addition, banking sector was found to have the greatest human capital due to the highest mean years of schooling of its employees which equaled 14.4 years in 2009 (National Statistical Office, 2012).

Since commercial banks are the primary source of deposits, loans and employment for the nation, it is sensible to conclude that the productivity of banking sector is very important to the national production, consumption and employment and also the financial stability of households and businesses. That is, if commercial banks are not productive and end up with insolvency, households will certainly suffer from money loss and financial instability. Meanwhile, businesses are troubled by illiquidity problem as they will find it far tougher to obtain credits from commercial banks. Such a problem may cause businesses to downsize or even end up with bankruptcy. Additionally, as households are facing financial instability due to the low productivity of commercial banks, they are likely to consume less, causing the diminishing aggregate demand. Moreover, businesses with illiquidity problem are likely to downsize and lay off their employees, leading to the rising unemployment. The decreasing aggregate demand and the rising unemployment will eventually lead the nation to the financial and economic crisis. These situations were actually happened in Thailand during the economic crisis in 1997 all because of the low productivity of Thailand's commercial banks (Sussangkarn & Vichyanond, 2007).

Prior to the crisis, mainly due to poor governance, most of commercial banks in Thailand had enormous sub-prime loans (loan of which value exceeds the value of the collateral) and inappropriate lending (borrowing short term but lending long term) provided to real estate sector, causing the enormous non-performing loans (NPLs) in banking sector. …

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